CMHC’s Siddall on the Hotseat: Commentary – Part I



If you thought Parliament’s hearings on the new mortgage rules was boring, you missed last week’s exchange between MP Ron Liepert and CMHC head, Evan Siddall.

This 4-minute video captures the tension…

Never, to our recollection, has there been such animosity towards the regulatory 3-Amigos: CMHC, OSFI and the Department of Finance. The trio’s insurance policies have ravaged mortgage competition, jacked up borrowing costs and are destined to cost consumers billions (literally billions)…if they’re not overturned. 

With most industry professionals we speak to, there’s an almost palpable loss of respect for federal regulators. It’s unhealthy, it’s unnecessary and it could have all been avoided. 

How? By conferring with industry experts before decreeing their policies, and by preserving sacred competition in Canada’s oligopoly-dominated mortgage market. These two reasonable measures would not have prevented rulemakers from achieving their goal, mitigating consumer debt risk. 

In his testimony, Siddall acknowledged making recommendations to the Finance Minister. Those recommendations resulted in the withdrawal of vital insurance and securitization options for:

  1. refinances
  2. average-priced houses in Toronto and Vancouver
  3. rental properties
  4. amortizations over 25 years, and
  5. low-ratio mortgages qualified at the contract rate.

Had officials justified these specific edicts in their testimony (with relevant data), it might have disarmed their critics. Instead, government representatives unapologetically demonstrated how little they thought about the wake of destruction they’ve left for lenders and consumers.

What follows is a sampling of testimony from one who many consider to be Canada’s biggest promoter of the new rules, Evan Siddall.

*******

 

Siddall on why the mortgage industry was never consulted:

“…More often than not our advice and analysis is provided confidentially, given that housing finance policy decisions can affect the marketplace…Broad consultations are not always appropriate.”

Counterpoint:  Industry was consulted countless times before on pending regulation. Given the gravity of these particular rules, this time should not have been an exception. The fed’s defence seems to be that traders might have shorted lenders’ stocks if the government tipped its hand before announcing the rules. But banks are public companies and they were consulted, noted MP Dan Albas. Why did policy-makers find it appropriate to solicit feedback from banks (but virtually no other lenders) before decreeing the most devastating rule changes the non-bank industry has ever seen. With no one to counterbalance regulators’ proposals, the mortgage industry got rash bank-biased policy. Canadian families will now bear layers of new costs, for possibly years to come. (Side note: There’s no reason to blame banks for these rules but, relatively speaking, they do benefit from them.)

Siddall on the damage to mortgage competition:

“…The results of these policy changes were fully intended…We did expect lower levels of competition in certain areas as well as a modest increase in mortgage rates…In our judgment the mortgage insurance regime was providing undesirable stimulus in the marketplace so indeed we sought to remove distortion…”

Counterpoint:  So the government picked favourites. It chose to cripple non-banks instead of raising qualification standards on all lenders equally. Siddall supported these changes despite non-banks demonstrating 50% lower delinquency rates than banks, based on his (CMHC’s) own data. Non-banks, and the brokers they distribute through, have been a primary reason why consumers get bigger discounts on mortgages today than they did two decades ago. But now they’ve been marginalized and consumers will pay the price. By the way, regulators’ idea of “modest” rate increases is up to “50″ bps. That’s up to $6,800 of extra interest on a $300,000 mortgage, over just the first five years. That money could pay someone’s university tuition for a year, or cover a family’s child-care expenses, or pay a homeowner’s hydro bill for four years—all of which are better uses of a family’s hard-earned income than government-imposed interest costs.

Siddall on the government’s key concern:

“…Action, we thought, was…needed to address the level of household indebtedness in Canada…The Bank of Canada calls this factor the greatest vulnerability to our economic outlook”

Counterpoint:  No one can argue that surging consumer debt isn’t dangerous. It is. And the government is reasonable for wanting to take action. But Siddall and his cohorts didn’t just take action. They cut off a leg to treat a gangrenous toe. There were multiple alternative treatments they could have prescribed to keep fringe borrowers from O.D.-ing on debt. (Examples). And all of those methods would have left the patient—Canada’s world-class competitive mortgage market—intact. 

Part II will follow this week…


Sidebar: Here’s a link to all of the Finance Committee’s hearings on mortgage policy.

Commentaries reflect the views of the author and not necessarily the views of this publication’s parent.


 

 

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Comments

  1. Comment avatar

    Hold Them Accountable    

    How does so much power fall into the hands of so few? This regulatory regime flouts all basic democratic principles. A handful of men – Siddall, Rudin and Morneau – should never be allowed to dictate such profound changes with no public debate.

     
  2. Comment avatar

    salsarkis    

    If they were all so worried about household indebtedness in Canada why don’t they do something about unsecured credit like the high interest rates on credit cards and the amount of unsecured credit a consumer can have. maybe encourage Canadians to control wasteful spending, oh but that makes the world go round??

     
  3. Comment avatar

    Appraiser    

    Crony Capitalism: is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism. ~ Wikipedia.

     
  4. Comment avatar

    John B    

    The argument made by the author here and in previous posts, and presumably supported by the Calgary MP in the video clip is that restrictions making CMHC insurance harder to get unfairly disadvantage smaller lenders, and accordingly home borrowers who do not have access to cheaper loan rates from these smaller lenders. Support for this position includes low default rates in Canadian home markets although it must be clear that this is backwards looking data and in rising markets default rates will generally look favorably low. Conversely, the risk of default necessarily increases as house prices rise relative to income, as incomes support loan payments and default can only occur on a leveraged home (ie if a loan has been taken out against the home). CMHC’s job is to protect its shareholders (Canadian taxpayers) and protect against future losses given its outlook on risks in the marketplace. Given the rise in housing relative to income in Canada taking place these actions do not seem to be inconsistent with that mandate.

    The picking favorites optics is unfortunate but also not relevant to the action, it is a result rather than a primary intention. I imagine smaller lenders have emerged and gained market share as a result of cheap CMHC insurance supporting their loans, and as that insurance has been scaled back they suffer disproportionately to large banks who have more financing options via deposits etc. It can be said that CMHC originally designated these smaller lenders the ‘winners’ by offering cheap insurance at low qualifying standards, although that was not their motivation I suspect either.

    CMHC’s only responsibility is to protect their shareholder/taxpayer from loss. Which firms benefit or are hurt by their should not be a factor in decision making, and in this example I am glad that it wasn’t.

     
    1. Robert McLister    

      John, You seem to make an honest level-headed argument. Clearly we disagree but divergent views help uncover the truth, so thank you for posting.

      On your points:

      Re: “making CMHC insurance harder to get unfairly disadvantage(s) smaller lenders”

      To be clear, the feds didn’t just make insurance harder to get. They eliminated key forms of insurance altogether! There’s a big difference.

      Re: “low default rates in Canadian home markets…is backwards looking data”

      So is historical investment performance, accident data and other business time series. But such data are still fundamental to actuarial science for pension fund managers, insurance analysts and other risk management professionals. Why? Because long track records have predictive power. Historical data is used in all kinds of risk models, including stress tests like those used at CMHC and lenders. Debt-to-income has been rising for years. Yet, mortgage delinquencies have been trending lower since the early nineties. That’s no accident, and it’s not just because prices haven’t crashed “yet.”

      Re: “in rising markets default rates will generally look favorably low”

      We’ve had rising markets before, and falling markets and 1000 basis point rate hikes and 500 basis point unemployment spikes. And that all happened when underwriting was nowhere near as stringent as it is today. Default rates surged like they always do, and they will surge again someday. And severe stress tests from every housing policymaker conclude that the system has more than ample buffers to sustain such “disasters.”

      Re: “the risk of default necessarily increases as house prices rise relative to income”

      That’s not necessarily true. Equity, debt ratios and other factors also matter. And rising default risk says nothing on its own. It’s the magnitude of increase that matters. Now, yes, default risk rises when lenders lend to financially unstable borrowers at increasingly higher debt ratios, and equity doesn’t keep pace. But regulators have full control over lending guidelines and can nip that in the bud pretty quickly.

      By the way, when income is zero (a.k.a., unemployment), it doesn’t matter what your debt ratio is. It’s going to be hard to pay your mortgage — but not if you have a financial cushion.

      That’s why families with excellent credit, assets and solid employment don’t deserve the extra costs this government is jamming down their throats. There’s absolutely no justification for it, and that’s what ticks people off the most.

      Re: “CMHC’s job is to protect its shareholders (Canadian taxpayers) and protect against future losses given its outlook on risks in the marketplace… CMHC’s only responsibility is to protect their shareholder/taxpayer from loss.”

      You might want to brush up on CMHC’s mandate. You got only part of it right. Its other legislated mandates are to promote access to housing and lending “competition,” among other things.

      And let’s not confuse the need to manage risk with the Finance Department’s incredibly short-sighted decision to impose blanket financing restrictions on the *entire* market, including borrowers who are absolutely zero risk to the system.

      On that note, how amusing that Minister Jean-Yves Duclos stood up in parliament the other day and said “Our government believes that all Canadians deserve a safe, adequate, and affordable home.” The government endeavours to “help home ownership stay within reach of more middle-class Canadians.” Meanwhile, the Finance Minister has likely just shut out ~40% of middle-class insured borrowers in Toronto and Vancouver (suggests the BoC), and 1 in 5 nationwide.

      Re: “The picking favorites optics is unfortunate but also not relevant to the action, it is a result rather than a primary intention.”

      If it makes you feel better, we can call it a secondary intention instead. 😉 Either way, a handful of overpowered public servants have intentionally (as Siddall confirmed) debilitated a vital part of the finance ecosystem. That decision will be painfully costly for consumers and it’s completely unnecessary to address over-indebtedness. The DoF had many other levers they could have pulled.

      Re: “smaller lenders have emerged and gained market share as a result of cheap CMHC insurance…”

      Yeah, that’s kind of the point: Use the sovereign guarantee to safely support competition, thereby saving more than 6 in 10 Canadians thousands of dollars each and every time they get a mortgage. Past governments recognized the grave need for such policy in an oligopolistic market. So they built Canada’s world-class securitization system based on insurance accessibility, for this very purpose.

       
      Comment avatar
  5. Comment avatar

    Jeff Murray    

    Could they not have included a confidentiality agreement and conditioned an insider trader clause that no bank or housing related securities could be bought or traded by industry participants who were consulted?
    This is commonplace in the corporate world.

    If we drill down on the house price inflation culprit it would show the BoC itself is responsible as a result of loose monetary policy and if we look at our housing in US dollars today compared to 2014 there is actually not that big of a net increase.

    Food for thought.

     
  6. Comment avatar

    Captobvious75    

    Is there a link to listen to all the previous testimonies and the presentation?

    And FYI- I hardly feel bad for those who, once declined on their mortgage application, took their cash and went on a vacation, or bought a car, instead of saving more money for a larger down payment. That’s a horrible example thrown out by Liepert.

     
    1. CaptContradiction76    

      Captobvious75,

      Do you think people are smart enough to make sound financial and housing decisions on their own?

      If so, you should rally against this burdensome government regulation which makes life more expensive for those prudent Canadians.

      If not, then you clearly support a nanny state where the government must save us stupid citizens from ourselves. If that is the case, then you are hypocritical for:

      NOT being concerned about stupid Canadians who are now shut out of the market and go blow their money

      BUT

      BEING concerned about stupid Canadians who would otherwise blow their money on housing, were it not for big brother government.

      You can’t suck and blow, Captain.

       
      Comment avatar

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