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A mortgage executive at a major bank (who requested anonymity) wrote to us today saying:

“Mortgage policy decisions are being made that may lead to the very outcomes that we are trying to avoid.”

He’s referencing the potential rule tightening and new mortgage liquidity constraints that are making headlines.

Both of those factors could raise the cost of mortgages and adversely impact homebuyer demand. These are risks, he says, that could cause a natural housing correction to snowball into something worse.

There’s a growing air of uncertainty in the mortgage industry, one we haven’t sensed since the tail end of the credit crunch.

Regulators, media and politicians are waving the caution flag on housing and mortgages, and the foundation of our market (CMHC) is suggesting they’re running out of insurance room.

This has much of the industry in a risk minimization (“risk-off”) mode. In turn, mortgages that are not insurable, income-qualified and owner-occupied are now attracting more scrutiny.

Here’s what we’re hearing…

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Many have now seen this National Post article.

The gist of it: CMHC is approaching its $600 billion government-imposed limit on issuing mortgage default insurance. That’s happening largely because of lenders’ enormous appetite for something called portfolio insurance (a.k.a., “bulk insurance”).

No one fully grasps the repercussions yet, but our sense is that the news is not great (at least in the short-to-medium term) for mortgage consumers, smaller lenders and brokers.

On the other hand, it may be healthy long-term for the housing market. Here’s why…

Canada’s housing market is more like a balloon than a bubble, writes BMO Capital Markets in this report.

It should “deflate slowly” in the absence of a “pin.”

That “pin” (catalyst) could be one of the following, says BMO (our comments in italics):

• An approximately 400 bps increase in mortgage rates (BMO’s Sal Guatieri told CBC today: “We tend to rule out that shock.” But his report notes “Even a moderate two-percentage-point increase to more normal levels would put some strain on affordability and slow the market.”)
• Major job losses
  (BMO is talking on the order of 400,000+. It adds: “Unless Europe’s credit crisis worsens materially, a recession is not in the cards given current low interest rates.”)

Lenders like to keep you in their web as long as possible. If you’ve got a closed mortgage and try to escape, they sink their penalty fangs deep in your wallet.

To the surprise of many, there are dramatic differences in how those penalties are calculated, even at the same bank.

CIBC, for example, sells mortgages under multiple brands, with “CIBC” and “FirstLine” being the most popular.

Recently, we did an interest rate differential (IRD) penalty calculation for a FirstLine customer who wanted to refinance. This client was fortunate to have closed his mortgage at FirstLine instead of directly with CIBC.

Government mortgage restrictions instituted from 2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist Benoit Durocher.

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