Mortgage brokers are taking a wait, watch and worry approach to news that CIBC’s wholesale mortgage arm, FirstLine, is no longer accepting new applications from so-called “stated-income” homebuyers.
If other banks and mortgage lenders follow suit, it could become difficult for self-employed, new immigrants and higher-risk borrowers to get mortgages based on the “misleading” notion that Canada is at risk of a U.S. subprime housing crisis if there is a downturn in the market, brokers say.
“If we keep making it harder and harder for people to get mortgages, and the rest of the lending community cuts out similar programs, this is going to have far-reaching effects and runs the risk of creating a made-in-Canada problem,” said Steve Garganis, a broker with The Mortgage Centre.
“It’s very misleading to suggest we have a subprime issue in Canada. We don’t. These things can have a destabilizing impact on the housing market.”
FirstLine, CIBC’s wholesale mortgage arm, quietly announced Tuesday that it will no longer accept applications from homebuyers who can’t prove they have the annual net income to qualify for home loans, a move that ignores the fact tax laws actually encourage self-employed to write down their total income and that new immigrants have no credit record in Canada, brokers note.
FirstLine also set a $1 million cap on what it will lend for a house purchase.
TD Bank said it continues to monitor its lending and has no policy changes to announce at this time. Other banks couldn’t be reached for comment.
FirstLine’s announcement, coupled with news this week that the Canada Mortgage and Housing Corp. could be forced to cut back on the mortgages it insures, is being seen as another major indication that lenders are moving to protect themselves from a possible downturn in the housing market.
In fact, at least one FirstLine employee raised the possibility that Canada could face its own subprime housing crisis in announcing the strict new rules to her broker clients. Attached to her emails was a Bloomberg report pointing to loosening standards among Canadian lenders that have helped push up housing prices the last few years and now pose an “emerging risk” to financial institutions.
Those mortgages, usually granted to the self-employed and recent immigrants, “have some similarities to subprime loans in the U.S. retail lending market,” the Bloomberg story says, quoting from documents obtained from the Office of the Superintendent of Financial Institutions.
That concern may be why FirstLine — once the biggest mortgage lender in Canada and often a lifeline for self-employed and new immigrants — has been slowly backing out of the mortgage business for about a year now, brokers say.
“We see this (FirstLine) change as minor and part of the regular course of business,” CIBC said in an email Wednesday.
Former Bank of Canada economist David Madani called FirstLine’s decision “prudent,” agreeing that lending has become easier the last few years in Canada as housing prices climbed and interest rates dropped.
No one is suggesting Canada is anywhere near as risky as the U.S. where some 30 per cent of homeowners were in over their heads as house prices collapsed. That led to the subprime mortgage crisis that decimated the housing market south of the border, Madani said.
Bank and housing experts have estimated far fewer than 5 per cent of Canadian mortgage-holders are at risk.
But there are worrisome similarities on four other fronts, Madani said in a telephone interview Wednesday: Canada has seen a “very sharp” increase in house prices relative to incomes the last few years; substantial growth in ownership rates; household debt has risen to record levels and there are “significant signs” of overbuilding, especially in the condo market, he said.
“I’m not confident we can dodge the bullet and that there won’t be a correction in the Canadian housing market in the not too distant future,” said Madani, now an economist with Capital Economics.
He predicts a 25 per cent decline in prices over the next few years and calls the Bank of Montreal’s recent description of the Canadian housing market as a balloon that will deflate rather than a bubble that will pop, “semantics.”
But restricting mortgages for the self-employed, who make up 13 per cent of the Canadian workforce, and new immigrants, could do more harm than good to the precarious housing market, warned Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals.
Already they are subject to far more rigorous checks and balances than in the States where some homebuyers famously fabricated high incomes. Canadian higher-risk buyers are also required to put down at least a 20 per cent down payment and pay higher mortgage insurance and interest rates, said Murphy.
Research has shown that those homebuyers aren’t prone to default on their mortgage payments anymore than those who qualify for standard mortgages, he added.
Garganis predicts there will be considerable outcry if FirstLine’s “drastic changes” are adopted by other lending institutions.
“These aren’t B-level homebuyers. This is your next-door neighbour who’s maybe a consultant who works from home. This is your contractor or anyone who isn’t taxed by their employer every paycheque and is considered self-employed.