Following weeks of consultations with mortgage experts, the government’s Standing Committee on Finance has issued five recommendations for Parliament.
They stem from the government’s mortgage changes last fall and this January. Those policies generated widespread criticism from non-bank mortgage providers who argued the new rules:
- created an uneven playing field between banks and non-bank lenders
- make it more difficult and expensive for low-risk borrowers to obtain a mortgage.
Largely as a result of that criticism, the Standing Committee on Finance recommended that the federal government:
- Work with provincial governments to ensure stable, affordable regional housing markets.
- Consider increased support for first-time homebuyers.
- Use Statistics Canada to beef up housing data and allow for more informed policy decisions.
- Put a moratorium on new mortgage regulations until the last set of policies can be assessed.
- Ensure that mortgage regulations treat all mortgage lenders fairly.
During its own testimony the Department of Finance questioned the extent to which taxpayers should financially support government-guaranteed mortgages. However, it provided the committee with virtually no context on the important benefits of mortgage competition, which are made possible by federal sponsorship of housing finance.
The DoF also charged lenders with relying on portfolio insurance. That isn’t surprising in the case of mortgage finance companies, since portfolio insurance does what it was intended to do: facilitate lower funding costs.
“According to (the DoF), the presence of risk in Canada’s housing markets can be explained by low interest rates, growth in home prices and support for the country’s housing market through Canada Mortgage and Housing Corporation,” the report reads.
“While (the DoF) does not think that mortgage interest rates will rise as a result of the changes, it indicated that it is possible that rates could increase slightly.” (It appears the DoF is either misinformed or purposely omitting facts on this issue. Mortgage Professionals Canada estimates that the changes have already increased the average conventional mortgage interest rate by roughly 0.25 percentage points.)
CMHC was a bit more forthright on this point. It noted that the changes have led to a 15%–20% reduction in the volume of its underwriting activity, mostly for first-time homebuyers. It anticipated that the new regs will negatively affect first-time homebuyers’ ability to borrow, lead to higher mortgage interest rates and lessen competition in the mortgage financing sector.
The industry had virtually no chance to comment on the changes before their implementation. In testimony from the Parliamentary Secretary to the Minister of Finance (Liberal MP Ginette Petitpas Taylor), she attributed that to the “importance of confidentiality.”
“…When it comes to changing mortgage rules, it’s truly important to make sure that we are very sensitive and very prudent with the information we have,” she said. “As a result, that is why there was no public consultation held regarding these matters.”
In other words, it was better to have less informed policy that failed to thoroughly explore superior alternatives.
The Opposition’s Response
At the end of the report, the Official Opposition criticized the regulations as a “one-size-fits-all solution” that was designed with only specific regions of Canada in mind—specifically Toronto and Vancouver. That has “unfortunately hurt other housing markets across the country,” it argues.
The Opposition called on the Minister to:
- reverse the mortgage changes “based on the impact they are having on Canada’s economy, including the real estate and mortgage industry…”
- study options to modify the stress test so that it doesn’t negatively impact first-time homebuyers
- conduct broad stakeholder consultations prior to “unilaterally introducing changes to…mortgage rules.”
“We believe the government needs to ensure that…small mortgage lenders and credit unions remain competitive, rather than advantaging the large banks,” the Opposition noted. “Since the changes on October 3 were made without prior consultation, they were not evidence-based policies and they hurt rural communities and reduce the competitiveness of Canada’s small mortgage lenders and credit unions.”
The Minister of Finance must now publicly respond to the committee through Parliament. Sources familiar with the matter tell us that could happen by August.
By Steve Huebl and Robert McLister