CMHC rewrites rules of homebuyer shared-equity program to limit potential losses and gains

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The Canada Mortgage and Housing Mortgage adjusted its First-Time Home Buyer Incentive program on Wednesday, placing caps of eight per cent per year on both the upside and downside returns it would received on its share in homes participating in the program.

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“Now, homeowners will pay back up to a maximum gain of 8 per cent per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment,” the program’s information page said. “The Government of Canada will also limit its share in the depreciation of a home at the time of repayment … to a maximum loss of 8 per cent per annum (not compounded).”

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The organization added the calculation was retroactive to the program’s implementation date on Sept. 2, 2019 when it was announced in the federal budget.

The change comes as higher interest rates — including the 50-basis point hike on June 1 that brought the overnight rate up to 1.5 per cent — are adding upward pressures on borrowing costs, cooling the demand for mortgages. This had led the average home price to slide to $746,000 in April from the $796,000 the month before, according to data from the Canada Real Estate Association.

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The shared-equity program was initially launched to help Canadians buy their first homes by offering five per cent toward the down payment for a first-time buyer’s purchase of an existing resale home, or 10 per cent for a newly constructed home.

The program struggled to win over the mortgage industry, which has pointed to the added legal costs during transaction closing and that the qualifying criteria are too restrictive for many first-time homebuyers.

The bureaucrats who designed this thing certainly didn’t want blood on their hands

Rob McLister

One of these critics is mortgage expert Rob McLister, who told the Financial Post the First-Time Home Buyer Incentive was rolled out with virtually no industry input. Now that the market is shifting, the parameters are changing with it.

“The government’s number crunchers and political analysts likely realized that price risk is real. They’re not stupid,” McLister wrote in an e-mail, adding that the federal government understands how overstretched valuations have become. “It’s probable that a significant correction would leave the government on the hook for materially more losses than they bargained for. Losing taxpayer money doesn’t make for positive sound bites.”

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“Moreover, the bureaucrats who designed this thing certainly didn’t want blood on their hands,” McLister added. “Nor did they want to be scapegoats.”

McLister also noted it is possible the CMHC came to understand through nationwide surveys that sharing home equity with the government could be a tougher pitch than it originally hoped. That could explain the lower enrolment rates: the CMHC had only approved 15,800 applications as of March, well below the target of 100,000 first-time homebuyers it hopes to reach by September, or three years after the program’s inception.

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As a result of homebuyers’ hesitation to share equity with the government, it decided to place a cap on its share of a homeowner’s upside gains and to limit its risk on the downside, according to McLister. This would leave the borrower bearing more of the brunt on the downside, though McLister argued the excess loss for program users would not be catastrophic.

For real estate agents like John Pasalis, president at Toronto-based housing analytics firm Realosophy Realty Inc., it is a signal a shifting market is putting pressure on regulators to change housing affordability programs.

“So, at the first sign that home prices are trending down CMHC needs to revise their co-buying program to cap their losses,” Pasalis tweeted on Wednesday following the announcement. “Which clearly means our federal housing regulator launched this program without even considering the possibility that home prices might fall in the future.”

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A spokesperson for the CMHC told the Financial Post it takes months for program modifications to take effect and that the decision to modify the shared-equity program came well before interest rates were hiked and markets began to moderate.

The CMHC added that eligible homeowners who have already repaid the incentive in excess of the maximum eight per cent gain will hear from the organization, which will provide a recalculation of their payment, receiving a reimbursement on any excess amount previously paid out.

“The maximum loss to the Government in the event of a depreciation will only apply to the homeowners who signed their Shared Equity Mortgage (SEM) agreements on or after the effective date of June 1, 2022,” the statement read.

The CMHC said this maximum gain and loss criteria is being added to bring more flexibility to the program, which the organization expects to be cost-neutral on average.

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