A clampdown on lending rules for foreign buyers could prove to be a major game changer for Vancouver's housing industry.
Canadian Imperial Bank of Commerce has sent out a memo to its mortgage specialists that said, as of Feb. 1, it has ended its Foreign Income Program and will introduce more stringent requirements for foreign clients.
Reacting to the federal regulator's new "rigorous due diligence" requirements for all financial institutions, the bank now requires proof of foreign income that is claimed in Canada. Income from a foreign source would be declared on Canada Revenue Agency forms, such as the client's T1 General, foreign income verification statement T1135 or a T1134, if a company were being used to apply. The bank will be looking for a Canadian credit bureau report or a foreign credit bureau report for disclosure of liabilities. In other words, the bank is seeking a higher standard of third-party verification.
Industry insiders say it's likely Canada's other big banks will follow CIBC's lead. Taken together with the recent announcement that British Columbia is broadening the foreign-buyers tax and increasing it from 15 per cent to 20 per cent, taxing empty houses used for what the province calls speculation another 2 per cent and tracking condo presales, the move adds another major squeeze to the Lower Mainland's housing market.
"I think it will have an impact on that superluxury part of the market," says Hani Lammam, vice-president of development and acquisitions for Cressey Development Group. "I'm sure it will. Because, you know, high-net-worth individuals tend to be creative with their finances with their taxes. They play games. I'm sure they don't want to disclose more than they have to."
In the summer of 2016, the Office of the Superintendent of Financial Institutions (OSFI) publicly scolded Canada's mortgage lenders for not paying close enough attention to foreign buyers' incomes, indebtedness and credit scores. In an open letter, the regulator said those risks had increased. On Jan. 1, OSFI brought in new guidelines for all uninsured mortgages, with stronger requirements around verification of income.
The requirement for the submission of Canadian tax forms is huge, immigration lawyer Richard Kurland says.
"It's the information-sharing component which is the core explosive game-changer," he says. "When banks report information, our Canadian financial security authorities get to communicate with their foreign counterparts. And that can mean foreign tax authorities, like Beijing tax collectors or Uncle Sam get the heads up. Canada says, 'Show me what was reported to you as global income property and we'll show you what was reported to us.'
"Knocking on Canada's door can trigger audits back home. That's what you want to see."
CIBC said the former Foreign Income Program had been cancelled and a more rigorous verification process was in place, reflecting the change in the regulator's language from "reasonable" due diligence to "rigorous," which meant stepping up requirements. The bank said it has always verified foreign-buyer income and followed regulator guidelines. "We continue to accept and verify foreign income and meet B20 due diligence requirements. We are focused on meeting our clients' needs while maintaining strong due diligence," CIBC said in a statement.
All banks contacted for a comment, including CIBC, Royal Bank of Canada and Toronto Dominion Bank, said that they have always done due diligence to verify income and assets for all applicants, and that they've met regulatory requirements.
Royal Bank of Canada said in a statement that it requires the non-resident applicant to confirm that they or a family member intends to live in the Canadian property. The person residing in the property would need to provide proof they are allowed to reside in Canada, for example, a student study permit.
Some banks offering special programs to foreign buyers have come under the gun in recent years for making allowances for non-resident buyers that would never be given to Canadian citizens, particularly around income verification.
Mortgage broker Monique Cornish says that with the changes, CIBC will have one of the most rigorous application processes for non-resident buyers.
"CIBC has been known in our industry as having a fairly large portion of their mortgage portfolio made up of non-resident and new immigrant borrowers, so I'm going to guess that perhaps they had a little bit of pressure put on them by the federal government to implement some new guidelines that would make it a little trickier to qualify for mortgages, and perhaps reduce the percentage of their portfolio that had non-resident borrowers and newcomers to Canada," Ms. Cornish says.
Ms. Cornish says it's also well known in her industry that people with non-resident or new permanent status in Canada have secured mortgage loans with little or no verifiable income to support the loan payments.
"A great example of these individuals – who don't generate sufficient income, or any income, to be able to support the loan – has been students attending university or getting a postsecondary education in Greater Vancouver. Some of the tightening that has been taking place recently is likely a result of these types of examples."
Reza Sabour, a mortgage broker and director with the Canadian Mortgage Brokers Association of B.C., says he has heard through the industry grapevine that the other banks will follow CIBC's lead on the stringent lending rules over the next few months.
"At the moment, they seem to be the first one that's been pre-emptive in doing it, but we suspect that all the banks will be doing it now, too. From my experience, any time there's a little government crackdown on these types of policies, the other banks quickly start to follow because they typically don't want to be audited. And OSFI is quite heavily watching the banks right now."
He says that he's seen banks become increasingly strict the past couple of years with foreign lending rules in the face of mounting pressure from OSFI, as well as intense media coverage of foreign capital.
"We did hear some rumblings that all the banks are trying to be on OSFI's good side right now … they are being pro-active, offering to tighten things up."
There are two types of programs that are used by foreign income buyers to obtain Canadian mortgages. One is for newcomers to Canada, intended to help those with new permanent residency status get into the market in their first few years in Canada. The other is for non-residents, who are people residing outside the country.
"The non-resident mortgage is the hot button product, the one that tends to create what some Canadians perceive to be a double standard," says Mr. Sabour.
While many foreign-owned homes are likely rented out, many other homes are clearly left empty, which has contributed to the city's near-zero vacancy rate and affordability crisis.
"Obviously, there was a problem with that in Vancouver and somebody was approving all those mortgages," Mr. Sabour says. "That created a massive issue, as it should. I think it's fantastic the province is starting to look at that … anything that cracks down on that is a huge win for the local population. Hopefully, it makes enough of an impact where it changes the behaviour."
Mr. Sabour has clients who are local income earners and yet are unable to obtain approval for a mortgage owing to stress-testing measures. And over the years, he's also seen non-residents who were not living in the country but wanted to own real estate in the Lower Mainland for investment purposes who qualified with greater ease because the stress-testing rules didn't affect them as much – since they are able to make large down payments. The standard qualifications for non-residents have been 35 per cent down, 12 months mortgage payments and property taxes upfront, with varying levels of due diligence on income verification and liabilities. Some banks have been more lax than others.
"It would frustrate me as a mortgage broker because I had a lot of clients paying taxes here, doing what their parents said to do – grow up, get a job, save your money and don't ruin your credit rating – and it was very frustrating for them not being able to qualify," says Mr. Sabour, whose own family immigrated to Canada 30 years ago. "I have had two professionals get turned down because of the new [stress test] rules. "And I know obviously some local clients do find that frustrating, because the mortgage rules are impacting them most and someone who is bringing millions of dollars from overseas is not going to care about a 2-per-cent stress test on that qualification. But someone who's worked really hard and now has to move two municipalities away to buy a townhouse, that's frustrating. And it's frustrating for us, too."
The regulator said the change was not targeting foreign buyers or any one bank. Spokeswoman Annik Faucher said OSFI couldn't disclose dealings with specific banks.
"Given record levels of household indebtedness and vulnerabilities in some housing markets, OSFI places an even greater emphasis on financial institutions' prudent mortgage underwriting," she said in a statement.
The guideline states: "[Federally regulated financial institutions] should demonstrate rigour in the verification of a borrower's income, as income is a key factor in the assessment of the capacity to repay a mortgage loan, and verification of income helps detect and deter fraud or misrepresentation."
The new rules likely wouldn't affect the presale market since presale purchases often don't require preapproved mortgages. If a presale project is several years from completion and the buyer is intending to flip it, they only need that first deposit. Also, the bank wouldn't guarantee a mortgage that far out, since a person's financial status can change and so, too, can lending rules, real estate lawyer Wes McMillan says. But he says lending restrictions could definitely affect Vancouver's overheated housing market.
"They could go to a private lender or put their money in another market."