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Market share FBThe Globe and Mail reports that “unregulated lenders” now own a 15% share of Canada’s mortgage market, according to a Finance Department memo it obtained. That sounds somewhat concerning as a layperson, doesn’t it?

It sounds like Canada has some drunken, unrestrained Wild West lending going on. You can hear Joe Public thinking, “These yahoos must be selling those insidious teaser rates and doling out those NINJA (no income, no job, no assets) mortgages that sunk the U.S. market in 2008.”

That’s unfortunate…because it’s not true.

Right off the bat, let’s dispense with the term “unregulated” as it applies to prime mortgage lending. It’s complete baloney (I’d rather use another term but kids might be reading).

Virtually all prime non-bank lenders are regulated. They must conform to:

  • Federal regulations that apply to the banks providing their funding
  • Federal regulations that apply to insurers providing their default insurance and securitization
  • Provincial regulations applying to mortgage brokerages, administrators, etc.

On top of this, non-deposit-taking lenders must withstand the regular audits and scrutiny of their OSFI-regulated bank funders and investors.

All told, this puts them under a microscope that’s just as intense as the major banks, if not more so. Anyone who thinks banks would risk their capital and reputation by funding them otherwise is woefully misinformed.

Note, of course, that the aforementioned regulations do not generally apply to private subprime lenders. Those lenders account for roughly 1 in 16 mortgage originations, according to CIBC (see its chart below). Yet, they present arguably no material systemic risk because they’re predominately investor- and self-funded, require higher borrower equity, and price and underwrite commensurate with their risk appetite. (Incidentally, the rise in private lending is directly attributable to policy-maker’s own actions — i.e., stricter federal lending guidelines.)

Source: CIBC, Teranet

Source: CIBC, Teranet

The Globe further reports, “The government memo estimated that about 90 per cent of the business of unregulated lenders is subject to federal mortgage rules, which include meeting the strict underwriting standards set by CMHC and the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.”

The message here is that non-deposit-taking lenders have countless checks and balances and ample supervision to assure their stability. That’s vital because, as the Department of Finance is quick to point out, they’re “enhancing competition in the mortgage market.” Moreover, they account for roughly half of broker originations.

So let’s not allow news stories without context to send the wrong idea about non-traditionally regulated lenders. They and their mortgage broker partners are overwhelmingly responsible for keeping rates and prepayment penalties down, and that keeps more money in Canadians’ pockets.

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With home prices rocketing into new galaxies, one might think that loan-to-values are surging. After all, we’re bombarded with headlines about under-capitalized homebuyers struggling to get into the market.

In fact, loan-to-values have held steady for at least nine years running.

From March 2007—as far back as our mortgage balance data goes—to spring this year, Canada’s average home price jumped 70% to $508,567. (Source: CREA)

In that same time-frame, the average residential mortgage surged by a similar percentage: 71%, to $181,000. (Sources: RBC, 2007; Manulife, 2016)

Looking at this another way, the mean equity in a Canadian home nine years ago was 65% (in homes with mortgages). Today, it’s about the same.

Interestingly though, the average mortgage amount has risen $75,443 over the last nine years. But the mean value of a Canadian home has surged almost 2.8 times that, or $209,190. That’s a sizeable net gain in nominal dollar equity.

Of course, what the market giveth the market can taketh away. But that net equity growth, if it holds up longer-term, could be an essential store of wealth for so many with insufficient retirement savings.

Only 1 in 5 middle-income Canadians who are retiring without an employer pension have saved enough to retire comfortably, reports CBC. Imagine if they lost $100,000 to $200,000 of home equity to boot.

This is just one more reason why it’s so utterly essential that policy-makers stack housing policies carefully. It would be one thing for mortgage tightening to cause a correction, but it would be absolutely calamitous if it ever triggered a crash.


Sidebar: These are the average mortgage balances in Canada’s largest cities. How noteworthy that high-priced Toronto is only 7% above average. (Source: Manulife Bank)

$259,000 — Vancouver
$217,000 — Calgary and Edmonton
$194,000 — Toronto
$156,000 — Montreal