The president of a macroeconomic advisory agency suggested changes CMHC needs to make to harness its mortgage market influence in 2014, including reinstating the regional mortgage cap; but will mortgage brokers agree with him?
The president of a macroeconomic advisory agency suggested changes CMHC needs to make to harness its mortgage market influence in 2014, including reinstating the regional mortgage cap; but will mortgage brokers agree with him?
“Prior to 2003, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure; this made a lot of sense given that CMHC’s original mandate was geared toward helping first-time buyers get into entry-level housing,” Ben Rabidoux, president of North Cove Advisors wrote in an article for the Globe and Mail Friday. “The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy to do so.”
Rabidoux, whose North Cove Advisors specializes in housing and credit trends, refers to the elimination of the cap in 2003 as a “massive policy blunder” and cites Finance Minister Jim Flaherty’s decision to cap the price of a house it will insure at $1 million in 2012 as a step back in the right direction. Though he also suggests implementing individual mortgage caps in each city that take into account average housing prices in each one.
“It ignores the fact that a million-dollar home is well above a starter home in nearly all parts of Canada. This should change,” Rabidoux said. “One possible solution would be to set the maximum mortgage cap to the average resale price in each census metropolitan area and have that cap change annually to reflect changing house prices.”
Rabidoux’s suggestions come on the heels of Finance Minister Jim Flaherty’s comment that the Canadian Mortgage and Housing Corporation had evolved past its initial intention. And he believes the CMHC should start requiring more documentation before issuing mortgage default insurance.
“Today, a borrower can obtain a prime, CMHC-insured mortgage with as little as a pay stub and a job letter, which would make it a low-documentation Alt-A mortgage by U.S. standards,” Rabidoux wrote. “This relatively low standard for mortgage documentation coupled with a very obvious moral hazard leaves the door open for what the mortgage industry calls ‘soft fraud’ or ‘fraud for shelter,’ which typically involves the applicant (often with the knowledge of the lender) misrepresenting their financial circumstances, usually related to their income or job status.”
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