CMHC announced a little over a week ago that effective in October of 2008 that they would no longer be providing insurance for 100% financing and no longer offering 40 year amortizations.

(I would have posted sooner, but my vacation took me away from everything electronic)
One would have to assume that the combination of these two items is where the majority of defaults were coming from. People who can’t save a down payment and can’t afford the monthly expense of 25 year amortization.

There are several interesting points to consider here. The statistics, from CMHC and Genworth (likely AIG as well), show that the majority of folks taking the 40 year AM can actually afford the monthly payments for 25 years. What the 40 year AM has provided is a way to improve cashflow for folks so they can “live a little” and not be completely tied to a mortgage or a term I like “mortgage slave”.

The whole point of the formation of CMHC was to aid in getting Canadians into houses by insuring lenders and lowering the downpayments for the buyers. The people I really feel sorry for is the single income folks who live in the higher priced cities who were looking at the 40 year AM as an opportunity to be able to afford a home and stop paying rent. Every little bit helps for these folks. They’ve got good credit. They are saving a downpayment. Now they’re going to have to wait some more to save an even larger downpayment, just so the monthly mortgage amount falls within their gross debt service (GDS).

Now that we’ve all digested that for a minute, take a look at what’s happening in the market as a result of this annoucement. Within hours of this annoucement, even though it doesn’t take effect until October AND it’s currently only one mortgage insurance company (of the 3), all the major lenders, one by one, all announce that they are no longer providing 100% financing and 40 year AMs.

Fortunately not ALL of the lenders have jumped ship and one lender actually was so bold as to state “business as usual”.

I guess the real news will come when Genworth or AIG decided to change their policy. This doesn’t seem likely for a few reasons. One, both companies are not restricted to operating in Canada and want to compete for business. Two, these products are offered in other countries around the world. In fact 40 year amortizations are the lowest in the world! In Europe 50 & 60 are the norm and in Japan they have something known as the generational mortgage with amortizations and mortgages lasting beyond the life of the original borrower.

Different countries, different cultures, different attitudes.