New Credit Scoring Metrics

Last January I talked about new technologies introduced at Equifax Canada to enhance the consumer’s credit profile, and subsequently reduce the lender’s risk. Based on “trended credit data,” the technology looks at payment patterns to predict future delinquencies.

This may sound intuitive, but studies have confirmed the conventional wisdom that transactors – those consumers who pay off their entire balance each month – are better risks than revolvers – consumers who only pay a portion of their balance each month. But it is the quantification of this intuition that matters. Just as importantly, studies revealed that not all revolvers are equal; those who pay more than the minimum on their credit cards, even if they don’t pay off the full balance, present less risk across all credit product types.

Both credit agencies, Equifax and TransUnion, are now using Total Payment Ratio (TPR) to measure the chance of delinquency. Simply put, TPR is calculated by dividing a consumer’s total monthly credit card payments by the total minimum due on all credit cards. For example, a person making $1,200 in payments on three credit cards when the aggregate minimum due on those cards was $600 would have a TPR of 2.0. A person making $1,200 in payments with an aggregate minimum due of $200 would have a TPR of 6.0. Studies clearly demonstrated that as the TPR increased, delinquency levels decreased on credit cards, auto loans and mortgages.

TransUnion also developed a metric called the Aggregate Excess Payment (AEP) to better gauge how many dollars in excess of the minimum payment were made. This variable is calculated by subtracting the total minimum due from the total payments made across all of a consumer’s credit cards.

Two consumers with a TPR of 2.0 could have much different AEP profiles. For example, a consumer making $2,000 in payments with a total minimum due of $1,000 would have a TPR of 2.0 and an AEP of $1,000. A consumer making $200 in payments when the total minimum due was $100 also would have a TPR of 2.0, but their AEP would only be $100. Not surprisingly, the AEP variable also performed quite well as a risk splitter across credit products.

The new metrics are good news for consumers, particularly those who only pay off portions of their credit cards each month. If you can’t pay the full balance, at least now lenders may view you in a more positive light depending on the amount you do pay.

If I can help, let me know.

Regulator launches disciplinary database

Due diligence is not the exclusive exercise of a lender.  Yes, you may feel like you went under a microscope to get a loan, but smart borrowers are equally inquisitive about where they should go to get a mortgage; and the inquisition just got a little easier.

As mortgage brokers continue to become the preferred choice of consumers seeking a “mortgage originator,” the mortgage broker’s regulatory record is now easily accessed online.  Developed by the Mortgage Brokers Regulators’ Council of Canada (MBRCC), the online database allows consumers to search broker and company names to view disciplinary actions; including license suspensions, administrative penalties, and cease and desist orders.  Good information to know when choosing a trusted advisor, and your mortgage broker is no exception.  As Cory Peters, MBRCC Chair says, “Mortgages are often the biggest financial commitment Canadians make.”  Enough said.  So who have you entrusted?

Furthermore, Peters points out that the online database will be a useful tool to brokerages and regulators, across Canada, assessing the suitability for potential hires and licensees respectfully.  Especially when candidates are moving from one province to another.  “Developing the database supports the MBRCC’s mandate to improve and promote harmonization of mortgage broker regulatory practices across Canada,” Peters said.

Too bad the same level of scrutiny is not available to consumers when investigating other origination alternatives (i.e. mobile bank representatives).  Perhaps another reason to feel good about your choice of originators ?

To access the online database, click here.

If I can help, let me know.

One insured mortgage vs. two uninsured mortgages

Last January I wrote about the upcoming increases in default insurance premiums.  Just a reminder, those new rates go into effect this Friday, March 17th, 2017.  In fact, most lenders have set today or tomorrow as the deadline for processing applications under the current rates.  The new rates represent a significant increase in the cost of default insurance.  One which warrants re-examining the 1st and 2nd mortgage alternative.

As a quick reminder, those lenders regulated by the Bank Act, are required to get default insurance on all loans over 80% loan-to-value (LTV).  Of course the borrower pays for this insurance, but s/he can avoid this by capping the first mortgage at 80% LTV, and arranging a second mortgage, with a lender not regulated by the Bank Act, for the difference.  A second mortgage comes at higher rates and different terms than the first mortgage.  That begs the question, is it more advantageous to get one insured loan, or two uninsured loans?

To begin to answer that question, please refer to my spreadsheet below:

There are three key metrics to take away from the numbers. The first is equity as measured by LTV. The borrower starts and ends with more equity going the 2nd mortgage route (Start: Financed at 83% LTV vs. 85.32% LTV…YR5: Financed at 71% LTV vs. 72% LTV). The difference is the added cost of the insurance ($17,430) plus the interest paid on it. The second metric worth noting is the interest cost. Over the five years the insured loan costs $6,864 less ($86,270 – $79,406). Finally, the always important, cash-flow. This one’s almost a draw with the insured loan slightly less at $2,928/month vs. $2,962/month.

In our example (CASE 1), we used 83% LTV. This is a good benchmark to show how the second mortgage strategy could work. But with a higher interest cost every year, and the equity gap/advantage narrowing quickly, for the second mortgage strategy to work, a much more aggressive amortization is necessary. CASE 2, is a better example of the approach to take wherein the second mortgage is retired in five years, a significant equity gap (financed at 68% LTV vs. 72% LTV) after five years , the interest cost is much closer ($81,140 vs. $79,406), and cash-flow is only $303/month more under the second mortgage scenario . It goes without saying the sooner you can pay off the second mortgage the better.

One caveat to consider is any additional costs that may come with arranging your second mortgage. Today, this mortgage space is almost the exclusive domain of private lenders. Broker fees, and lender fees will occur. You can subtract this amount from the equity gap to base your final decision.

If I can help, let me know.

Equifax releases phase one of new multi-million dollar technology platform

Just a reminder, Equifax Canada is one of two consumer reporting agencies registered in Ontario (the other is TransUnion Canada), under the Consumer Reporting Act.  Consumer reporting agencies create and maintain your credit report. They collect information from various sources, like banks, credit card companies, mortgage companies and other creditors.

You owe it to yourself to know the basics behind this law. Here’s a quick video, published by the Ontario government, to help you with that:

The new technology will provide mortgage lenders with access to enhanced insights into consumers’ credit profiles.  Equifax Canada says it will enable its clients to deliver a better end-consumer experience, faster service, and fair and flexible access to credit for all Canadians.

In addition, the new product should help mortgage lenders better assess those Canadians with little-to-no credit history and give those consumers wider choices than just the high-interest lenders. “Our clients want and need us to innovate by helping them reach new markets and compete more effectively in a rapidly changing credit environment that includes emerging alternative and Fintech lenders. This investment will go a long way to achieving that goal,” explained Jimmy Chan, Chief Information Officer, Equifax Canada.

Among the insights available to lenders is trended credit data which details repayment history and highlights trends adds significant insight that goes well beyond a static point-in-time credit score when it comes to underwriting lending risk.

Phase one of the new technology platform was launched January 24th.  You can read the Equifax press release hear for full details –

If I can help, let me know.

CMHC increases mortgage insurance premiums

CMHC announced today it is increasing its loan insurance premiums effective March 17. This latest hike comes less than two years after the previous one, which took effect June 1, 2015.

The increase is the result of last year’s rule changes, claims CMHC. “Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI’s new capital requirements that came into effect on January 1st of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long-term stability of the financial system,” it said in its release.

Click here to read the full press release.

And what about the long-term stability of the financial system? It looks like this is the latest “tinkering” that continues to substitute for real effective change in how mortgage default insurance is practiced in Canada. Something I was writing about just last November. Click here to read the article is you missed it.

And please sign my petition for change:

According to CMHC, the higher premiums are not expected to have a significant effect on home ownership affordability. The crown corporation estimates the average homebuyer will see a $5 increase to their monthly mortgage payment as a result. The table below shows the current and new premiums forthcoming:

Loan-to-Value Ratio Standard Premium (Current) Standard Premium (Effective March 17, 2017)
Up to and including 65%



Up to and including 75%



Up to and including 80%



Up to and including 85%



Up to and including 90%



Up to and including 95%



90.01% to 95% – Non-Traditional Down Payment




If I can help, let me know.

New rules for LTT start January

The rates for land transfer tax (LTT) will be going up in the new year. The LTT rate on amounts ontario-land-transfer-tax-refundexceeding $400K will be subject to a tax rate of 2%, up from the current 1.5%. In addition, the LTT rate is also increasing on higher value residential properties. It will go from 2% to 2.5% on amounts exceeding $2 million. With the prices in the GTA, that will apply to a significant number of purchases. On the other end of the spectrum, Ontario is doubling the rebate on the LTT for first-time homebuyers to $4,000.  Once the changes take effect, January 1, first-time buyers won’t pay any land transfer tax on the first $368,000 of a purchase price.

See the detailed guidelines here.

Rethinking government-backed mortgage default insurance

Mortgage default insurance (MDI) is once again under the microscope.  The federal government of Mortgage Default InsuranceCanada is analyzing, again, the distribution of risk in the housing finance system.  But do we need more tinkering, or is it time for something more substantial?

MDI plays a significant role in managing the risk.  The government guarantees MDI so that borrowers can obtain bigger loans (>80% financing).  This not only supports greater access to homeownership but also promotes stability in the housing market, the financial system, and the economy.  It’s the latter of theses roles that is under the most scrutiny since promoting stability protects taxpayers from potential mortgage loan losses.  How do they do it?

The government can set eligibility rules for government-backed insured mortgages.  Between 2008 and 2015, five rounds of changes were made to the eligibility rules.  The latest were introduced last month on October 17th affecting high-ratio loans (>80% financing), and on November 30th, the same new rules will apply to low-ratio loans (<80% financing).  Tinkering with eligibility rules on borrower qualification will improve the overall credit quality on loans and reduce potential losses.  But it’s a piecemeal approach, and can take a number of attempts, as witnessed, before effecting the desired outcome.  That begs the question, is there a better way to reduce the risk faster, and by a greater amount?  Yes, there is.

Currently, MDI is provided by Canada Mortgage and Housing Corporation (CMHC), a federal crown corporation, and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.  The government backs 100% of the mortgage insurance obligations of CMHC, and to support competition in the MDI marketplace, the government backs private mortgage insurers’ obligations subject to a 10% deductible charged to the lender.  The same deductible is now being considered on CMHC insured mortgages.  But is this more tinkering?

To really reduce the risk, and expedite the process, requires a wholesale change in the fundamental way MDI is practiced in Canada.  In 2011 I started a petition to effect the necessary changes needed to MDI.  The federal government recently announced it would launch a public consultation process this fall to seek information and feedback on how to modify the distribution of risk in the housing finance system.  The time to get involved is now!  I need your support.

To learn more, please visit and support my petition below and help me fight for real effective change, and lets put an end to this continual tinkering, once and for all.  There is a better way.

Thanks for your support.

P.S.  To follow my progress and be part of the dialogue visit my LinkedIn Showcase Page

The New Rules

new-mortgage-rulesThe changes announced by the Government of Canada, Department of Finance, on October 3rd, go into effect today!  Here is what you need to know:

  • For now, different rules apply to “conventional” loans (less than or equal to 80% financing) vs. high-ratio loans (80% + financing).  On November 30th, the same new rules apply to both groups.
  • Effective today, insured high-ratio loans must qualify using the interest rate that is the greater of the contract interest rate or the Bank of Canada’s current conventional five-year fixed posted rate*.
  • Most lenders will honour any pre-approvals they committed on prior to today, up until they expire.
  • For some lenders, if a legally binding agreement of purchase and sale was signed prior to October 17, 2016, the old rules will apply.  The mortgage application will be qualified using the contract interest rate regardless of the application or closing date.
  • Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by the new rules.

  the current five-year posted rate is 4.64% as of October 17, 2016

If I can help, let me know.

Back to the Future Mortgage

At the risk of sounding old – wait a minute, I am old – what’s up with Nike’s Back to the Future II nike-hyperadaptself-lacing shoes? They’re called Hyper Adapt 1.0, and their official US release date is November 28th. That’s right, I said self-lacing. Equipped with a magnetic adapter which takes three hours to fully charge, once the user slips her foot into the shoe, a sensor located in the heel will be activated, and the shoe will tighten. Users can adjust the laces to tighten or loosen by pressing a plus or minus sign button on the side of the shoe. I can see the lineups now as “sneakerheads” and fans of the hit 1989 movie run to get into their first pair.

The idea of not lacing up “running shoes,” as we like to call them in the north, is nothing new. But this tech version represents a new take. Yes, technology continues to affect every part of our existence. Right down to our air jordans. But is this another gimmick, or a practical solution, to an everyday need. And what about the life skill of tying laces? I can’t speak for everyone, but this was one of my first big accomplishments in life. The same questions about writing skills come to mind as technology becomes more immersed in our early childhood education.

Ok, so how does this relate to mortgages? Without question, technology is equally shaping the lives of consumers in the market for mortgages. Advancements in technology have had a profound impact on the mortgage business. Look no further than where you might be reading this blog from. But the one caution I felt compelled to write about after I read about the Nike Hyper Adapt, was the price we pay for “convenience.” First of all, Nike has not yet revealed the price of its new shoes, but I’m sure there will be a premium for the convenience, not to mention the R&D costs they will want to recover. We always pay extra for convenience. Most staples you purchase from the handy variety store will cost more than if you took the extra time to drive to the grocery store. The same goes with your mortgage. Did you let the bank look after paying your property taxes? The very same goes for mortgage life insurance. How much time did you invest in getting the right mortgage for you? Was it quick and easy, or did you invest some time, and speak with one or more trusted advisors.

As the old adage goes, don’t get caught with your pants down. Or maybe I should say, don’t get caught with your shoe laces undone. If you’re like me, you have more than one pair of running shoes. Maybe this fits one more purpose. Gimmick or not, you can decide. Watch Nike’s video below, and try not to get too excited.

Happy running!

The Bailout Rap

My apologies for looking back and recycling an older post this month, but this summer has been a repeatperiod of transition for me.  Two moves (home and office) in two months has cut in to my blogging time.  Given the significance of the subject, it is worth repeating, many times over, lest we forget.

Not altogether inappropriate, this day marks a noted event, 9 years ago, that started the 2007-2009 GFC (Global Financial Crisis).  Considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.  The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing “a complete evaporation of liquidity.”

Rap music was popular at the time.  Still is I think.  When I came across this video in 2009 I had to share it.  I couldn’t say as much, as quickly, or with as much panache. These guys do a bang up job.

For this video, hat tips to Gregg, and also Brad at the Charleston Market Report. Brad has a selection of housing related videos.