Better late than never, our beloved federal Finance Minister, Dim Jim Flaherty, dropped a big ole lump of coal in the stockings of the CREA and CAAMP yesterday. Clawing back mortgage requirements again, much like they did a year ago. Harper and Co. seem to be trying to play this off like they’re saving the country from the bony grip of debt… blissfully omitting the fact they were the ones who spiked the punch bowl in the first place.

Basically the changes we’ll see come March 18th boil down to this:

1) Max amortization periods will be lowered from 35 years, to 30 years
2) HELOC’s are now limited to 85% of the homes value, down from 90%
3) CMHC will no longer back HELOC’s

What’s it all mean? Well, lets look at it point by point. First, the change to amortization length from 35 to 30 years. Basically what this does is lower the amount a borrower can qualify for. So lets say you qualify for $300,000 under the current rules, come March 18, you’ll only qualify for $280,000. Here is a visual aid that may help.

CHMC Changes and Effects

Obviously this graphic hasn’t been updated to reflect the new changes, but this effectively puts us back at the level we were at in March 2006. Back to the first step up our stairway to disaster as it were. In fact if the feds had reigned in their changes at that point we could have limited our bubble in Alberta to a much more modest level, and in all likelihood saved most the rest of the country from any at all. But alas, they really took the axe out in June 2006, and after that all bets were off.

Basically this is going to make the already shallow pool of first time buyers out there evaporate even more, and those that do stay in will have less to play with. Thus I imagine we’ll continue to see further tightening at the lower end of the market, and as those transactions are typically the oil that keeps the market running smoothly, we’ll eventually see it work it’s way up into the higher end as the gears start grinding.

Changes 2 & 3 deal with HELOC’s, and these aren’t really going to have a direct effect on housing… but they’ll have a serious effect on household spending. No only will people not be allowed to borrow as much, but with the CMHC no longer backing those instruments, the cost of financing is going to go up. And by that I mean above and beyond just the expected increases in interest rates.

When the CMHC still backed HELOC’s they basically game the system to more-or-less allow everyone to borrow money at similar terms. Unless one had VERY poor credit, the sums involved and your credit worthiness was largely a none factor and it allows everyone to enjoy the lowest of borrowing rates, thus borrow more money. Now with the government out of the game, it means lenders will have to obtain insurance for those loans privately, and now the more your borrow, and/or worse your credit history, the higher that interest rate you’ll have to pay, and the more you’ll have to pay indirectly for insurance.

I imagine that will have a pretty chilling effect on consumer spending. Particularly the under-40 crowd, which it seems all to ofter lives off consumer debt, and lives a little too well. I guess the good news out of this is that if you’re affected by the first change, at least you’re not affected by the other two… cause, lets fact it, you have no equity to borrow against!

At the end of the day I guess we should look at these changes as another step in the right direction. If we wanted to look a gift horse in the mouth we could say we’d still like to see amortizations ratcheted all the way back to 25 years, and down payments requirements raised to 10% (and that would REALLY throw the brakes on first-time-buyers)… but alas we’ll just have to wait on that. It’ll give me something to bitch about anyway.