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CMHC rewrites homebuyer common stock program rules to limit potential gains and losses

The changes come as first-time buyers have largely moved away from the software

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Canada Mortgage and Housing Corp adjusted its first-time homebuyer incentive program on Wednesday, placing caps on the eight percent annually on both the upward and downward returns it would receive for its stake in homes participating in the program.

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“Now, homeowners will pay up to a maximum of 8 percent annually (not compounded) on the incentive amount from the payment date to the time of payment,” the program information page said. “The Government of Canada will also limit its share of home depreciation at the time of repayment…to a maximum loss of 8 percent per annum (not compounded).”

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The organization added that the calculation of the estimate limit was only retroactive to the program implementation date of September 2, 2019 when it was announced in the federal budget.

The change comes as higher interest rates – including a 50 basis point hike on June 1 that raised the overnight rate to 1.5 per cent – are adding upward pressure on borrowing costs, damping demand for Mortgages. This brought the median home price down to $746,000 in April from $796,000 the previous month, according to data from the Canadian Real Estate Association.

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The common equity program was initially launched to help Canadians buy their first home by offering five percent of the down payment for a first-time buyer’s purchase of an existing home for resale, or 10 percent of a newly built home.

The program struggled to win over the mortgage industry, which noted the added legal costs while closing the deal and that qualification criteria were too restrictive for many first-time homebuyers.

The bureaucrats who designed this thing definitely don’t want blood on their hands

Rob McAllister

One such critic is mortgage expert Rob McCallister, who told the Financial Post that the first-time homebuyer stimulus was introduced with virtually no industry input. Now that the market has shifted, standards are changing with it.

Number analysts in government and political analysts will probably realize that price risks are real. “They are not stupid,” McCallister wrote in an email, adding that the federal government understood how the ratings had become overworked. “It is possible that a major correction will put the government in financial trouble and cause the government to incur more losses than it bargained for. Losing taxpayer money does not produce positive signals.”

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“Moreover, the bureaucrats who designed this thing definitely don’t want blood on their hands,” McCallister added. “And they don’t want to be a scapegoat.”

McCallister also noted that it is possible that the Center for Home Health has understood through national surveys that sharing home ownership with the government could be tougher than it originally hoped. That could explain the low enrollment rates: The Home Health Care Center approved just 15,800 applications as of March, well short of the target of 100,000 first-time homebuyers it hopes to reach by September, or three years after the program began.

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As a result of homebuyers’ reluctance to share equity with the government, the company decided to cap its share of the homeowner’s upside gains and reduce its downside risks, according to McClester. This would leave the borrower bearing the brunt of the downside, though McCallister argued that the excessive loss for program users would not be disastrous.

For real estate agents like John Basalis, president of housing analytics firm Realosophy Realty Inc. Based in Toronto, this is a sign that the shifting market is pressing regulators to change housing affordability programs.

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A CMHC spokesperson told the Financial Post that it takes months for the program adjustments to take effect and that the decision to adjust the common equity program came long before interest rates were raised and markets had begun to moderate.

The CMHC added that eligible homeowners who have already paid off the stimulus in excess of the maximum 8 percent will hear from the organization, which will provide for a recalculation of their payments, and receive compensation for any excess amount previously paid.

“The maximum loss incurred by the government in the event of depreciation will only apply to homeowners who have signed Common Mortgage Agreements (SEM) on or after the effective date of June 1, 2022,” the statement read.

CMHC said profit and loss cap criteria have been added to give more flexibility to the programme, which the organization expects to be cost-neutral on average.

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2022-06-02 21:10:49

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