Canada

Canada Quietly Changed Its First-Time Home Buyer Program To Limit Its Losses

Canada is changing a first-time home buyer program to limit its exposure to losses. The Canada Mortgage and Housing Corporation (CMHC) made unannounced changes to the First-Time Home Buyer Initiative (FTHBI). The program, which sees the government take a stake in a successful applicant’s home purchase, is now limiting its downside exposure. Only a few months ago, when it was thought home prices would only go up, taxpayers were going to have unlimited upside. Now that prices are falling, Canada quietly updated the program to limit exposure to losses. 

First Time Home Buyer Program

The First-Time Home Buyer Initiative (FTHBI) is a shared equity program for new owners. Successful applicants see the speculator government take a 5 to 10 percent stake in their home. The idea is to reduce the outstanding balance and lower monthly payments for the owner. It frees up a little more cash for households and the government shares in the gains and losses.

Since it reduces monthly mortgage payments, policymakers sell it as an affordability measure. It’s not. This is technically referred to as a demand inducement scheme. Demand inducement schemes are designed to stimulate demand and thus raise prices. Really, what they’re doing is making it more comfortable to carry higher debt loads. Stress tests still limit borrowers, but some find lower payments more palatable. 

The program has poor uptake, and that’s not a surprise — you’d have to be terrible at math for it to make sense. It may sound smart to reduce leverage to “save” money, but then you’re paying more for the “help.” Since home buyers still have to qualify for the extra debt, they can already pay the mortgage comfortably. If you believe home prices will continue to climb more than a ~3% variable rate mortgage, you aren’t saving money. You’re paying the most expensive loan you’ll have.

First-Time Buying Program Might Be A “Capital Cushioning” Program

The timing of the program left a lot of questions since it appears to also be a “capital cushioning” program. These are programs used to transfer assets from low-use owners (investors) to high-use ones (families) during rising risk. Investors are more likely to default than owner-occupied mortgages, and accept bigger losses.

During the US bubble, the government ried to transfer some of the risks this way. The narrative is poor people defaulted at subprime lenders during the ’08 bubble. In reality, it was high credit score investors using subprime lenders that defaulted at a higher rate. They needed more leverage, so they sought it at a subprime lender.

Borrowers with subprime credit scores defaulted only a little higher than usual. They held onto their negative equity home and rode it out for years. Naturally, by moving more of these assets from investors to owner-occupiers, lenders reduced risk. The only problem is this comes at the expense of poor people, which isn’t the feel good story the government sells it as.

Canada Quietly Changes The Program To Put A Cap On Annual Losses

Naturally, the program received criticism, especially around the rollout period. They are encouraging more leverage and incentivizing desperate buyers right before rates rise. They’re also using taxpayer capital, meaning taxpayers shoulder some of these losses. Of course, now the program has a new caveat — the state has limited its maximum loss exposure.

Yesterday, the program was quietly updated without announcement with new limits. The maximum loss the speculator state will take is 8% per annum, with the owner assuming the rest of the risk. As prices fall, they’re selling households on the upside — you’ll only have to pay them 8% maximum per year if prices rise.

There we have it. The program encourages first-time home buyers to leverage up during this limited-time offer. If things go well, you’ll pay an 8% max interest instead of the ~3% interest a variable rate mortgage costs right now. If prices fall, you’re on the hook for any of their losses greater than 8%. When a program has greater benefits for the administrator than the user, it’s best to take a few extra moments and consider if it’s worth it.

7 Comments

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  • Reply
    Wordy 4 days ago

    When the essay word count is minimum 2000 words, but you only have 500.

    • Reply
      Mortgage Guy 4 days ago

      when you’re so dumb you don’t realize the news is written for people with various backgrounds who don’t understand why the program is predatory.

      The worst part is I have a pretty good guess you’re in my industry but you’re probably the skeezy high pressured turd that hopes their client doesn’t understand what they’re signing.

      • Reply
        Gman 4 days ago

        Too many sales people in the mortgage industry and not enough experts is the problem with the mortgage industry. The industry needs to clean house and bring in much tougher standards and higher barriers of entry in order to gain the respect of other professions such as Legal, Insurance, Accounting, Investment etc….. Most people assume all mortgage agents and brokers are the same which is not true. There are some very good agents and brokers out there who truly know their stuff and truly care for their clients but they are far and few between. The majority are only in it for the money and can barely read or understand the commitment their client is signing.

  • Reply
    Scott 4 days ago

    Is it a coincidence that all these inane ideas came right after marijuana was legalized…?

  • Reply
    Dave Cramer 1 day ago

    I’m not sure I agree that this is a bad idea. If you don’t have the money for the down payment and you want in the market and are willing to be in it for a while I don’t see the downside.

    Now as to why it hasn’t seen much uptake. I can’t figure out where or what house you can buy that actually qualifies. The only way this works is if the bank of Mom and Dad provide a significant gift.

    It’s also very difficult to find all the rules in a simple place.

  • Reply
    Phillip 19 hours ago

    The policy allowed people with income but not a 20% down payment saved up to get into the market – yes you can afford a mortgage without it but you’d have to get up to 80k in savings to afford the few 400k homes out there

  • Reply
    Nin 18 hours ago

    It is rule. House price go up. Buyer makes money. House price go down. Buyer lose money. This is the rule in the market.

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