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Lending standards may already be too tight: mortgage professionals

The risk of mortgage rates rising to unaffordable levels in the near future is "negligible" and recent measures taken by Ottawa to clamp down on housing loans may be too harsh, says Canada's mortgage industry association.

Due to the effect of tightened lending rules "housing demand at present and for the near future is probably lower than it needs to be," according to the Canadian Association of Accredited Mortgage
Professionals, which represents brokers and others in the industry.
 
In fact, the group suggested in a report Wednesday that the rules may need to be relaxed.
 
CAAMP said that a vast majority of borrowers studied had left themselves room to absorb a hike of as much as one percentage point on fixed-rate mortgages and even more on variable-rate mortgages.
 
"Canadians — lenders and borrowers — have been highly prudent in the mortgage market," Will
Dunning, the association's chief economist, wrote in the report.
 
"There have been some calls for mortgage lending criteria to be tightened further. This analysis concludes that Canadian lending criteria are already tight enough. In fact, some might argue that with
the changes implemented in April 2010, Canadian criteria are currently too tight."
 
The report came two days after federal Finance Minister Jim Flaherty further altered lending rules to curb higher-risk borrowing in the housing sector. Changes coming into effect in March include reducing the maximum amortization period to 30 years from 35 for insured mortgages and limiting how much money
Canadians can borrow using their homes.
 
It was the third time mortgage rules have been tightened in the past three years, a period in which historically low interest rates have been fuel for rampant borrowing.
 
On Tuesday, Bank of Canada governor Mark Carney left the key overnight lending rate untouched at one per cent, but with a renewed warning that household debt is mounting.
 
Both Carney and Flaherty have warned repeatedly over the past several months that Canadian consumer debt is rising too rapidly and threatens the future health of the economy.
 
Flaherty dismissed the CAAMP report Wednesday, noting that the group has a vested interest in seeing the housing and mortgage markets remain robust.
 
"My concern has been to strike the right balance between the availability of credit in the residential housing sector and the danger of developing any sort of bubble in the housing sector," he told reporters, adding that he doesn't believe further tightening will be necessary at this time.
 
John Andrew, a professor at Queen's University School of Urban and Regional Planning, said it's unlikely mortgage reforms would put a significant chill on the housing market because the changes are aimed at the highest-risk borrowers, who are already unlikely to qualify for insured borrowing from most lenders.
 
"I dispute their claim that the housing market is slowing down," he said.
 
"I don't see (mortgage changes) really affecting the market that much because there really aren't that many lenders that are going to be lending ... to that type of a borrower anyway."
 
But CAAMP said changes made by Flaherty last April had already disqualified a significant number of potential borrowers, thereby curbing debt growth.
 
Last April, the government introduced changes that forced borrowers to meet the standards for a five-year fixed-rate mortgage even when applying for a lower interest, shorter-term loan.
 
That slimmed average gross debt service ratios, a measure used by banks to test how much housing debt will eat into income, by about one per cent to 19.3 per cent in the second half of the year, the CAAMP report said.
 
The study also tested the impact of higher mortgage interest rates, assuming a rate of five per cent by the end of 2012. That would raise the cost of a fixed-rate mortgage by about one percentage point but would have a bigger impact for those with variable rates, about 2.5 per cent.
 
It found that expected increases in income levels should more than offset increases in interest rate payments and most borrowers would be able to absorb the shock.
 
"Recent mortgage lending, in an environment of very low interest rates, results in some risk of financial difficulties if and when interest rates increase in future," Dunning wrote in the report.
 
"However, the degree of risk does appear to be extremely small."
 
Still, the CAAMP report found the amount of outstanding mortgage debt in Canada surpassed $1 trillion
in August and stood at $1.08 trillion in October — about 57 per cent higher than five years earlier.
 
That represented a debt growth rate of 9.4 per cent per year. The figure is slightly lower than the average over the past decade, but troubling because it far surpassed income growth.
 
Mortgage defaults also remain higher — at about 0.43 per cent — than they were before the recession, when the rate stood at less than 0.30 per cent, the report found.
 
However, CAAMP said that as the housing market slows, debt growth is already decelerating and as of October stood closer to seven per cent, below the 10 per cent average for the decade.
 
The report was based on 59,000 insured mortgages for home purchases and 26,500 for refinancing that were funded in 2010. The vast majority of those included in the data — 97 per cent —were considered high risk, meaning the loan-to-value ratio exceeded 80 per cent.
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