Many in our industry were taken by surprise by the news that CMHC was cutting back on portfolio insurance, i.e. Bulk Insurance, as well as announcements made by lenders to discontinue offering NIQ/Stated Income Programs within conventional mortgage guidelines.  The surprise created a stir and a great deal of speculations in our industry.  What does it mean?  How will we be impacted?  Are the changes going to be fair and equitable, and will all stake holders be mandated to play by the same rules?  The answer to these questions is simple, we just don’t know.  In time the “benefits” or “ consequences” will become apparent.  Without the passage of more time all we’re doing is guessing.  Speculation, conjecture, turning the issue into a theoretical exercise or simply navel gazing will provide no answers.  So what are the facts?

If you would like a clear picture of the issues and facts, I would strongly suggest that you visit Canada Mortgage Trends and read a great article written by Rob McLister.  In typical “McLister” fashion, Rob explained the facts in a clear cogent manner.  His article titled, “Risk-Off” in the Canadian Mortgage Market, should be a must read.

Over the ensuing months I suspect I’ll be blogging about the changes introduced by CMHC, and the impact these changes will have in the mortgage market.  For now I will set aside the debate that’s taking place in the press, i.e. should the government be providing capital relief for banks?  Was bulk insurance our answer to TARP? Could this cutback lead to a liquidity issue?  Has our banking reputation taken a hit in the eyes of the world given the magnitude of the government guarantee?  For now I will focus on NIQ or Stated income Programs.

Firstly, this program is an easy target.  The imagery around NIQ or Stated Income Programs is blood in the water.  For those who want draw comparisons  between the U.S. Sub-Prime Meltdown, and the exposure we have in Canada, the NIQ programs provides great fodder.  Never mind that Canadian lenders were never as irresponsible as U.S. lenders as it relates to these programs.  At one time one could simply fog a mirror in the U.S. and be gifted an obscene  amount of money, a mortgage.  Throw in a teaser rate, and a ridiculous reset rate, the  U.S. borrower could never have earned the right to have a mortgage.  It was a gift, pure and simple.  In my humble estimation the adjudication process in Canada was infinitely superior to the so called standards imposed in the U.S.  The most glaring difference is that lenders in Canada never shirked their duties or responsibilities as it relates to risk.  Canadian lenders did not subscribe to the U.S. model where risk was sold and became someone else’s problem.  Canadian lenders have acted responsibly, and to validate that hypothesis look no further than our collective delinquency ratios.  But if we’re going to spend time patting ourselves on the back because we’re so responsible, well, it’s also our responsibility to look at this issue from a macro perspective and support what’s right.

The NIQ programs, Stated income and Business For Self programs that we’ve all become accustomed to has benefited a great many.  From a borrowers perceptive these programs have been a financial godsend.  In some cases borrowers have the best of both worlds.  A borrower qualifying under a BFS program hires a great accountant,  minimizes personal income tax, and yet they receive the absolute best rate.  Is that equitable?  Is it deserved?  Shouldn’t these borrowers be paying a premium?  And should the government be back stopping these mortgage by providing a sovereign guarantee?  From where I sit I’m not sure what the answers are.  One thing I do know is that change creates a domino effect, and the dominoes are just starting to fall.

Until next time,

Cheers