Below is a brief analysis of the recently announced CMHC changes from our national head office.
CMHC announced more restrictive underwriting criteria that will apply to new applications for homeowner purchases effective July 1, 2020. We recently argued against tinkering with mortgage underwriting criteria in light of the COVID-driven housing market slowdown. While we maintain that view, the reality is these changes are here to stay and they will further restrict activity. We estimate the more restrictive criteria could affect roughly 20% of CMHC-insured borrowers.
On the other hand, it’s not clear yet that the private mortgage insurers, Genworth and Canada Guaranty will follow suit. We believe there’s a rational argument to not do so given a) the opportunity to take market share in loans no longer insured by CMHC, b) familiarity with the credit quality and loss performance given MIC and CG already underwrite similar loans, and c) the potential to extract more market share in “lower risk”/CMHC-insured loans as Genworth and Canada Guaranty deepen relationships through a more complete product lineup. The risk to Genworth and Canada Guaranty would be expanding in a “higher-risk” segment of borrowing. In our view, the risk-reward is worth exploring, and therefore, the obvious negative impacts of CMHC’s changes could be neutralized. Homebuyers deciding to increase their down payment or purchase a lower-priced home could also mitigate the impacts of the changes.
Here is a summary of CMHC’s Underwriting Criteria Changes
1. The Gross Debt Servicing ratio will now be a maximum of 35% of your income. This is the ratio of your mortgage debt to income. Previously it could be as high as 39%. The Total Debt Servicing Ratio will now be a maximum of 42% of your income. This is the ratio of all your debt to your income. Previously this ratio was 44%. Since Q2 2018, CMHC-insured loans with a GDS above 35% represent an average of approximately 18% of transactions. We estimate the 4-point reduction in GDS ratio thresholds will reduce homebuyer purchasing power by approximately 10-12%.
2. Establishing a minimum credit score of 680 for at least one borrower. The previous CMHC standard was a minimum 600 credit score. Since Q2 2018, CMHC-insured loans with a credit score of less than 680 represent approximately 6% of transactions.
3. Borrowed down payments (flex down) will no longer be allowed. In 2019, borrowed down payment applications were less than 2% of all CMHC’s homeowner transactions.
It’s difficult to estimate the exact amount of affected CMHC-insured borrowers given none of these risk categories are mutually exclusive. However, it’s safe to assume that the GDS/TDS change will affect approximately 18% of previously CMHC-insurable homebuyers, which likely doesn’t include all of the credit score/down payment affected homebuyers. Thus, 20% is a reasonable guess. On the positive side, CMHC did not increase minimum down payment rules which could have affected over 50% of new mortgage applications.
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