Jun 4, 2020
CMHC Multi-Residential Underwriting Rules Tightened
It appears that notwithstanding the Bank of Canada's attempt to ease credit and increase liquidity, CMHC is taking a different approach. It announced last week that CMHC insurance for multi-residential buildings will only be offered or the following purposes as it relates to residential housing:
- capital repairs/improvements, including improvements for increased energy efficiency and accessibility; or
- securing permanent financing (takeout financing to pay off construction loans or refinancing those loans).
Apparently, other uses may be permitted on a case-by-case basis. However, "In no event shall equity takeout or distributions to shareholders be permitted." Eliminating the ability to takeout equity on refinancing is entirely new concept. It ignores improvements previously financed separately or by the owner's own equity. These restrictions are being imposed despite the very stringent loan to value and debt coverage criteria that CMHC sets for these insurance policies. In times when the government is encouraging liquidity in the financial markets and encouraging easier credit to finance expenditures for consumers and businesses, CMHC is severely restricting the ability to raise insured financing that would allow shareholders to extract additional equity from their property to be spent on other acquisitions, construction, etc.
In the past, CMHC would insure loans for generally up to about 65% of a value that was based on a formula that was less than market value, effectively resulting in true loan to value ratios based on the fair market value of the property of between 50% and 60%.
CMHC supports financing of multi-residential, seniors homes, etc., based on its mandate to increase and support the supply of this type of housing. It has now made some type of political or ethical decision that it is inappropriate for owners to withdraw more insured money than they absolutely need to. I am not certain what the philosophical basis is for this but it will have the impact of reducing liquidity and increasing the cost of borrowing. Borrowers who wish to leverage their multi-residential buildings and who still have a conservative level of 65% of values approved by CMHC, will have to seek conventional, uninsured mortgages or take out second mortgages to withdraw equity at higher rates.
This newest policy does not actually surprise me. Any of you who have followed my blogs relating to "pronouncements" by the CEO of CMHC, Evan Siddall in the past, would have read about Mr. Siddall's draconian views on the need to maintain the mortgage stress tests without material change to avoid financial pandemics, as well as his own recent predictions of real estate meltdowns of 9-18% over the next year.
Clearly, the Bank of Canada and CMHC are working at cross-purposes in creating liquidity. For some reason, CMHC has deemed it unethical or immoral for CMHC insurance to cover equity withdrawals that could otherwise be used to be spent in, and revive the economy.
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