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February 6, 2012

Mastermind for Feb 1 Understanding CMHC

by mark mclean

Happy Wednesday and welcome to this week’s Mastermind post. It’s great to see over half my office show up mid-week to shoot the breeze. If you missed today, you missed a great discussion on the recent move by CMHC to cut back on the amount of mortgages it insures. We were lucky to have Bosley’s own mortgage consultant, Joe Sammut, from Mortgage Architects, at our meeting to shed some light on the subject. If you haven’t had a chance to read The Financial Post’s story on the subject you can look at it here   Of course the media is all over this so if you are looking for a different point of view have a look at this article from Mortgage Trends.  Both articles offer an in-depth view of the recent news.

During our meeting we wanted to get an understanding on how potential changes could affect first time buyers particularly those who are  self-employed. Joe shared with us one of the biggest changes made by CIBC ( and likely to be followed by the other big banks ) that they will no longer be using “stated income” in their loan approval processes. As Joe points out, it is a classic example of short-term pain, long-term gain. Stated Income has been a problem for some time but the tightening of the rules doesn’t actually mean that the banks are worried about increased risk.

 Of course our concern is people being penalized because of the career paths they have taken. Over the last few years the Cottage Industry, defined as a small group of people working from their homes, has grown into the Cottage Economy, a much larger segment of the population who own their own businesses. These business owners make up a huge part of the  Canadian economic engine. On the surface, the move by CMHC sounds like an opportunity to lend less to entrepreneurs but the reality is that the high ratio rules still apply. If they have less than 20% down, they still qualify for high ratio insured mortgages.  It is important to note three important things about what is going on in the world of mortgages. First, that the rate of default of mortgages is currently less than 1%, second, CMHC has a substantial war chest saved up for any sudden increase in defaults and, three, the government imposed cap on CMHC insured mortgages is rising, not just due to an increase in high ratio mortgages given but by many of the big banks using CMHC to insure low ratio mortgages. I tend to agree with Canadian Mortgage Trends in their take on the situation. Look for the government to restrict the insuring of low ratio mortgages and raise the ceiling on the total value of insured high ratio mortgages. My suggestion is to read both articles thoroughly.  Remember; If you can’t explain it, you don’t understand it.

Have a great week!

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