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Looser mortgage lending raises worries

Financial institutions appear to be cracking down on rules for borrowers with self-declared income, a move that comes as Finance Minister Jim Flaherty said he’s concerned about a lack standards in the sector.
Responding to a question about whether the Office of the Superintendent of Financial Institutions was looking into the practice of banks loosening their standards for so-called stated income mortgages, Mr. Flaherty confirmed it is an issue.
“OSFI’s concern arises out of some work that OSFI has done as part of it – the ordinary course of its business to look at some of the — some of the loans being made by financial institutions. I was informed of what their assessment showed with respect to a few financial institutions which is a matter of concern and that is — that is being corrected,” he said.
The Financial Post first reported last month that the government was looking at another round of tough new mortgage rules, among the considerations being a crackdown on how the self-employed qualify.
Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the self-employed. A source indicated many financial institutions have looked more at the financial behaviour of the self-employed — about 13% of the market — because income is hard to verify.
Vince Gaetano, principal of Monster Mortgage confirmed that CIBC’s wholesale arm FirstLine Mortgages Inc. is pulling out of the stated-income business. Mr. Gaetano said Street Capital Financial Corporation has followed the CIBC lead and he expects other financial institutions to follow very soon.
“We are hearing rumblings that everybody is going to be tightening up in the next week,” he said. “What’s happening is one person leads and everybody follows.”
What it ultimately means for the self-employed is they will end up back in the arms of non–traditional lenders and that means higher rates for them — something they faced in the housing market about five years ago.
“It’s bit like we are going back in history,” said one economist, who didn’t want to be named. “This is the way it used to be before the market took off.”
For his part, Mr. Gaetano said the federal government should blame itself for loosening standards on the minimum down payment required before consumers have to get mortgage default insurance. The government required 25% down last decade but it has since been lowered to 20%.
“The reason it changed is the banks were pushing their line of credit products. They could only lend up to 75% and they wanted the extra 5% to go to 80% without insurance under the Bank Act,” said Mr. Gaetano.
That drop in the minimum down payment could also be attributed to the banks being forced to buy more portfolio insurance for loans that have more than 20% down.
The banks have been seeking insurance on loans with even high down payments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.
Canada Mortgage and Housing Corp. acknowledged to the Financial Post this week it had talked to lenders about reducing its bulk or portfolio insurance as it tries to allocate its resources. The Crown corporation, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government, but it is getting close to its $600-billion limit. Third quarter results showed it was backstopping $541-billion of loans.
Banks have been scrambling to deal with the CMHC change and are said to have contacted private insurance Genworth Financial Canada and Canada Guaranty Mortgage Insurance which together have a $300-billion limit guaranteed by Ottawa for loans they insure.
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