Over the last month or so, the Canadian PF world has been atwitter with musings about zero down mortgages in Canada. Friend of the blog Boomer and Echo wrote about it, as did others. At this point, a full 99% of the crowd has probably voiced an opinion about it.
Basically, every article ever written by a personal finance blogger about the topic goes a little something like this. (Takes a deep breath)
JESUS H CHRIST WHAT KIND OF MORON GOES FOR A ZERO DOWN MORTGAGE? IF YOU CAN’T AFFORD TO PUT 20% DOWN (IDEALLY 50% THAT’S WHAT I DID JK I’M A RENTER FOR LYFE) ON A PLACE MAYBE YOU SHOULDN’T GET IT. OH, AND WHILE WE’RE AT IT, ONLY SPEND 3.2% OF YOUR INCOME ON A HOUSE YOU GOTTA MAX OUT THOSE TFSAs AND RRSPs and WHATNOT P.S. BUY MY COURSE.
(The all-caps is barely an exaggeration. These people really hate anyone buying a house in 2016, especially in Toronto or Vancouver.)
History of zero down mortgages
For a brief couple of years between 2006 and 2008, zero down mortgages were officially encouraged by CMHC. Thousands of these mortgages happened. I was personally responsible for two of them, but that’s because I encouraged applicants to pay down higher interest consumer loans with down payment money in exchange for lower interest mortgage payments. Each person saved $1,000+ annually by doing it that way.
The financial crisis hit, and the feds figured they should shut down the riskiest of mortgages. They saw what happened in the United States and wet themselves with as much vigor as Ralph Wiggum. So they got rid of zero down and 40-year amortization mortgages. Eventually 35-year amortizations went away too, which was followed by 30-year loans. These days, the maximum amortization for an insured mortgage is 25-years, but banks have the option to make uninsured loans longer.
So if the feds got rid of zero down mortgages, why are ads like this one still showing up?
These mortgages are using something called the CMHC Flex Down Program, which besides sounding like a pretty good band name, allows people to borrow the down payment on a loan with 5-10% down. In exchange for taking on this extra risk, CMHC charges people a whole $200 extra per $100,000 financed.
But here’s the interesting part. I have contacts in each of Canada’s big five banks, along with some of the smaller lenders out there. Remember, I used to be a mortgage broker, and apparently I have more than one reader of this here blog. So I asked them: who’s doing these loans.
The answer was universal, at least among those who worked for prime lenders: “not us.” Each of them told me they shut down a mortgage application as soon as borrowed funds are disclosed as the source of the down payment.
So who’s doing these loans?
I did a little digging because I was curious about just how bad of a problem these zero down mortgages are. I wanted to know which lender was doing these loans, how many of them were outstanding, and so on.
And then I got bored and played baseball on the Playstation. Want to hear about the player I created, Nelson Smith? He’s awesome, he has 32 home runs and it’s only Jul- HEY WAIT I’M SORRY DON’T HIT THE BACK BUTTON.
Here’s what I did find out. These loans go exclusively through mortgage brokers, because like I mentioned before, no regular bank will touch them at this point in the cycle. Dominion Lending Service, the biggest mortgage brokerage chain in the country, is responsible for a lot of them. But they’re hardly the only one facilitating these loans. Many of their competitors are all over this too, especially in struggling Alberta. There aren’t many people here buying houses.
They’re all going to one lender, Home Trust. You might better know Home Trust as Home Capital Group, the largest subprime lender in the country, and as a company that admitted some $1.7 billion of mortgages on its balance sheet might be frauds. So hey, they’ll finance anything!
Here’s what we know about these zero down mortgages:
- They’re done all across the country, not just in Alberta. Alberta brokers are just the ones pushing them now because of the crappy economy
- They’re insured against default or else the lender wouldn’t touch them
- Home Capital is the only one doing them with any sort of regularity
Now, admittedly, I could be wrong about that last part. As far as I could tell, Equitable Bank, Xceed, and other big subprime lenders don’t offer these loans. But at the same time, some are probably sneaking through the prime lenders even though they’re not disclosed. For the sake of argument though, let’s just assume Home Capital is the only game in town for these loans.
At the end of 2015, Home Capital had about $23 billion in loans outstanding. Approximately $10.7 billion of those mortgages are in the company’s insured portfolio. We know that all of these zero down mortgages have to be in the insured portfolio, since they’re an insured product.
Home Trust handles all sorts of loans, not just ones with a borrowed down payment. We know that a big chunk of that $10.7 billion outstanding in the insured portfolio are regular insured loans with regular down payment sources. But let’s be conservative and assume 50% (or $5.4 billion) of these loans have a borrowed down payment.
Let’s also be conservative and say Home Capital only has 50% of the borrowed down payment market. Remember, lots of people lie about borrowing a down payment, and plenty of “gifts” from relatives are really loans in disguise. So we’ll double the amount outstanding and say $10.8 billion in loans are made under some sort of borrowed down payment circumstances.
The total amount of mortgage debt outstanding in Canada as of 2015 was approximately $1.4 trillion, give or take a few billion. Look on page 15 of the linked report from the Bank of Canada if you don’t believe me. These borrowed down payment loans are just 0.8% of the market.
At the end of the day, these zero down and borrowed down payment loans are a problem. Mortgage insurers should probably refuse to grant those mortgages. But the fact is that a) borrowers are always going to stretch the rules, especially at this point in the housing cycle and b) brokers, loan officers, and underwriters are compensated on volume. They couldn’t give two flying craps about the quality of loans. As long as they pass lending standards, they’re good to go.
These trash loans are less than 1% of the market. They’re a problem, I’ll admit, but they’re not a very big problem. CMHC will eventually put a stop to them. If you’re really scared of the housing market, you should be losing sleep over a 20% decline in Toronto or Vancouver, or the massive amount of people who barely scraped together 5% down, not over this.