The COVID-19 pandemic caught the world by storm last year, and markets across the globe had to adjust. As a result, the housing market in Ontario experienced some major fluctuations and instability. In response to this economic uncertainty driven by unforeseen circumstances, the Canada Mortgage and Housing Corporation (CMHC) implemented temporary changes to its underwriting practices for mortgage loan insurance. The CMHC develops policy and guidelines in relation to mortgage financing in order to help make housing affordable for all Canadians. These changes were developed to protect Canadian homebuyers by reducing government and taxpayer risk. These changes were also meant to support the stabilization of the housing market, which in turn would diminish excessive demand and rapid, unsustainable price growth.
On July 5th, 2021, the CHMC returned to the pre-July 2020 underwriting practices for mortgage loan insurance, specifically:
- CMHC will consider a Gross Debt Service (GDS) ratio up to 39% and Total Debt Service (TDS) ratio up to 44% for borrowers who have a strong history of managing their payment obligations
- At least one borrower (or guarantor) must have a credit score that is greater than or equal to 600 at the time of request for insurance
- CMHC will consider the overall strength of the mortgage loan insurance application, including alternative methods of establishing creditworthiness for borrowers without a credit history
As usual, the CMHC will continue to apply rigorous underwriting principles and guidelines to the business we do to ensure potential homebuyers can meet their financial obligations.
The reason for the reversal of the July 2020 changes developed in response to the COVID-19 pandemic is because the underwriting changes were not as effective as anticipated and the CMHC incurred the cost of a decline in their market share. It is important for the CMHC to maintain a healthy market share as it helps fulfill the financial stability aspect of their mandate. The CMHC aims to maintain enough presence to be able to:
a) step in to support financial stability
b) absorb additional market share as required
Bob Dugan, the chief economist for the CMHC explains, “Economic conditions are expected to return to pre-pandemic levels by the end of 2023, if broad immunity to COVID-19 takes hold by the end of 2021. This includes the pace of home sales and prices, which we expect to see moderate from 2020 highs over the same period. However, significant risks remain with respect to the path, timing, and sustainability of the recovery".
The CMHC will continue to be attentive in their underwriting practices as high levels of debt can negatively affect economic growth and put the Canadian financial system at risk. They are always actively observing and analyzing the market conditions and work closely alongside federal partners to ensure appropriate economic policies and guidelines are in place.