Bank of Canada Wants to Meet With CMHC

Bank of Canada wants to meet with Canada Mortgage and Housing Corporation (CMHC) to discuss new rules the Crown corporation has put in place that could fuel an already-robust Canadian housing market.

New products such as interest-only mortgages make borrowing easier. CMHC, which insures mortgages when the downpayment is less than 25% of the value of a home, introduced a new program last month that allows consumers the option of not making any principle payment for the first 10 years of a mortgage.

Tt is something they are watching and they will be talking with Canada Mortgage about that.

If we look elsewhere in the world where there has been a major move to interest-only mortgages or other innovations of that sort, that has had an influence on housing prices, and we would want to sit down with Canada Mortgage to look at their analysis of the influence they expect it to have here.

Some commentators suggested Mr. Dodge may have been thinking about the United States with his comments yesterday. About 25% of new mortgages in the US are so-called "exotic loans," which include everything from the interest-only option to a reverse amortization, whereby the principle amount of a loan actually goes up in the early years. Those types of US-style loans have yet to become a significant segment of the Canadian market. There also have not been problems in the US, referring to the fact the loan-default rate there is still low, despite the new products.

In addition to the interest-only loan, CMHC has introduced measures allowing consumers to amortize their mortgage payments over 35 years. The change effectively lowers monthly payments by spreading the debt over a longer period.

The CMHC changes have as much to do with competing in a tough marketplace as a change in policy. The agency controls two-thirds of the mortgage insurance market in Canada while rival Genworth Financial Canada controls the rest.

Another change that would make it easier for consumers could come from the Department of Finance, which last month issued a white paper suggesting consumers should be able to put up as little as 20% as a downpayment, in order to borrow without mortgage insurance.

New products like interest-only mortgage will lead to more prices increases as opposed to get more people into the housing market.