I don’t know if you kids heard, but there are some new mortgage rules out there that are going to affect you.

Everyone, in unison: YES NELSON, WE HEARD.

So why am I even writing this article then?

Wait. Who’s italics man? I think you’ve got this backwards.

Well, that’s what y’all get for sassing me.

Well for the four of you who have apparently been living inside a cave within an even deeper cave, here’s what happened on Monday.

New mortgage rules

The first change really doesn’t affect many people, except the immigrants, so we’ll get it out of the way quickly.

The feds announced the previous loophole that enabled foreigners to buy property, classify it as a principal residence, and then sell said place without paying capital gains tax would be closed. Damn government, always closing loopholes. Always the good loopholes too.

The only way a foreigner will be able to avoid capital gains is if they’re a permanent resident. Which pretty much makes them a Canadian, no? I don’t know, let’s ask my British friend who just became a permanent resident.

“Cheerio mate! Want to go kick around the footy and then eat some crisps?”

You sick freak.

Now onto the thing that got the most headlines, the ol’ stress test. And no, we’re not talking about that time you intentionally broke your popsicle stick bridge with massive amounts of extra weight just for chuckles and kicks.

Instead of qualifying at today’s low interest rates, folks getting insured five-year fixed mortgages will now have to qualify at the average of the big bank posted rate, which currently stands at 4.64%. That’s a big change in mortgage rules.

Just how big? There are all sorts of other variables which would affect things, but the gist of it goes something like this. If you qualified for a $500,000 mortgage before (enough to get you a generic sky box in Toronto!) you’d qualify for about $400,000 under the new mortgage rules.

To really judge the impact of the new rules, allow me to quote from a press release put out by Genworth, the free market competitor to CMHC:

Approximately 50% to 55% of our total portfolio new insurance written would no longer be eligible for mortgage insurance under the new Low Ratio mortgage insurance requirements.

Let me dwell on this for just a second, because it’s kind of amazing. Genworth (which has the same underwriting standards at CMHC), has said that half of its borrowers wouldn’t qualify for loans under the new system. Anybody with a rudimentary understanding of economics knows that’s very bad for the future of housing.

Genworth shares fell more than 9% in trading yesterday, as the market quickly realized what this would mean–a big reduction in sweet, sweet insurance premiums.

What didn’t make the headlines

You’ve already read the important stuff. Now it’s time for the stuff that doesn’t seem as important but will still likely matter.

Let’s talk a little about bulk mortgage insurance, which isn’t something too many non-mortgage people realize exists. It goes something like this.

Another way for the mortgage default insurers to make a little extra money is to offer bulk insurance on so-called conventional mortgages–loans with more than 20% down. These loans are considered to be safe, so this insurance doesn’t cost much.

Note that borrowers don’t pay for this bulk insurance. Lenders pay for it.

Why would they do such a thing? It comes down to funding.

These lenders don’t raise capital by taking deposits or issuing GICs like your local friendly neighborhood bank. They rely exclusively on the bond market, debt investors who lend them money at a lower rate than the mortgage rate. The lender then takes the spread, and profits are made.

When a non-deposit lender is able to bulk insure these mortgages, their debt cost goes down. If you were lending a bank money, would you give them a lower rate if they had the principal guaranteed on all their mortgages? Of course you would. That makes these loans less risky.

Come November 30th, the ability to bulk insure these mortgages is going to get much tougher. These conventional mortgages will now be tied to the same rules as high-ratio mortgages. A lender won’t be able to insure a mortgage with more than 20% down unless the borrower goes through the same qualification process as someone with a smaller down payment.

Oh, and lenders won’t be able to bulk insure any home that isn’t a principal residence. I’ve heard that after finding out that news, one lender immediately stopped doing loans for any rental houses.

That doesn’t mean lenders can’t do these deals. It just means that they can’t insure them.But without the ability to insure these deals, they’re not going to be able to get the funding to do them and make money without those rates going up. See the catch-22?

This is bad news for these lenders, and their stock prices reflected it on Tuesday. First National, the biggest, fell 8%. Everyone’s favorite issuer of high-interest savings accounts, Equitable Bank, fell 6.3%. Street Capital fell 5.5%. Home Capital fell too, decreasing 3.3%.

Why should you care about these lenders?

You know those super-low mortgage rates y’all want? It’s not the TD Banks of the world that are offering them. They’re offered by the non-deposit lenders in an attempt to get market share. Since they don’t have to subsidize a huge branch network, they can afford to cut their rates. Banks match for good clients but hope to partially make that up by charging more to morons like your brother-in-law.

If funding costs go up for these lenders, you can guess what’s coming next. Higher rates for all! And especially higher rates for people with more than 20% to put down who want a more unconventional mortgage. This part of the market will likely get dominated by lenders who can finance these loans internally.

Conclusion

Everyone is stressing out about the new stress test, and rightly so. But for responsible people (i.e. you kids), I think the bigger issue could end up being an increase in mortgage rates and the inability for some of these more innovative conventional loans to get done. That’s the more interesting part of the new mortgage rules.

Do you have credit card debt? 

Paying 18% (or even more!) annually in interest charges is just plain dumb. Borrowell gives unsecured loans with rates as low as 5.6%. Plus, they'll let you check your credit score for free, baby!

Tell everyone, yo!