I am writing this just minutes after Jim Flaherty’s February 16, 2010 press conference and typically I now have more questions than answers. I makes me nervous when the government feels they need to intervene to protect citizens from themselves. Call me a cynic, but here are the three points to the plan, the intent behind it and the questions I have:

1.      All borrowers must meet the standard for a five-year fixed rate mortgage regardless of mortgage type or term. Currently the standard is the three-year rate, which is historically less than the five year term. The intent of the change is to make Canadians qualify at the higher rate so that they can actually make payments at the higher rate should interest rates rise.  In effect, they would now qualify to purchase smaller homes then they would have previously qualified for.  My question: What happens when someone needs to refinance, can afford the “actual” mortgage payments, yet cannot qualify for financing under the “theoretical” five year mortgage rate? Do they lose their home?

2.      The maximum Canadians can withdraw when refinancing their mortgage is 90% of the value of their home down from 95%. The intent is for Canadians to maintain some equity in their home if real estate prices drop and also to encourage Canadians to pay down their mortgages. My question: If Canadians are refinancing to consolidate debt, why would you force them to potentially carry 5% of additional credit card or other higher interest debt over what a mortgage solution would afford?

3.      A 20% down payment will be required for non-owner-occupied properties purchased for speculation. The intent is to make it more difficult for average Canadians to use real estate as a wealth generating strategy, in order to protect them from risky speculation and artificially driving up housing prices. My question: Does this policy apply to 2^nd homes such as cottages?  My rant: How nice for our government to tilt the real estate playing field in favour of the rich.

These new rules are to take effect April 19, 2010 but you can bet that lenders will begin to react immediately.  Fortunately these policy changes will open the door of opportunity for some as it closes the door for others. Please take this time to review how these changes might affect you or your clients moving forward, and then call me to discuss your best strategy to take advantage of the new policies.

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If I hear another cute radio commercial promoting how bankruptcy could be the solution to stopping annoying creditor calls or to consolidate debt into “one easy payment” I believe I am going to pull out what’s left of my hair.

How irresponsible – not to mention immoral – to council clients to simply shirk their responsibilities and essentially screw over the people that have provided them financing. But Bruce you might be thinking, bad things can happen to good people. Can’t we give them a fresh start? Who are they really hurting? Only the big corporations who can afford the losses?

The problem I have with these bankruptcy “professionals” is their view that a short term gain is in the best interest of their clients. (It is certainly in the trustee’s best interest). What about the long term pain? What happens when they want to purchase a home at some time in the future? It’s funny but bankruptcy with all the negative stereo types attached to it is actually not the worst option for the client.

 A bankruptcy will show on a client’s credit bureau for seven years after filing and six years after discharge, but lenders will generally give favourable consideration to clients who have spotless re-established credit for two years post bankruptcy discharge,  in effect clients are given a second change. Declare bankruptcy a second time however and it remains for 14 years on the credit bureau and lenders will have little interest in dealing with these clients. Make no mistake, bankruptcy is a poor solution and should be avoided.

So what is worse than a bankruptcy? A credit proposal. The problem with a credit proposal is that lenders treat them like a bankruptcy but there is generally no quick resolve and discharge, so the proposal remains on the credit bureau for a much longer period of time. It is in effect, a bankruptcy that never ends.

So what is worse than a credit proposal?  A power of sale judgement.  Clients that default on their mortgage payments will ultimately have power of sale procedures taken against them. This stays on the credit bureau for seven years as well. The reason this is poorest solution is that number one, lenders don’t want to lend to clients that have screwed them over personally (or another financial institution.) The second reason is that this process, in most cases, is 100% avoidable by simply listing the home for sale. Duh.

I am amazed at the number of power of sale properties that are listed every day with clients walking away from equity. Properties that cannot be listed and sold through traditional methods can be sold privately and often provide the client the possibility of remaining in the property as a tenant, with an option to repurchase the property at some point in the future. Does that not sound like the best solution for all concerned?

If you are faced with the prospect of a client approaching power of sale, a credit proposal, or bankruptcy  ask yourself this question. Are you part of the problem or part of the solution? Give us a call. We can help.

We welcome your comments.