Logic has left the building.
- Stellar credit, tremendous equity, and strong liquid assets fail to get one across the financing finish line, the focus on documented income is stronger with each passing month. To the point of being unreasonable in many cases (i.e. retirees)
- Lenders abruptly end interest-rate specials with no exceptions, (triggering a potential rate hike if you need an extension beyond the scheduled closing date).
- Buying down of interest rates is suspended with some lenders. The ability to buy down a rate, aside from keeping us all competitive (good for the consumer) has been a key move to help approve difficult files via a lower qualifying rate.
- Lenders change debt servicing formulas weeks, even days, after granting a pre-approval – yet the existing pre-approvals are not Grandfathered, rendering the initial pre-approval essentially void. (However no notice is sent to those affected, until an actual offer is written everything seems just fine.)
- Outbuildings removed definitively from appraised value, among other changes to appraisal review, driving values used for lending purposes downward on purchases and refinances alike.
- Media reports hype any tidbit that looks like it might lead to rising interest rates or declining market values. Not a new thing I realise, but it seems somewhat clear that a neutral economy and a reasonably strong CDN dollar will conspire to leave interest rates more or less where they are for potentially another year or two.
Bottom line, ‘SUBJECT TO FINANCING’ is a key clause in every offer you write. No matter what your Broker or banker might say, do not take the chance on a subject free offer unless you have the cash in hand to close without financing, because new hurdles are popping up faster than ever.
To some extent it can certainly be argued that the tool known as logic has been removed from the Chartered Banks hands by the Federal Government. Taken away literally in some cases, such as the extreme ratcheting down of stated income programs for self-employed and retired individuals. In other cases taken away figuratively, as lenders have chosen self-(over?)regulate in an effort to generate an appearance of extreme prudence, perhaps in order to avoid further scrutiny by the Federal Government.
Over the past few months, as with the past few years, the steady changes in lending guidelines have continued, both publicized, and often simply with quiet internal banker memos.
Essentially there are four sorts of guideline & policy changes which seem to be occurring with steady frequency;
4) changes which Lenders make internally without formal notice to any interested party…no link as we only find out the hard way. 🙂
As you can imagine #3 and #4 each pose large challenges with Broker/Client relations. Compounding the issue is that it tends to be a nuanced or multi-faceted (see complicated to articulate) topic such as that of rental income calculation (i.e. X% addback vs. X% offset vs. DCR worksheet vs. T1 General net rents) on subject and/or non-subject properties.
That last sentence was meant to make your head hurt a bit, and explaining each of those terms and acronymns is another 500 words…which makes the point; Tricky changes within complicated policies containing arcane definitions do not make for a clean 20 second soundbite, let along a headline.
A little bit more about each of the 4 types of changes we are seeing.
1) Policy Changes, which do make the Headlines
The recent announcement regarding CMHC securitisation is a great example. http://www.thestarphoenix.com/business/Mortgage+rates+rise+slightly/8756927/story.html
Not a great policy perhaps, but a great example.
Lots of ink was spilled over this topic, especially as to whether or not it may or may not affect interest rates. If yes, to a very marginal degree; Current suggestions are a 0.15% to 0.45% increase. A reasonable summation was that of CIBC chief Economist Avery Shenfeld – “Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.”
Google alerts has filled my inbox with headlines on this topic, which ultimately is unlikely to have a dramatic impact on my clients, or really any individual clients, lives.
The story refers to a ‘cap’ being set at $350M per month on CMHC securitisation of (NHA MBS) mortgages. The lenders that would hit such a cap are not only few and far between, but they are the large Banks with diverse sources of funds.
This policy is extremely unlikely to reduce supply of mortgage funds and thereby increase rates. Nearly every Credit Union for example is unaffected in any way by this policy, as such there should be no rate movement there. That creates competition which impedes the bigger Banks from successfully raising rates.
A non-story for the average individual, sorry I just gave it as much attention as I did.
2) Publicized guideline changes which also make Headlines
An excellent example of well covered changes, yet changes that should have a very minor impact;
On June 27, 2013 CMHC (Canada Mortgage and Housing Corp.) announced a further tightening in their methods for calculating debt ratios and in particular confirming income for mortgage applicants. This would be the fifth set of changes in as many years.
The latest guidelines were penciled in last July – and many lenders already enforce a few of them. However they have now been solidified and are effective on all CMHC-insured mortgages on December 31, 2013 at the latest.
Although these guidelines are targeted at insured mortgages, as with past changes, we are already seeing some adopted early and applied to Conventional (uninsured) mortgages. So having 20% or more down will not necessarily exempt you.
A) Business owners – a.k.a ‘self-employed’: Lenders must use an amount not exceeding the gross sales, as per the statement of business activities in the clients T1 general tax return or the financial statements. Lenders must also review your Line 150 income (along with the composition of your line 150 via T1 General Tax return) and are not able to gross it up by more than 20% from the actual dollar figure reported as per employment earnings. Asset income, Dividend income, Rental income, etc. is all stripped from the useable line 150 fitgure.
Gone are the days of stating an income 120K for a client only showing a 55K Line 150. This change has had a significant impact on the 1M – 2M market in the lower mainland.
B) Employee income: Lenders must use “an amount not exceeding the average income of the past two years.” Got a job with a base salary, which is topped up by things like Overtime, bonuses, tips, seasonal employment, etc? Lenders now need the annual CRA Notice of Assessment to demonstrate the average gross income for two years running.
One good year no longer makes it happen if there is a variable component to your income.
C) Rental Property income: If a borrower owns other non-owner occupied rental properties, the principal, interest, property taxes and heat (P.I.T.H.) on those properties must either be:
aa) deducted from gross rent revenue to establish net rental income; or
bb) included in ‘other debt obligations’ when the Total Debt Service (TDS) ratio is being calculated.
So Long As – The Property has been listed on the clients T1 General Tax returns – Report Your Net Rental Income Please!
If the property has not been reported on your T1, the rental income will be excluded. That specific rental property mortgage must then be debt serviced with your employment income. This will typically stop an application in its tracks.
D) Adding a Guarantor or a Co-signor: The income of the guarantor must not be used in debt-service ratios “unless the guarantor…occupies the home and is the spouse or common-law partner of the borrower.”
However if you add the individual as a Co-signor (meaning that unlike a guarantor, the additional inidividul goes on title) then there is no problem.
Parents can still co-sign a mortgage for their kids without having to move in with them, the parent(s) simply have to be added to title. This is something that I have always advised my clients to do anyways. After all if you are adding your name to the debt you might as well also have your name added to the asset.
E) Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders more often than ever are now starting to condition that tradelines be paid and closed, not simply paid to zero. This can have ramifications for a clients credit score moving forward as the sweet spot for establishing a strong credit rating is three tradelines. Being left with only one single tradeline is a potential problem.
i.e. a $15,000.00 credit card with a Zero % interest rate, or unsecured credit line balance of the same, would have a $450.00 per month payment applied to it for application purposes. In other words that 15K of debt, even at 0% wipes out 100K of potential mortgage money one would otherwise qualify for.
A $450.00 car payment has the same impact. 100K of mortgage money gone.
F) Secured lines of credit: Lenders must factor in “the equivalent” of a payment that’s based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year posted rate. Again, interest-only payments will soon be disallowed for debt ratio calculation purposes!
i.e. A 100K balance on your secured credit line currently has to be debt serviced with a payment of $289.56. The new method potentially increases the payment used to application purposes to $595.34. The Net result of this is that applicants in this scenario would qualify for $65,000.00 less mortgage money than they currently do.
G) Heating costs: Lenders must now obtain the “actual heating cost records” of a property.
Previously we used a flat figure of $50.00 for Condos, and $100.00 for detached homes. The changes have a marginal negative impact on detached homes and a smaller still positive impact on Condo applications. i.e. a 2500 sq ft detached home allowable heating cost rised to 125.00, while an 850 sq foot condo sees the heating figure cut in half from 50.00 down to 25.50. Not exactly a dragonslaying guideline change.
As these rules are adopted prior to Dec 31st, but most assuredly by Dec 31st, please note the key takeaway;
‘SUBJECT TO FINANCING’ is a key clause in every offer you write. No matter what your Broker or banker might say, do not take the chance on a subject free offer unless you have the cash in hand to close without financing, because new hurdles are popping up faster than ever.
3) Broker notice-only guideline changes
These changes are not deemed media-worthy as they are frequent, they flip flop, often there are exceptions made, and they ultimately only apply to a small percentage of new mortgage applications. However the impact on an individual file can be massive.
An example would be TD’s decision to utilise NAS (Nationwide Appraisal Services) for review and approval of all appraisal reports.
This in itself was at first not a tremendous concern as independent brokers were still able to order appraisals directly from the standard companies we had each been dealing with in the past. However, rather than a TD underwriter reviewing the report, the report would be sent directly to NAS where a NAS agent would review and signoff on behalf of TD.
What this shift to review and approval by a third-party achieves for the lender is removal of potential bias, or at least removal of the optics of potential bias. Unfortunately, it also removes a degree of logic from the underwriting process.
In years gone by appraisals were reviewed in-house by an underwriter who had an overall picture of the borrower. Often exceptions were made to guidelines based on the overall strength of the file. For instance, if the property had an out-building with significant value and the clients had excellent credit and a strong net worth then we were often able to include some or all of the value of said out-building if it was required to enable the transaction happen. We are talking about authorised outbuildings with values as high as $250,000.00 Deluxe Carriage houses, second garages, workshops, etc.
Interestingly, when these same clients are returning this year for a renewal with a slight increase or a refinance transaction three or four years after the original financing with the same lender we are finding that the approved lending value of their property has declined even though the market value may have increased. The elimination of the outbuilding that was previously allowed is now halting specific transactions.
This is not going to become a media story as it does not affect thousands of people in a small way, however it does affect hundreds of families in a potentially very large way.
I am not critiquing the media for not covering topics such as this, I am simply pointing out that data that directly affects a buyer or property owner can be difficult to access without an industry insider working for them.
4) Internal memo guideline changes (a.k.a. land mines)
These are the truly challenging types of changes we are dealing with in the lending landscape. However again, they impact primarily new mortgage applications, not existing mortgages (other than when moving to a new lender for a better rate perhaps). Thus the media appeal of explaining these nuances which in many cases have no impact on the majority of readers is simply not there.
These quiet policy changes that are made internally with no significant communication. They are like land mines which lay in wait to be discovered the hard way by broker and client alike.
They include but are not limited to;
- More detailed review of Strata minutes. (key words; water, leak, membrane, building envelope, engineer, special assessment, etc)
- Request for strata minutes on any buildings over 15 years old
- Strata Depreciation reports, or at least the vote results being requested
- Deviation from CMHC & Other insurers policies. ‘the insurer will allow it, however we (the lender) no longer will’
- Holding Companies no longer allowed on title with all but a very few lenders
- Restrictive and inflexible Appraisal review.
- Dividend income no longer allowed.
- Remediated Grow-ops no longer approved
- Lease Land properties no longer approved (Native and Government)
- Co-Op properties no longer approved
- Financing of undivided interests no longer approved
With lenders, routinely picking and choosing varying guidelines to follow a Broker’s job is arguably more difficult than ever. The only role in the transaction that is more difficult is that of the client as they are along for the ride with very little control. More than ever the client needs a Broker that is 100% in tune with what is going on. It is not so simple to be that Broker, I try…and I succeed ~98% of the time.
Is this all Bad news? No Not at all. The market will keep moving, things will keep happening. It just will require a few more steps to make some things happen over others.
Bottom Line for Brokers; We need to have a pre-approval (ratehold) for clients with two or even three different lenders in order to cover policy changes that render said pre-approval outdated with no notice.
Bottom line for you the client, ‘SUBJECT TO FINANCING’ is a key clause in every offer you write. No matter what your Broker or banker might say, do not take the chance on a subject free offer unless you have the cash in hand to close without financing, because new hurdles are popping up faster than ever.
OK, for reading all of that – the reward of a Fun Item
Recently a client of mine received a few more phone calls from me than usual while working on their file. Their voicemail put a smile on my face each time I heard it.
Build your own, or just play around with this a bit; http://oldspicevoicemail.com/
Thanks for your time.
AMP – Accredited Mortgage Professional
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