Wow! In 1 Day, 2 different entities tighten mortgage rules

First the finance minister came up to the plate to tighten mortgage rules earlier today.  And then later today the OSFI did not want to outdone.
 From the Financial Post OSFI lays mortgage rules finalized mortgage rules; mortgage brokers not so happy

Canada’s banking regulator announced finalized guidelines for mortgage lending that along with other measures unveiled today by Finance Minister Jim Flaherty are aimed at cooling the country’s frothy housing market.
The Office of the Superintendent of Financial Institutions first proposed the guidelines back on March 19, as part of an international initiative spearheaded by the Financial Stability Board in Basel, Switzerland.
The new guidelines, which come after much discussion with industry, are designed to compel lenders to look more closely at the credit history of borrowers even when mortgages are backed by the federal government and to limit the level of risk exposure.

Among the major changes:
— The maximum loan to value on home equity lines of credit (HELOCs) is cut to 65% from 80%
— The loan to value should be re-calculated upon any refinancing and whenever the lender deems prudent
—HELOCs will continue to as revolving lines of credit with no specific amortization period. However, OSFI says lenders must now expect borrowers to have the ability to fully repay HELOCs over time.

All this on the heels of Mark Carney saying from the Financial Post "Canada’s relatively healthy economy has been largely based on borrowed money, but the situation cannot go on indefinitely", Bank of Canada governor Mark Carney warned Thursday.

I will be adding to this list, green =mortgage loosening, red = mortgage tightening

1954-1990- Somewhere along this time, 10% became minimum down payment.
1990- 5% was introduced as a trial run, then officially accepted in 1999.
2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market
2001 – CIBC offered below-prime mortgages.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth announces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 5% down.
April 2010- CMHC did some minor tightening of their guidelines, investors need 20% down.
March 2011- CMHC only allows 30 yr amortizations, restrictions on pulling equity out 
2012 - CMHC only allows 25 yr amortizations, insured mortgages limited to $1 million, home equity refinance drops from 85% to 80%.

No surprise of more mortgage tightening here

From the Globe and Mail

Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.
At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.
In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.
And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
The changes will take effect on July 9, 2012.

And if one thinks that this 4th round of mortgage tightning in the last 4 years is the last of mortgage tightening, think again.

From the Financial Post

It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria. Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate.

And some wonder why we have a debt problem.

Could a soft landing hit Saskatchewan Real Estate?

Here is how the average Saskatchewan house price has fared since 1990.

After 2006, crazy huh?  Especially when we compare growth in the average house price and average weekly wage in this province from 1990 to 2011.

And if see who is leading mortgage debt growth since 2006, we can start connecting the dots that buyers in Saskatchewan have used more leverage than wage increases to help launch house prices.

But is it possible for real estate in this province to experience a "soft landing" rather than a "hard landing", which will most definitely hit some jurisdictions in Canada? A soft landing is where incomes basically catch up to house prices.  In this scenario, house prices could fall, but would stay within a 10% correction.

First, the stars would have to align, namely interest rates would have to stay low for a long period of time.   This I believe will happen.  Resources would have to stay strong for a very long term. No more busts.  Employment, population and wage growth would also have to stay strong as well.  To keep much wealth in the province and housing supply relatively low, we would have to expect that most recent retirees and baby boomers would not move to where real estate is cheaper and the climate is nicer.  And no 2008 financial crisis could happen.  Forget the stuff in Europe, a China hard landing, the US experiencing a Japan like scenario, etc.

While it would be tough, almost impossible for all of that to happen, maybe the worst that does happen would not be all that bad and in that case here is why a soft landing is possible for Saskatchewan real estate.

Here are few reasons:
Saskatchewan's "Housing Bubble" Is Smaller Than The National Average

House Price to Income
Even though Saskatchewan and it's cities have experienced the fastest house price growth across the country in the last decade, it has helped that house prices were at a low level.  Our house price to income is less than the Canadian average.

Unfortunately Stats Canada data for household income is only up to 2009.  In the last couple of years I believe the house price to income has most likely rose higher for Regina, Saskatoon and Saskatchewan but all still below the national average.  As of 2009, the house price to income ratio using CMHC and Stats Canada stats stood at:
Canada : 5.1
Saskatchewan : 3.7
Saskatoon : 4.2
Regina: 3
We are not Vancouver who stood at over 9 times in 2009, that ratio is definitely over double digits now! Ouch!

Affordability

And this is how Saskatchewan compares to other provinces and the national average.

This is taking into account a 25% down payment over 25 years with a 5 year fixed posted rate with an median household income.  Saskatchewan is the third least affordable province after BC and Ontario. But Saskatchewan is just a tad less affordable now than compared to the long term average and just a few percentage points less affordable than Alberta and Manitoba.

But we should remember that this affordability report does have it's flaws.  Down payments have shrunk over the years and even though interest rates have plopped to all time lows, affordability is over the long term average for BC, Ontario and Saskatchewan.  But on the other hand, the RBC affordability index uses a POSTED RATE.  Looking at today's posted rate and we see it is at 5.24%.  A discounted rate can be had for 3.49%, if not lower.  So take this affordability index with a grain of salt.  A true affordability index ( in my mind) would be the average first time buyer down payment, average household income and the discounted five year fixed over the last 25 years, but until that happens I will settle for this one.

As long as interest rates stay extremely low for a long time, affordability is not totally out of whack like Toronto in the late 80's and Vancouver now.

Saskatchewan Debt To Income And Mortgage Debt To GDP Ratios Are In Relatively Better Shape Than Canadian Average
One of the big reasons why Saskatchewan households are in better shape, relatively speaking, was that house prices were affordable for such a long time and households did not use debt like it was candy until 2007 or so.  The rest of the country was piling into more debt 2 to 3 years earlier.  Basically, households in Saskatchewan have been the last ones to the credit party.  The following chart is from 2 years ago, I'm sure the debt to income ratio for Saskatchewan is higher than 116% now, but still in waters that are not as treacherous as Alberta or BC and still below the national average.

The numbers I find are showing that mortgage debt to GDP ratio in Saskatchewan is lower than the national average.  The national average for residential mortgage debt to GDP is around 64%.  While the numbers are not exact, residential mortgage debt to GDP for Saskatchewan homeowners is in my best estimation, near 40%.  This is also due to the fact that resources are a big part of our economy and bring our GDP higher.  This makes the residential mortgage debt to GDP ratio look better than it really is but it showing better than the national average.

Provincial Wage Growth At The Top
Saskatchewan has had one of the best growth rates of wages in Canada. Saskatchewan and Alberta have been leading the provinces in weekly wage growth over the last decade and a half.  The scary thing with Alberta is that they have had the highest wage growth and highest debt growth over the last decade.  We don't want to be following in their footsteps.

Saskatchewan Economy Is Less Reliant On Consumer Spending
While only a few percentage points from the national average, Saskatchewan relies less on consumers for GDP and employment growth compared to the national average.   And it is down from bubblicious BC by over 10 percentage points!

Tip for Saskatchewan Housing Market: Don't be Alberta or BC!

Saskatchewan's Economy Relies Less On Residential Investment For GDP Growth

At under 5%, Saskatchewan is also less reliant on residential investment for GDP growth.  Each previous time ( early 80's and the early 90's) parts of Canada experienced house bubble busts when residential investment rose above 7% of GDP.

Provincial Government is in Relatively Good Shape

From CFIB Economics

Public Sector Debt Clock

	Federal	Provincial/Territorial	Total	/pers
Canada	$644,616,489,514	$483,999,047,367	$1,128,615,536,882	$32,278
Newfoundland and Labrador	$9,388,886,074	$7,700,000,000	$17,088,886,074	$33,555
Prince Edward Island	$2,674,195,250	$1,913,348,292	$4,587,543,542	$31,626
Nova Scotia	$17,574,248,623	$13,753,393,166	$31,327,641,790	$32,864
New Brunswick	$14,006,859,565	$10,193,438,041	$24,200,297,606	$31,852
Quebec	$148,110,306,422	$171,914,470,157	$320,024,776,579	$39,835
Ontario	$251,150,164,457	$240,643,410,471	$491,793,574,927	$36,100
Manitoba	$23,277,629,919	$14,826,696,583	$38,104,326,502	$30,179
Saskatchewan	$19,344,457,658	$3,553,393,166	$22,897,850,824	$21,822
Alberta	$70,719,778,383	-$14,733,034,169	$55,986,744,214	$14,595
British Columbia	$86,307,992,229	$34,133,931,662	$120,441,923,890	$25,727
Yukon	$646,460,656	-$200,000,000	$446,460,656	$12,732
Northwest Territories	$796,671,409	$200,000,000	$996,671,409	$23,064
Nunavut	$618,838,869	$100,000,000	$718,838,869	$21,415

( Saskatchewan debt does not include crown corporation debt in above table)

Saskatchewan's per capita share of debt is second best amongst the provinces.  And as we can see in the next few graphs total debt has shrunk from over $12 billion in 2004 to just over $8 billion in 2011.

Here is how it looks when we break down debt from Crown corporations and debt from the General Revenue Fund.

If the debt is knocked down some more, it would lead to better tax rates ( yeah!).  But this is very dependent on strong resources.  If resources are not strong, lowering the debt does not have a chance.


People Feel Relatively Safer Investing In Homes
My feeling is that the stock market will be "sideways" and "choppy" for the next few years, this will lead to people continuing to put more money into real estate than the historical average.  And for many people how can you blame them? Take a look at these next charts.

Do you plant your money in the "casino" or  "steady eddy real estate"?  *Note this is the TSX at the closing of each year.  Does not include dividends.

Quite the roller coaster for the TSX, make sure to take some gravel before entering.
This is another look at how the TSX and the average Canadian house price compare from 1996 to 2011.

With Low Interest Rates, There Might Not Be Much Negative Equity
Because interest rates are so low, people can pay off their mortgage principal quicker than in years past.  Here is one example with a 20% loss in house prices, negative equity does not happen for too long.

Here is how a loss of 20% in house prices looks like with a 25 year mortgage at 3.5% being paid down at $1800 a month.  In Saskatoon the average house in a decent area ( not condo or townhome) is around $360,000.

Here I am suggesting in this example the value of this house would lose 20% in 5 years and stagnate for a decade. 

Conclusion
I believe Saskatchewan has one of the best chances in the country to experience a "soft landing" in housing but like I said before, the stars would have to align. 

New Stats Canada Household Ratios For 2012 1st Quarter

Stats Canada is out with the quarterly stats for households, here we go.  Household debt continues to climb and now stands at over 154% of personal disposable income.

 Household debt to GDP has stayed around the 94% mark since the beginning of 2009.

Homeowner's equity as a % of real estate is down from it's 2007 high of 71% to settle in at 66% as of the first quarter of 2012.

This even though the average house price in Canada has increased from just over $300,000 in 2007 to over $360,000 as of now.

Here is how Canada compares with the US with home equity.

Some may say that we need to look at debt to assets but the US said the same thing in late 90's and mid 2000's. 

The problem with this thinking is that while assets go up and down, debt remains until it is paid off.  As we all know Canadians have had less income and GDP growth but more debt growth than the Americans over the last 30 years.

The biggest increase in the price to income ratio happened when interest rates moved upward

The biggest increase that the house price to income ratio experienced was between 2002 and 2007.

But this was during a time when, on average, interest rates increased.

The next graph shows year over year change in mortgage credit growth and interest rate levels.

Housing bulls forget it has always been about the increase in credit that has moved house prices, not because interest rates were lowered.  If that was the case why did house prices in Canada, on average stay level during the 90's?

Even though interest rates went from double digits to single digits.

And some wonder why household indebtness in the number one domestic risk to the Canadian economy.





Dr. Housing Bubble: This time is not different- Canadian house prices reach apex, set for deep fall

From Dr. Housing Bubble "Canadian house prices reach apex, set for deep fall. Canadian household debt at record levels."

Being inside a bubble creates an interesting atmosphere.  To a certain degree logical voices from outside of the bubble need to speak up to recognize what is rather obvious yet lost for many within the bubble.  There is no bigger housing bubble than the one currently happening in Canadian real estate.  Not only is the bubble raging it has far surpassed what the US housing bubble reached at its pinnacle.  Those in the housing bubble of course are intoxicated by the elixir of easy money.  After all, simply sitting in your condo and having it go up $50,000 or $100,000 in a year for not lifting a finger sounds like a good investment.  This happened all across the US from condo happy Miami, Boston, and Chicago to housing crazy California and Nevada.  Yet the echoes are the same when one points this out.  It is truly different here.  The only true thing is that human psychology driven by unfettered greed creates bubbles over and over like the sun rising.  Taking a look at the Canadian housing market, you realize that not only is a nationwide bubble in full force but some cities like Vancouver and Toronto are extraordinarily overpriced.

Comparing the Canadian and US Housing Markets
While the US housing market peaked in 2006 (six years ago and prices are now hitting lost decade territory) Canadian home values are now at their apex:

Source:  SoberLook, Bloomberg
The source of this bubble is hot money from foreign markets and local buyers being caught up in the frenzy.  Yet as we are now witnessing in this globally connected system, a bubble bursting in one market (i.e., Spain) will have ramifications all across the world.  So paying attention to the Canadian housing bubble is obviously important for those in Canada but very important for people here in the US.
The above chart highlights a big bubble that simply rolled right through the US housing correction.  Yet keep in mind that Canada has a large flow of money coming in from foreign markets.  Places like Australia and ironically, China have restrictions on foreign funds even though most investors into the Canadian housing market are coming from Asia.  Some interesting dynamics for Canada:

“(Financial Post) Conventional wisdom is that this is the market at work. This is not the market at work. This is manipulation of a government system of open-ended mortgage insurance that is poorly supervised. What is going on here is a deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble. This mania happened in several other countries — where it was shut down — and has spread to Canada. Officials here have been urging restraint but that is not the solution. A ban on foreign buying of residences is the only solution.”

Just take a look at home prices in Vancouver and Toronto:


You might be thinking that household incomes can certainly afford those prices:

The above is median household income for more prosperous Vancouver.  The bottom line is that this is a bubble and has many aspects of a mania:

“This is what is happening. For example, a modest bungalow in Toronto sold last month for $1,180,800, $400,000 more than the asking price of $759,000. Canadian bidders were furious and deserved to be. The winning bid was made by a university student whose parents have a business in the United States but who live in China. I don’t know if there was a mortgage involved, but student housing — even for foreign students — is now liberally insured by CMHC, in other words, by the Canadian taxpayer.”

A bungalow selling for $400,000 above asking price?  That is simply insanity and of course, it is harming local buyers.  The anger is obviously there as some in Canada are pushing for Australian like remedies where foreign money is heavily restricted.  Yet there are many winners right now so why stop the Canadian housing bubble party?
The coming hit to the economy
As occurred in the US, at the height of the bubble a big jump in construction jobs occurred.  Canada was tracking with the US but now has entered into a new realm:

The above is not occurring because of massive population growth.  This is happening because of big real estate speculation and largely in condos:

“Nearly three times’ more condo high-rises are being built in Toronto than are being built in New York City and nearly seven times’ more than in Chicago, according to Bloomberg News.
This development boom, and accompanying price increases, is not about housing to meet a sudden surge in population. It is not about an economic boom. If it was, Calgary and Edmonton would have 128 cranes, like Toronto does, building housing and pushing up all prices. Instead, this is taking place in Toronto and Vancouver where economies are moribund.”

Many different dynamics yet a bubble is definitely there.  You even have people flipping rights to properties skipping out on paying taxes to the Canadian government:

“(Financial Post) 3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.”

This reminds me of all the buyers purchasing places without even viewing the property here in Southern California.  Yet this is even worse because at least here, each transaction generated state and federal revenues.  In Canada with the large foreign buyer market, some are actually gimmicking the system:

“Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.
The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.
Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.”

Ironically in Canada foreign buyers are in a much better position given the high tax structures in place for locals.  Some will argue that this is carefully managed but of course it is not.  This is like the Alt-A and option ARM pushers that claimed they were verifying all other data carefully and most taking on these loans were doctors and actors not looking to document high income.  Since other countries around the world have stifled this kind of nonsense, more and more money is flowing into a market that is very favorable to the foreign investor.  Yet Canadians looking to buy will have to contend with these mania forces and many are doing the exact thing that Americans did.  Many Canadians are simply loading up on debt since incomes do not support current prices without leverage:

The above chart looks even more problematic than what occurred in the US.  Not only is the Canadian economy heavily dependent on construction now but households are more and more in debt.  Even US debt rescue shows bring out Canadian families as their examples (although the shows do their best not to explain that we are looking at a modern day Canadian household).  It is only a matter of time that the bubble will pop.   Bubbles last longer than most will expect (in the US home prices went on a tear for well over a decade even though household incomes were not keeping up before it popped).  As the global economy slows including China, hot money will likely slow down.  Legislation comes late so if they implement similar rules like Australia or China for foreign money, it will likely push prices lower since much of the price movement is coming from hot money.  People forget that California was one big beneficiary of the Japanese stock and real estate bubbles and when the market contracted, California took a hit in the early 1990s.  But of course, this time it is different.

Year over year change in the average Saskatoon house price

Here is how the average house price looks like in Saskatoon over the years. First graph is annual prices from 1981, second graph is monthly from 2002.

Here is how the average weekly wage looks like in Saskatoon.

Here is growth of the average weekly wage and average house price, indexed from Jan 06.

If wages moved at the same pace as house prices since 2006, the average weekly wage would have climbed from $680 to be over $1400 today, but unfortunately, the average weekly wage in Saskatoon is just over $850.   What will happen to wages when the boom ends, since the time period of  Jan 2010 until now, wages are not even beating inflation on average?

Ron Olson "Confusing lower interest rates with improving housing affordability is a fundamental error"

A good article by Alan Thomarat the Saskatchewan Home Builders Association President in the Star Phoenix

Olson continues to say, "Canada is struggling to regain the quality of jobs lost to the recession and young people still face poor job prospects (in the rest of Canada, while Saskatchewan seeks to build its workforce). Our industry and governments can draw two important lessons from the aftermath of the financial crisis:

". First, we must deal with fiscal and economic issues directly, rather than avoiding them. As we have learned, inaction has a high cost.
". Second, we must solve problems, not chase symptoms. We need to address our problems directly, rather than papering them over with short-term fixes."
"In short, by acting now, we can capitalize on the Canadian Advantage, (and build real advantages in every community)"
Olson also notes that, "Over the last year, a seemingly endless stream of commentary has claimed that 'housing affordability has never been better.'
"This is not the case. "Historically low interest rates mean mortgages are cheaper - but houses are not.
"Confusing lower interest rates with improving housing affordability is a fundamental error - one that can lead to economic calamity in the future. We are operating in an environment of modest wage growth and relatively low inflation, so it is prudent to ask what is behind escalating new home costs?
"To a large, and growing extent, costs imposed by (municipal) governments are the key factor. These include both direct charges, taxes, fees and levies, as well as the impact of planning and other regulations on the cost of land. The cumulation of all government-imposed costs causes a significant deterioration in housing affordability.

"At the municipal level, the transfer of community infrastructure costs alone into the mortgages of new home buyers amounts to more than $5 billion each year. Transferring community-wide costs to a select few new home buyers is not fair, nor sustainable, and it threatens the stability of housing markets.
"Compared to other inputs, such costs are not market-responsive - they do not adjust downward in response to changes in market demand. This is why our industry sees government-imposed costs as the 'hidden killer' of housing affordability."

Government imposed costs have helped significantly in the deterioration of housing affordability, but it is not the cause.  It was and always has been emotions and credit, and if we take away some credit, housing land costs will come down as prices will meet buyers.  But we have a system where buyers chase prices because of easy credit and for some, foolish emotions.

While some will say that construction costs have skyrocketed and I know they have, they have not escalated to the point where an average lot in Saskatoon that was $55,000 in 2005, now goes for $120,000 plus.  What has happened is that Governments have taken advantage of the housing boom and used it as a cash cow. This is a win win situation for Governments, blame escalating land costs on developers and construction costs while they increase revenues by increasing land costs, all the while with keeping property tax increases low. 

The weekly wage in the above graph is the Saskatchewan average.  But as we all know the average Saskatoon wage is less than the average Saskatchewan wage.

Comparing The TSX To Canadian Real Estate Since 1996

So do you plant your money in the "casino" or  "steady eddy real estate"?  *Note this is the TSX at the closing of each year.  Does not include dividends.

This is another look at how the TSX and the average Canadian house price compare from 1996 to 2011.

Between 1996 and 2010, the TSX increased by 147%.  Not including dividends.
Between 1996 and 2010, the average Canadian house price increased by 140%.

With what I believe will be a "choppy" and "sideways" stock market for the next few years, many will feel safer with real estate.  But should they?

OSFI Updated Proposal: Heloc's Restricted to 65%, Home Reno Market To Take A Hit?

Here is the updated press release from the OSFI regarding their proposals on mortgage tightening.

The following provides a brief description of OSFI’s decisions on key issues, which will be reflected in the final Guideline.

1. Re-qualification at Renewal – Current practice regarding residential mortgage renewals has served FRFIs well. OSFI agrees, for example, that having a good payment record is one of the best indicators of credit worthiness. OSFI, therefore, expects that FRFIs themselves will remain responsible for deciding what level of review to place on borrowers’ qualifications at the time of renewal. FRFI renewal practices should be articulated in internal policies governing their underwriting of residential mortgage loans. FRFIs, however, will be expected to refresh the borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively evaluate their credit risk.

2. Home Equity Lines of Credit (HELOCs) – OSFI is maintaining its position that the HELOC component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent. HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance. However, HELOCs at or below an LTV ratio of 65 per cent will not be required to be amortized, as the revolving aspect of a HELOC is a fundamental feature of the product.

3. Domestic vs. International Application of the Guideline – Guideline B-20 will primarily apply only to the Canadian operations of FRFIs. However, the international mortgage lending and acquisition activities of FRFIs would need to be reflected in the Residential Mortgage Underwriting Policy (RMUP) of FRFIs (or their residential mortgage underwriting policies) and in their governance and risk management frameworks (i.e., business strategy and risk appetite).
 
4. Disclosure Requirements – For greater transparency, clarity and public confidence in FRFIs’ mortgage operations, OSFI is maintaining disclosure requirements in Guideline B-20. These will now focus on the domestic residential mortgage operations of FRFIs and key mortgage metrics (e.g., LTV ratios and amortization). However, the disclosure requirements will not include information that is considered proprietary to FRFIs, the disclosure of which could cause a competitive disadvantage for FRFIs relative to non-FRFIs and international competitors that do not face similar requirements.
 
5. Residential Mortgage Underwriting Policy – Given the significance of mortgage operations to many FRFIs, OSFI expects FRFI Boards to play a substantive role in the development and assessment of the RMUP (or internal mortgage underwriting policies), as well as to provide general oversight of FRFIs’ mortgage operations and internal controls. OSFI will clarify the duties of the Board in this regard in the revised guideline.
 
6. Application of the Guideline to FRFIs that are Mortgage Insurers – Sound mortgage underwriting practices are critical for both mortgage originators (and acquirers) and mortgage insurers. However, given its general focus on the mortgage origination process, Guideline B-20 will only apply to FRFIs that are mortgage originators (or acquirers). A separate guideline applicable to FRFIs that are mortgage insurers will be published for consultation at a later date.
 
7. Automated Valuations of Property vs. On-Site Appraisals – No substantive changes will be made to the draft guideline in this regard. FRFIs are still expected to take a risk-based approach to assessing the value of a property, with more comprehensive valuation approaches for higher-risk transactions. It is OSFI’s position that FRFIs should generally not rely on any single method for property valuations.

While the teeth of the OSFI are not as sharp as some thought, there is still a huge reason why OSFI was not going to let the heloc proposal fail; it's because of the sure sign we are in a consumer credit bubble.  Even though the average house price in Canada has increased from around $300,000 in the second quarter of 2007 to over $360,000 at the end of 2011,

Home equity has decreased from 71% to 67% in that same time period.

Meaning that we have spent beyond our means. A sure sign of a credit induced bubble. 

Credit will be tightening, but not as much as the first proposal by OSFI as the mortgage industry did a bang on job of protecting their own bottom line. Still credit is tightening and the biggest impact, if gone through, will be heloc's loan to value shrinking from 80% to 65%.  This will lead to less consumer spending as people will not be able to borrow as much from their homes.   Instead of being able to borrow up to $288,000 from a $360,000 house, people will only be able to borrow up to $234,000 on that same house.

 And if I were to guess what part of the economy what take the brunt of this slowdown, home reno's. The long term percentage that home reno's have of GDP is at 2%, right now it is at about 2.8%