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It is my firm belief that current legislation regarding mortgages is not in the best interest of Canadians, I have reached out to my PM, Karen Ludwig, New Brunswick Southwest.

Karen Ludwig MP,

October 3, 2018

Re: Mortgage Legislation

Dear Karen,

I would like to begin by thanking you for the opportunity to discuss current mortgaging in Canada with you. I know Canadians many would also thank you for your interest, sadly many are unaware of the current legislation and its effect on them. I’m always surprised at the lack of knowledge of mortgaging by many, almost daily I have someone calling for a mortgage and begin by telling me that they’re a “first time homebuyer” and therefore only have to put 5% down. The 5% down payment has included everyone for decades, how did so many miss that? A lack of knowledge although surprising should not be confused with acceptance of the policy.

I have spent my full adult career in real estate and mortgage services. In the past 28 years I have had the pleasure of assisting Canadians in mortgages as the president and principal broker of Start Ventures Ltd. Prior to that I was a licensed real estate broker of a company owned by my husband and myself. I have had the pleasure of helping thousands of Canadians become homeowners and to assist homeowners to wisely use their home equity with refinancing options.

I have seen decades of twists and turns, good and bad, come and go. In my opinion, the 2 that stand out is the conservatives plan years ago to allow 100% financing for those with credit scores over 680. This sounded great and was wildly popular, but the buyers had no investment or sweat in their homes and the homes were over financed or “under water” the minute the buyer took ownership and the home became an anchor around the buyer’s neck. The program was short lived. Sadly, I have to say that current legislation by your liberal government is the most flawed of any I’ve seen in my 28 years. I know that no government intentionally undertakes to make life difficult for their citizens and certainly would not intend to put a catalyst in motion that would deny many Canadians a home of their own, yet I respectfully submit to you that’s exactly what has happen.

Mortgages in Canada usually move along with a more thoughtful plan than our neighbours to the south. Canada drifted briefly into “alternative lending” to a small degree, with a very few alternative options remaining today in Canada. Alternative lending was completely out of control and the largest contributor to what brought the US real estate and mortgage industry crashing down.  90-day arrears in the USA run in the 8% range, Canada’s 90-day arrears stat is .24%. It’s interesting to note that American mortgages do not carry a pre-payment penalty, a nice thought for Canada.

Prior to the current legislation there were safe guards in place to protect borrowers from the impact of rate increase and to save them from becoming mortgage poor:

-          Borrowers had to qualify with 2 ratios – GDSR (Gross Debt Service Ratio) and TDSR (Total Debt Service Ratios). The GDSR is known as the “shelter” ratio and is total of mortgage principal and interest payment, property taxes and an allowance for heat. In most cases the TDSR cannot exceed 32% of the gross monthly income of the borrowers. The TDSR includes the shelter costs in the GDSR as well as any other debts including credit cards, lines of credit, installment loans such as car, student and, other loans and vehicle leases. The TDSR limit is 42%, rare exceptions are available to borrowers with long standing credit responsibility as evidenced by their credit score. In these cases, the GDSR can increase up to 39% and the TDSR to 44%

-          The “payments” on credit cards, lines of credit and any revolving debt had to be calculated at 3% of the balance on the account. If a borrower has a line of credit at $10,000 with a minimum monthly payment of $85 when I do my ratios I have to use 3% or $300 as the payment on that debt. Borrowers find this annoying and unfair, but it isn’t, and I always tell them that. Minimum payments as we all know never retire a debt at least not in our lifetime. The 3% calculation preserves the ability for consumers to pay that debt down within their affordability ratios. The 3% rule is in the best interest of Canadians weather they like it or not and I hope will always stay in place

-          Borrowers had to qualify under the 5-year mortgage rate. A 6-month convertible term or a variable rate mortgage at a prime minus rate generates the lowest payment thereby increasing their borrowing power which meant a more expensive purchase availability. This buyer could set himself up to be mortgage poor with a catastrophic potential should rates rise. For many years borrowers have had to qualify at the 5-year rate regardless of the shorter term they may take so if they lock in or decide to change products they can qualify for a new, safer rate. The goal in the 5-year rate being the standard is that borrowers with a 5-year mortgage term have 5 full years without the possibility of a rate based payment increase. It is also deemed likely that income has increased in 5 years and that borrowers will have ample time to adjust their debts and budgeting prior to renewal in the face of a rate increase. I feel strongly that as mortgage professionals we owe it to our clients to guide borrowers to term decisions sensibility that are viable in their individual situations. Assisting a borrower in over buying to make them mortgage poor serves no one and to do so is highly unethical, in my option.

Under legislation passed by the government of the day the above qualifying standards continue to exist and a 200 basis point “stress test” is added. So, the borrower with a 5-year rate of 3.49% must now qualify based on 5.49%. In real terms, a current client working in health care in NB earns $82,000 per year has a max purchase price of $263,000 qualifying at the 5-year rate, under the 2% stress test they max out at $215,000. The model gets more difficult as the home prices and borrower ability lower.

My clients in Carleton county NB are seniors receiving pensions. The wife is blind. Their current mobile home floor was rotted, roof leaked, electrical problems and most likely if inspected would be condemned. Using the 5 year qualifying rate they would qualify for a $95,000 mortgage, under the “stress tests” rules they qualified for $67,000. My question is what do you buy for safe, reasonable housing with a mortgage ceiling of $67,000?  The current legislation neither saved this couple nor did it serve them. I could go on to tell you about more of my clients, I have many more suffering from the stress test but in respect for your time I’ll move on.

Those seeking to transfer their mortgages at renewal must qualify under the 2% stress test will shut out many homeowners even if a competitor offers them a better rate. The current lender is happy because the stress test has trapped the homeowner and there’s no need to sweeten their renewal offerings. Again, not in the best interest of Canadian homeowners.

CMHC and insurers have completely got out of the refinance business, at a glance it doesn’t sound bad. Homeowners should have equity in their home after borrowings, this change would only effect those that had little to no equity and likely shouldn’t be thinking of a refi, likely the mindset of the framers. However, the refinancing option largely depends on where in Canada borrowers live. NBSW is a poster card of ridings that are severely hurt by the absence of insured refinances. Lenders are extremely reluctant to lend in low population areas, a distance from large centers, although the guidelines vary slightly the norm is uninsured lending is difficult if not impossible in towns, villages and rural areas with a population of less 5000 and over 50klm of a major center of 50,000+ people. Lenders have been told that they are to adhere to the CMHC guidelines on conventional deals where CMHC is not involved which is another situation that would benefit from review, on that same thought process should lenders not be required to lend in areas where they would lend with CMHC coverage? With only few lenders doing refinances in smaller areas the lending offerings are not competitive for those borrowers. Canadians work hard for their homes and to build equity in their homes, the power of their home equity should not be inaccessible because they choose to live and make their home in a slower paced area of Canada.

About CMHC, I and my colleagues both lenders, realtors and brokers have noted dramatic increases in insurer declines. This is widespread enough to warrant a look at their decline numbers and reasoning.

As with everything there are winners, I submit to you that landlords are the winners of the stress test. More Canadians than ever have will be tenants for longer as a result of this sweeping action. More units will be required to accommodate the bulging families that cannot become homeowners or homes they could qualify for either don’t exist in their market place or are substandard housing.

In closing, I must confess there is much more I could say, many more of my clients I could tell you about. I work in an industry I love, I have been blessed with wonderful clients that I serve over and over. When I tell my soon to be homeowners they approved always my conversation always starts the same “Let me be the first person to say Welcome Home! You’re approved! Congratulations now let’s get you moved!” in 28 years the joy of sharing this time with my clients never gets old. I am passionate about my work and those I serve, when I feel they have been wronged I will stand up for them, always. The current legislation was put in place to quiet markets in Toronto and Vancouver, I don’t work in that market but understand it’s had some success doing so in the west but far less in Toronto. To be perfectly honest, the effect in those cites is not on my radar but what I can tell you is that it has been devastating in most of Canada and certainly in the Atlantic Canada, although it was never the intension of your government. Somethings in life and even in parliament just don’t work, even with our best intentions and when that happens the sooner they’re fixed, the better for all.

Respectfully submitted,

Rene Pineo Wearing