A funny thing happened late last week. On Friday, the Canadian government took new measures to stabilize its red-hot housing market.
I say funny because their housing policies seem to contradict our own, and that might be worrisome for us.
As a result of surging home prices north of the United States border, the Department of Finance Canada imposed tighter down payment requirements for certain government-backed mortgage loans.
Minimum Down Payment of 10%
In short, they will soon require home buyers to come up with a minimum down payment of 10% instead of 5% if the loan amount exceeds $500,000.
It only applies to the portion over $500,000, so if a borrower takes out a mortgage for $750,000 they’d have to come up with a total of $50,000 in down payment funds.
Broken down, it’s $25,000 for the first $500,000 and another $25,000 for the $250,000 above that key threshold.
That increases the blended down payment to roughly 6.7%, which may not seem like a big deal, but every dollar counts when it comes to housing affordability, especially when home prices are increasing.
The new rule will take effect on February 15, 2016, and the Canadian government hopes it will lead to a “secure housing market and balanced economic growth over the long-term.”
In other words, they hope it tempers worrying home price gains and helps the country avoid a real estate bubble.
Bizarro World
I find the whole thing strange because it seems to completely counter how things are done around here.
After just a few years since home prices bottomed, we have actually been lowering down payment requirements to help individuals afford homes, this despite home prices absolutely surging since 2012.
As opposed to requiring 5% down, Fannie and Freddie introduced new products that only require 3% down.
So instead of perhaps stopping and saying, “Wait, home prices are beginning to look a little steep again,” we’re saying just make mortgage lending easier again.
Sure, there are tighter lending guidelines in place these days thanks to the Ability-to-Repay and Qualified Mortgage Rules, but down payments seem to be trickling back to zero.
In fact, they did hit zero again. Last week, a San Francisco credit union announced the availability of the POPPYLOAN, which allows buyers in the region to score up to $2 million with absolutely no down payment.
It’s their answer to high home prices and the growing inability to save for a down payment.
Forget being concerned that home prices might be heading back to bubble territory. The approach is to once again lower the barrier to entry so everyone can realize the American Dream.
Now I will say that we already have similar rules in place for conforming loans, those that do not exceed $417,000. And larger loans, known as jumbo loans, tend to require higher down payments.
But the Canadian approach just seems so foreign (pun alert) to our mortgage finance system here in the U.S.
The FHFA, which oversees Fannie and Freddie, didn’t raise down payment requirements as home prices increased at what one might refer to as unsustainable levels.
They nearly halved the requirement and introduced new ways for borrowers to qualify for mortgages using household income from anyone living in the house.
And I just see it getting worse as home prices rise higher and mortgage rates begin their long awaited ascent.
Instead of questioning the meteoric rise of home prices, we will question why it’s not easier to get a mortgage.
Sadly, that could land us straight back in the mess we supposedly just climbed out of.