Ottawa’s Gift to Lenders: Some Numbers



Business gift_FBHappily, it’s only taken six hours to update 183 rates and 25 lenders’ policies following today’s default insurance rule changes. I reckon I’ll be done combing through the rate sheets and policy updates by the weekend, just in time to question the grey matter of those responsible for this absurdity.

Here’s some of the results so far of the DoF’s mortgage insurance ban. These numbers are not exhaustive. They’re just from the banks, monolines and credit unions this author commonly uses:

  • Typical new rate surcharge on refinances: 15 bps
  • Number of broker lenders who have terminated prime refinances altogether: 6
  • Typical new rate surcharge on amortizations over 25 years: 10 bps
  • Number of lenders who have terminated amortizations over 25 years altogether: 7
  • Typical new rate surcharge on single-unit rentals: 15-25 bps
  • Number of lenders who have terminated rentals altogether: 6
  • Typical new rate surcharge on properties over $1 million: 15-25 bps
  • Number of lenders who have terminated lending on $1 million+ properties altogether: 5

Some of the lenders who pulled the plug on these products will be back in the game once they’ve arranged new funding. But they’ll be tacking on meaningful rate premiums, like almost every other lender.

But there’s more:

  • Number of lenders who raised all their rates in the last week (and no, not because of bond yields), instead of just raising refi, long-amortization, rental and $1 million+ rates: 4
  • Number of lenders with better rates on higher-defaulting low-equity insured mortgages than lower-defaulting 20%+ equity conventional mortgages: 18
  • Number of borrowers with 20%+ equity who default on their mortgages: Less than 1 in 300
  • Canadian taxpayer losses from a U.S.-style housing catastrophe: $0
    (Insurers’ capital would be drawn down ~$9 billion, says Moody’s. But that’s a fraction of their combined overall capital base, so a taxpayer bailout would be extraordinarily improbable.)

And that brings us to the most upsetting stat of all:

  • Estimated number of mortgagors who will unjustifiably get their pockets picked by those behind this, one of the most costly, reckless, ill-planned, non-consultative series of policy decisions in Canadian mortgage history: At least 6 million (half of current borrowers)…and more to come. 

 

 

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Comments

  1. Comment avatar

    Broker Complete    

    Thanks for the recap Rob…it certainly does turn the stomach as you have implied. We have an absolute mess at this point with some lenders having 5+ different rates for a simple 5 year fixed term. Mix in lender programs cycling between available and not available every two weeks, and I can’t imagine how anyone could have their feet firmly underneath them. It’s certainly frustrating as a mortgage professional but I suppose the bright side is that our government has made it so confusing and difficult for the consumer to understand product and pricing that professional navigation will be more important than ever…

    The consumer getting stung with more expensive money for no logical reason…hard to find the bright side there though.

     
  2. Comment avatar

    Matthew Kaminsky    

    Hey Rob,

    You’re being too harsh on the government, and not harsh enough on the big banks. The economics of mortgages for the major chartered banks viewed from the perspective of lifecycle customer profitability are extremely strong. The most recent changes have a de minimis impact on the mortgage profitability of major FIs. They’re using the changes as smoke screen for extracting more and more rents from consumers. TD, Scotia, Royal, CIBC, BMO- one and all are highly unethical institutions whose real motto is screw your customer. When the ROE on the domestic franchises of the large Canadian bank drops below 10%, maybe they can have a bit of credibility when arguing that they’ve suffered meaningful margin contraction. Otherwise, that kind of talk should be dismissed for exactly what it is. The mealy mouthed double speak of the real villains in this scenario- politically connected bankers who game the system to screw their customers.

     
    1. Robert McLister    

      Hey Matt, I wish you’d be a little more candid sometimes. lol

      The point of this piece was that consumers lose because bureaucrats have revoked the sovereign guarantee from statistically safe mortgages. They’ve done so under the guise of system stabilization, despite all available data (even their own projections) completely contradicting their stated justification.

      As for whether the DoF got a little “push” from bankers on these rules, I’ll leave that to the conspiracy theorists. As much as brokers suspect as much, no such evidence has come to light.

       
      Comment avatar
  3. Comment avatar

    Eric Lam    

    To me many of the rate surcharges listed above for the kind of mortgages they apply to seem to be both relatively small and logical. Aren’t long am/rental units/over $1mm mortgages by definition riskier all else being equal? Shouldn’t they have slightly higher rates attached? And as to your point about lenders having lower rates for insured high ratio mortgages, as compared to uninsured low ratio, isn’t that rational too? Assuming that both sets of borrowers are of similarly high quality why wouldn’t a lender give a lower rate to someone who has purchased mortgage insurance?

     
    1. AJ    

      If you think a 15 basis point rate difference is small in this market then you know nothing about mortgage competition. Many people nowadays will switch lenders for 5 basis points or less.

      Your point is lost on me because other things are never equal. What if that $1 million property has a mortgage at 80% loan to value with a borrower who has a great job and a 800 credit score? Why should that person with 20% equity have to pay more than someone with 5% equity? It doesn’t make sense. It is asinine that CMHC will insure a 95% loan to value but not insure a lower risk 80% loan to value.

       
      Comment avatar
  4. Comment avatar

    Ron Butler    

    There are so many unintended consequences of the regulatory insanity.

    Picture the wise consumer who did her research perfectly: stayed away from collateral charges, stayed away from banks who had adverse penalty calculations, she selected a standard monoline 5 – yr fixed rate product with the best possible penalty options so if an emergency occurred or a change in lifestyle required it, she could break the mortgage and refinance with the same lender so she could get an additional 10% break on an already low penalty.

    Well the government surely destroyed all that planning. This is just one of dozens of unintended screw overs that are coming out of the woodwork after just 2 days.

    Rob is dead right, Reckless, costly, ill planned and ZERO benefit to Canadian consumers. It is time to call the MPs and let them know.

     
  5. Comment avatar

    Chris Murphy    

    My assumption – trying to find rationality in all this – is there is an actuary in Ottawa who is looking 10-15 years into the future. I am guessing the concern will be the impact of insured mortgages on the Government of Canada balance sheet as a potential obligation and how that will appear to the world investors lending us money to finance government debt. Where will the Canadian population be? Can it sustain what level of growth and expansion?
    In that rarified atmosphere, it isn’t the statistical reality but the perception of risk that can influence institutional investors.
    IF property valuation continues to climb then so would mortgage debt especially for the new generation of buyers.
    The government would rather those folks rent, buy cars and furniture with debt to keep the economy going. How else can anyone purchase a $80,000 pick up truck.
    I hate assumptions…

     
  6. Comment avatar

    CEO    

    With one of the highest personal tax rates in the world, small business tax proposed increases; high corporate tax; massive increasing hydro rates; carbon tax coming; draconian government changing of housing and mortgage industry….(and this is in just the first 12 months of this government), it’s making less and less sense for a business owners to have a business in Canada, in mortgages/housing and other sectors.

    The brain drain and corporate drain (with jobs ) should be a real concern to everyone. Our organization is definitely going to look to expand outside our borders in the coming months for this very reason.

    Another unintended consequence!

     
    1. IncreasinglyInformed    

      Also, with high wages ( compared to many others ), vastly decreased heating bills for Natural gas users, low inflation, increased child tax benefits that do not have a material increase in our debt to GDP level, average corporate tax rates – as reported in ROB, BNN, Reuters, FP etc…., and high marks for our international competitive in business, very affordable (how much extra do people pay for beyond the voucher- rotten out – inner core schools in the US ? -) high performing education system ( when measured without bias and partisanship -from international test results, mediocre-to-good health care without the co-payments and bills that many Americans pay for, fairly good infrastructure ( say compared to even the USA ), are soon to have billions in tax revenue from taxing pot VS the failed and costly war on such matters ( see Conrad Black’s take on private for profit prisons ! )….. I say we’re doing all right ! P.S. Approx. 4/5 of the increased hydro cost ( In Ontario) are due to : a) inflation, b) legacy cost, c) over capacity to compensate from the 03′ blackout – but, no one , then, was predicting – the extent of decline in manufacturing – due to globalization / automation d) the kicking the can down the road policies of Peterson, Rae and Harris/Eves that did not want to pay NOW ( much less costly ) to upkeep nuclear plants …. Yes the LP of ON paid nearly 2.5 billions to cancel 2 plants. Harris sold off the 407 highway on a 99 year lease for 3 billion below market value. Where there Conservatives sitting on the 407 board of directors ?

       
      Comment avatar

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