Tightening the screws on housing market credit

The Government of Canada came out with an incremental announcement regarding the policies surrounding mortgage credit:

Specifically, the following provisions will be enacted immediately:

* Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.

Notably, this does not prevent people putting 20% down from getting a 35-year amortization mortgage; it does prevent people putting less than 20% down from getting a 35-year amortization mortgage. This change will only impact those mortgages where mortgage insurance is required.

On March 18, 2011 the following will come into force:

* Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.

This lessens the amount, slightly, of the home equity people can withdraw in a second-line mortgage.

On April 18, 2011 the following will come into force:

* Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

This is probably the most important of changes – second-line mortgages will no longer have the public guaranteeing the loan value via CMHC.

Clearly the government is worried about CMHC guaranteeing mortgages that will eventually default. My opinion is that the government should not be in the market of guaranteeing mortgages at all – this is precisely why we have a financial industry, which can appropriately price the risk. If they cannot price the risk properly, they should either get out of the business or go bankrupt.