Home loans soon to be under stricter regulation

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The Canadian Mortgage and Housing Corporation (CMHC) recently issued new guidelines for the use of debt ratios and confirmation of income documents in their mortgage calculators. Set to take effect on December 31, 2013, many lenders are already adhering to the stipulations, while others, like Genworth Canada, are in the process of reviewing them, and may not completely implement the guidelines by the end of the year.

What the new debt ratio rules mean for borrowers
Last year, the Department of Finance issued its fourth round of rules tightening mortgage insurance practices. Those rules, intended to shield the Canadian economy from the brunt of the worldwide debt crisis, set restrictions on mortgage applications for new borrowers with less than 20 percent equity. The long-term repercussions of last year's moves, along with this newest set of rules from the CMHC, should serve to further cement mortgage standards and close existing loopholes.

In its effort to clarify how each key input is to be treated when calculating debt service ratio, CMHC included several specific factors in its latest round of rules.

As CMHC spokesman Paul Sauriol stated, "Under current practice, CMHC stipulates standard formulas for calculation of debt service ratios but has not been specific as to how each key input is to be treated."

Some of those key inputs include stricter rules limiting borrowers with variable income, who will now need to use an amount that does not exceed their average income over the previous two years; eliminating the use of guarantor income unless that person occupies the home or is the spouse or common-law partner of the borrower; and restrictions on the use of unsecured credit lines and credit cards to finance debt.

Taken together, those and other measures introduced by CMHC should serve to further solidify Canada's already conservative lending policies.

Pushback
Not surprisingly, some lenders are not ready to accept such tight regulation. Genworth Canada, for one, prefers to rely on their own calculations for debt ratio. And Canada's other private insurer, Canada Guaranty, says that it is currently reviewing the new guidelines.

Whether or not every lending institution and insurer is brought into line remains to be seen. But by issuing these standards CMHC is continuing in the vein of Canada's strict regulation standards to ensure that the country does not fall into the same credit crisis that engulfed much of the world five years ago.

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