“I’m sorry, Sir, you must be mistaken… the CMHC NEVER allows GDS ratios above 32 per cent.”

Jsan at greaterfool.ca 4 Dec 2010 12:33am cites the response they got to an e-mail sent to the CMHC describing a single mom on a $64K pa salary who had taken out a $695K mortgage on a $725K home in New Westminister [as described in whispersfromtheedgeoftherainforest.blogspot.com 15 May 2010] –
“When assessing a mortgage applicant’s ability to pay, a calculation known as the Gross Debt Service (GDS) ratio is used. This is the percentage of gross income required to cover the mortgage payments (principal and interest, based on the qualifying interest rate explained above), heating expenses, property taxes and (where applicable) 50 per cent of condo fees. CMHC mortgage loan insurance is not normally available when a prospective borrower has a GDS ratio above 32 per cent.
The blog post that you referenced in your correspondence claims CMHC has insured a $695,000 loan for a single individual who has an income of $64,000. This would result in a GDS ratio far in excess of the maximum that CMHC can accept. Unless there are extenuating circumstances, such as a family member helping the borrower with the mortgage payments, this situation is highly unlikely.”

This reminds us of a kind of perverse and reverse version of the apocryphal story from about three or four decades ago, of the Rolls-Royce that broke an axel in the Spanish Pyrenees. The tale goes that Rolls-Royce flew in mechanics and repaired the car at great expense to themselves. A few weeks later, when the owner, back in London,  enquired about why he hadn’t yet been sent a bill, he was told: “I’m sorry, Sir, you must be mistaken… Rolls-Royce axels never break.”
So, now, Vancouver 2010, despite overwhelming evidence to the contrary, Jsan is told: “I’m sorry, Sir, you must be mistaken… the CMHC never allows GDS ratios above 32 per cent.”

[PS: Isn’t the internet a thing of remarkable beauty? After writing the above based on vague memories of a story heard years ago, I googled ‘Rolls-Royce axels never break’ and the very first hit was to this discussion of the urban legend: ‘Buttered Rolls’ at snopes.com. ]

5 responses to ““I’m sorry, Sir, you must be mistaken… the CMHC NEVER allows GDS ratios above 32 per cent.”

  1. Oh I am sure CMHC has the rule on the book. I am also pretty sure that the banks will “fudge the numbers” to make it work anyway.

  2. The ratio has been spun and mangled with ease for years, and since CHMC is backed by Taxpayers, the Banks don’t give a hoot. Soon as the Mortgage is signed – BOOM – it’s off their books and onto CHMC.

    The BOC is floating rate increase rhetoric – yet you notice that RBC (*just got killed on Friday’s numbers) and others are trumpeting that rates will be low – “until at least Spring”.

    BUNK. Central Banks are buying Gold as fast as they can and the printing presses are churning out Bonds that NO one is buying. Securitization is well underway, and many Canadian are going to go over the Fiscal Falls.

    There are signs that we are in a DEPRESSION in the United States, EURO Zone has Germany saying NEIN to anymore Euro shenanigans – India and Pakistan are in the middle of a Cyber War – China has suspended new mortgages to try and cool down the vast overbuilding in the Middle Kingdom.

    Ireland, Iceland, portugal, Spain, the Baltics, Ukraine and Poland and Italy, and many African nations are STONE BROKE.

    The jig is UP and since all the Bank boys have been selling their crapy paper to each other – we ALL lose.

    We don’t need to have a crystal ball, to see what’s arrived for Christmas.

    It isn’t a turkey.

    Oh, and don’t give me the guff about Stock Market comeback – this has been hot money looking for yield, “anything” – and so, they are going to get a shake too.

    Vancouver is going to be in a WORLD of hurt – and with condo sales down nearly 40% Y.O.Y, and SFH down nearly 20% – if you haven’t gotten liquid, you are going to be unhappy.

    Those gamblers that put down all that money for the dumps at Athlete’s Village couldn’t miss – right?

    Enjoy watching that Circus – because it costs us a credit downgrade for Vancouver and a nearly $800 MILLION dollar bill.

    Payback for all the years that people here in smugville laughed at Montreal’s Big “O”.

    Now we have a BIG OUCH, right on the swamp in the DT core.

    • Great post Ralphie boy! Just one point of disagreement: you said
      We don’t need to have a crystal ball, to see what’s arrived for Christmas.
      It isn’t a turkey.

      Oh, yes it is! A big fat one we all gonna choke on.

      Check out Agent Will’s stats for Van sales. They are crowing about a 98% sell/list ratio, BUT sales are way down and so are listings = seller resistance to price adjustment thinking they’ll wait out the market. Generally this indicates the tipping point which we’ll probably see in the spring.

      Stats at http://agentwill.com/weekly-stats/

  3. pricedoutfornow

    I think this woman must have claimed she was going to rent out the basement suite in order to get the mortgage. That must be it, otherwise her income alone wouldn’t be able to sustain the mortgage payments on the house. Anyone can see that.
    I have a friend who owns two properties which he bought for $350k each. His salary is $55k per year. How did he do this? Well, he bought the first property, told the bank he was going to live in one half of it and rent out the other half (of course this is not in the lower mainland) and got the mortgage.THEN, he figured, who can lose on real estate and bought a second property. He decided to move into the second property, and also rent out the basement suite. How did he do this? Well, to buy the second property he got his parents to use their LOC to fund the entire purchase. Then he approached the bank about a second mortgage. Apparently the bank was NOT happy (since they thought he was using property #1 as a principal residence) so it was tough to get the second mortgage. But eventually he got it. So now (which seems ridiculous to me), he’s living in half of one property and rents out the three other suites. I don’t think he’s doing so well since some of the properties have required maintenance and repairs this year. And interest rates have gone up (he has a variable, 35 year mortgage) But hey who cares, right because real estate always goes up!

  4. Village Whisperer

    Michael… bingo!

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