Name: Robert McLister

Email: [email protected]

Biographical Info: Robert McLister is one of Canada’s best-known mortgage experts, a mortgage columnist for The Globe and Mail, editor of CanadianMortgageTrends.com (CMT) and founder of intelliMortgage Inc. and RateSpy.com. Robert created CMT in 2006. The publication now attracts 550,000+ annual readers, is a four-time Canadian Mortgage Awards recipient and has been named one of Canada’s best personal finance sites by the Globe & Mail. Prior to entering the mortgage world, Robert was an equities trader for eleven years and a finance graduate from the University of Michigan Business School. Robert appears regularly in the media for mortgage-related commentary (recent coverage: http://bit.ly/tUjp3Q). He can be followed on Twitter at @CdnMortgageNews


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Are regulators oblivious to the consequence of their own mortgage policies? That’s what certain industry stakeholders and MPs suggested to Parliament’s Standing Committee on Finance this past week.

Well, observers can now decide for themselves, based on officials’ own comments—starting with those of OSFI Assistant Superintendent Carolyn Rogers.

Rogers testified last week. Below are a sampling of her statements, with commentary on each…

  • On the Destruction of Lending Competition: MP Dan Albas asked Rogers if the harm done to competition is a concern, stating, “We’re not just making life tougher for consumers, we’re also making the market less competitive.”
    .
    National Bank Financial (NBF) substantiated that concern in an unrelated report this week, stating: “…We believe increased portfolio insurance premiums could materially impair residential mortgage origination capabilities of mortgage finance companies (MFC)…Increased premiums shift both pricing power and market share control to balance sheet lenders like the Big Six Canadian Banks, highlighting that further downside risk could emerge for MFCs…We believe increased portfolio insurance premiums could materially impair MFCs’ ability to originate residential mortgages in the 65% to 80% LTV ratio range, which we estimate at 35% to 45% of (their) total residential mortgage origination, including insured and uninsured mortgages.”
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    Rogers, for her part, expressed no such concern. She responded to the MP’s question by acknowledging only that the government’s rules are having a “disproportionate impact” on bank challengers. Her testimony made little effort to elaborate on the serious “side effects” noted above. Nor did she make an attempt to help parliamentarians grasp the extent of those repercussions on consumers and lenders.
    .
  • On Refinancing: Rogers stated that the new rule landscape “doesn’t preclude any one lender from doing refinancing.” This was either a tacit admission that she/OSFI doesn’t understand lenders’ funding challenges, or refuses to acknowledge them in public. For as every mortgage professional in Canada knows, there are indeed lenders who have lost their ability to offer refinancing to their customers. Most can still do refinances but with a serious rate handicap versus the major banks. NBF estimates that MFC rates on 80% LTV purchases and renewals have had to rise up to 30 bps due to premium changes alone. We’re seeing 15-50 bps rate premiums on MFC refis. A 15-50 bps rate disadvantage cuts the knees out from most securitizing non-bank lenders, pushing volume into the arms of OSFI-regulated lenders. This is solely the result of a deliberate government agenda.
    .
  • One-sided Stress Tests: Rogers failed to elaborate on how her agency chose not to apply the new “stress test” to uninsured low-ratio mortgages. OSFI’s decision has created an enormous bank advantage over MFCs (which must apply the test to all mortgages, or incur much higher funding costs). OSFI could have coordinated with the Department of Finance to apply the same test to banks. This would seem logical given the Bank of Canada’s public warning that uninsured mortgage indebtedness (e.g., the ratio of uninsured borrowers with loan-to-income ratios over 450%) was rising to concerning levels. OSFI and/or the Department of Finance consciously chose not to subject banks to the same standard as insurers and (by extension) non-banks.
    .
  • On the Policy-maker’s Intentional Failure to Consult Non-bank Stakeholders: Albas said he was told by officials in October that the government chose to only consult with the likes of major banks, despite roughly 2 in 5 mortgages being originated by non-bank lenders. Rogers had no answer to why policy-makers failed to confer with industry experts before making such game-changing rules.
    .
  • On the Regional Aspect of OSFI’s Rules: Rogers stated that OSFI’s policies “are regionally neutral.” How this can be true when the new capital requirements specifically use location in their formula is anyone’s guess.
    .
  • On Higher Resulting Mortgage Rates: Rogers essentially disclaimed responsibility for hiking costs on consumers, saying “Pricing decisions belong to the lender. We (OSFI) don’t set prices. We set capital requirements. And if lenders and insurers choose to pass the capital requirements on to consumers in the form of higher prices, that’s a business decision and not a regulatory decision.” Meanwhile, considerably higher funding costs have ravaged certain MFCs’ businesses, with some lenders reporting a 30 to 50%+ drop in year-over-year volume. Why? Because they had no choice but to terminate products and jack up rates, thus harming consumer choice. OSFI and the Department of Finance knew this would result from their capital changes, or at least they should have.

Rogers’ testimony omitted the true impact that OSFI’s capital changes are having in the marketplace, contained statements that could be interpreted as misleading, and failed to provide any substantive evidence justifying her agency’s changes. She delivered this testimony snidely at times, at one point scoffingly commenting, “I might have guessed…that was the source…” after it was revealed that an MP’s concern was related to a worry from mortgage firm DLC.

This hearing will cast serious doubt on OSFI’s credibility and motives. For as CMHC CEO Evan Siddall has stated, the market consequences of the government’s actions were “fully intended.” The rule changes thus appear to have been purposely targeted and premeditated based on false (or at least questionable) pretenses.

Government officials said in their testimony that they want consumers and the industry to be resilient to future potential shocks. That’s a worthy and necessary goal. But, we all must remember that the prior system:

  • was a product of extensive prior rule tightening (over 30 new lending restrictions since 2008 alone)
  • held defaults on MFC’s insured mortgages to half that of the major banks (MFC arrears were a minuscule 14 bps, said the Bank of Canada in December)
  • limited prime mortgage arrears to a paltry 45 bps during one of the worst recessions on record
  • was mostly based on a level playing field among lenders, unlike today.

Despite all this, regulators once again failed to share any meaningful evidence that Canada’s prior time-tested regulatory system:

  • was immoderately risky
  • justified OSFI’s and the Department of Finance’s devastation of non-bank lenders
  • justified forcing hard-working Canadians to pay thousands more in interest.

In his questioning, MP Albas suggested policy-makers were “spinning” their position, to convince Canadians these rules are in their best interests, while simultaneously taking away critical financing options and raising costs on Canadian families. Rogers’ testimony did nothing to counter this charge. In fact, her statements demand legislators’ immediate scrutiny on her agency’s one-sided decisions, to confirm the unparalleled cost of those policies justify OSFI’s purported benefits.


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

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Mortgage Professionals Canada has asked the Department of Finance for a moratorium on mortgage rule changes until the effects of the current changes are known.

Speaking before the Standing Committee on Finance this week, MPC CEO Paul Taylor spoke to the association’s key concerns about the new rules and its hope that certain aspects will be revisited.

“The recent changes are having a cumulative negative impact on the mortgage market and ultimately on the Canadian consumer,” MPC president and CEO Paul Taylor said. “We are asking for slight amendments to the portfolio insurance eligibility guidelines, and to wait for the remaining existing changes to make their way through the market before implementing any further changes.”

He touched on the disproportionate impact the portfolio insurance changes are having on non-traditional bank lenders, as well as the reduced purchasing power for young homeowners due to the more stringent stress testing of insured mortgages.

Taylor also told the committee how the new rules are negatively affecting the mortgage broker channel and hurting competition.

“Canadian consumers have been more and more inclined to use the services of a mortgage broker to provide choice, advocacy and support, and to assist in the technical requirements of mortgage qualification,” he said. “Placing competitive disadvantages [on] the non‐traditional bank lenders will adversely affect this segment of the Canadian mortgage marketplace…We therefore maintain that in light of decreased competition, increased financing costs, decreased purchasing power, and increased regional prices and access disparity, that the government suspend any further changes to the housing market it is considering.”

MPC’s Recommendations

The association made the following specific recommendations to the Standing Committee on Finance:

  1. Allow for refinanced mortgages to be included in portfolio insurance. “If an 80% loan‐to‐value ratio is unacceptable, please consider reducing the threshold to 75% rather than removing eligibility to these products entirely,” Taylor said. “This adjustment would alleviate some of the competitive disadvantage pressure the cumulative effect of these changes place on the non‐traditional bank lenders.”
  2. Reconsider the increased capital reserve requirements implemented on January 1, 2017, for insured mortgages, as they are making low-ratio insurance too costly for small‐ and mid‐sized lenders.
  3. Apply the stress test to all mortgages sold by all federally regulated lenders, not just insured mortgages.
  4. Uncouple the stress-test rate from the big five banks’ posted rates. Use an independent mechanism to determine the rate.
  5. Conduct a review of the long‐term impact of regional‐based pricing on the Canadian economy as a whole, and the potential additional harmful effects on already-strained regional economies.

The first three recommendations above would needfully re-level the playing field between major banks and Canada’s 400+ other lenders. It would put real choice back to hands of Canadians and meaningfully reduce borrowing costs for well-qualified borrowers. If the government deemed it necessary, these “fixes” to a now broken system could be re-instated with stricter qualification criteria, ensuring the government’s concerns (e.g., over-leverage) are addressed.

We’ll have more on the hearings to come, including surprising testimony from OSFI.

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People are increasingly open to purely automated banking and investment services. But Canadians also lag the world in robo-advice acceptance, finds a recent survey.

Accenture Financial Service’s 2017 consumer study reveals that 6 in 10 Canadians (59%) would use entirely computer-generated support for banking. The consulting firm attributes this to the growing need for “greater control over [our] service experience,” adding that “improved speed and convenience is the main reason consumers will turn to automated servicing.”

There are case studies of this throughout mortgage industries abroad; Quicken Loans is a perfect example down south. U.S. borrowers closed more than $6.5 billion worth of its “digital” Rocket Mortgage in 2016, despite Quicken not having rock bottom rates, nor emphasizing a “human touch.”

But if you believe the survey, most Canadians have no intention of ditching their mortgage advisors. A majority (61%) said it was important that specialists be available to offer mortgage advice in bank branches. Compared to the U.S. and U.K., however, Canada doesn’t have many digital mortgage options for folks to compare.

Any way you slice it, we’re behind the times with fintech adoption. As just one example, 14% of Canadian Gen Y respondents said they would consider banking, buying insurance or purchasing investment advice with an online provider like Amazon or Google. That was a whopping 26 points below the global average of 40%.


Sidebar: Accenture’s research segments financial services consumers into three groups:

  1. Nomads (23% of Canadian consumers): Described as “a highly digitally active group,” they are ready for and open to new models of delivery for financial services. Nomads are independent and not tied to a traditional provider (e.g., bank).
  2. Hunters (23%): Bargain hunting is their game. This group searches relentlessly for the best deal on pricing. Yet they still actively rely on human advisors.
  3. Quality Seekers (55%): This group considers quality first, especially when it comes to service, advice and data protection. 

More than 32,715 respondents took part in this survey from 18 different markets internationally.

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Manulife Bank has rolled out another balance sheet product in the broker channel: the Manulife One for investment properties. We’ll call it the “M1R” (M1 for rentals) for short.

It’s an important product that broadens choice for broker customers, as there are few other automatically readvanceable HELOCs for rental properties (Scotia STEP being its main competition in the broker space).

“We are very pleased to be expanding further our commitment to mortgage brokers across Canada and appreciate the confidence they are showing in partnering with us,” said Jeff Spencer, Manulife Bank’s VP, Retail Sales & Distribution. This is the second balance sheet product that the bank has launched in the broker market in the last month.

Here’s a quick rundown of M1R’s features:

  • Maximum LTV: 80% (75% for high-rise condos; note: any portion over 50% LTV must be in a non-readvancing 5-year fixed sub-account)
  • Maximum loan amount: $750,000
  • Rental treatment: Manulife allows Gross Rental Income x 50% for the net rental income (on the subject property or an owner-occupied rental; note: Manulife removes heat and property taxes from the debt ratios). On non-subject, non-owner-occupied properties, it allows gross rents less allowable operating expenses (actual expenses as noted on the T776)
  • Rate Hold: 120 days for purchases and 90 days for refinances (on the 5-year fixed portion)
  • Minimum credit score: 700 (primary applicant)
  • Rate: The LOC rate is prime + 0.70%

 

What’s to love:

  • The fact that Manulife has filled a key niche with a competitive new product that lets brokers better compete with big banks
  • The LOC is fully readvanceable. Clients can set up multiple readvanceable sub-accounts after closing (Tip: do it in the first 30 days to ensure you get the same rate on the LOC)
  • The 5-year fixed portion can be qualified on the contract rate (the LOC must be qualified using the BoC’s 5-year posted rate)
  • The LOC account is a bank account, and can be used to segregate and track expenses pertaining to the subject rental property
  • Broker compensation is notably higher than Scotia, and paid on the limit of the LOC

 

What could be improved:

  • The 5-year fixed rate is 15 bps higher than Scotia’s rental rate
  • Clients can’t have more than $1 million of rentals with Manulife (hopefully they look at raising this limit in the future, as it’s quite limiting to some clients)
  • The only term option for sub-accounts is the 5-year fixed
  • It’s not available in Quebec
  • It’s got M1’s $14 monthly fee. A lot of customers aren’t keen about it. But, on a positive note, the fee can potentially be written off (speak to your accountant) and includes unlimited e-banking, which is essentially a dedicated accounting solution for that rental property.

 

All in all, the M1R is a solid new rental financing option that should do decent volume in our channel. And if Manulife addresses a few of these wrinkles, its uptake will be all the greater.

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Canada’s mortgage rulemakers want less exposure to insured mortgages and—as this BMO Capital Markets graph shows—they’re getting exactly what they want.

                                     Source: Sohrab Movahedi, Analyst, BMO Capital Markets

 

Uninsured mortgages have been growing at two and a half times the pace of insured mortgages since the financial crisis.

But high-equity mortgages aren’t growing in that same way at CMHC. A quick check of its financials pegs the average loan-to-value of its insured mortgage portfolio at 52.5%. Five years ago, it stood at 55%.

But in that same timeframe, home prices surged 36%, as measured by CREA’s Home Price Index. By that measure alone, one would expect the loan-to-value of CMHC’s portfolio to have dropped more than 2.5 percentage points. But it didn’t.

One reason is because CMHC isn’t insuring as many low-ratios mortgages these days. Its bulk insurance in force has plunged almost $60 billion since 2011. Conversely, 96.5% of the homeowner insurance it sold in its last reported quarter was high ratio.

Thanks to insurance restrictions and premium hikes, CMHC’s portfolio will grow even more top-heavy with high-ratio mortgages in 2017. No longer will it benefit from the diversification of low-ratio mortgages in its revenue stream and portfolio, not to the same extent it once did. That has to worry someone out there.


Sidebar: Speaking of worries, we asked CMHC if it was “concerned” that its dramatic hikes in low-ratio premiums could hurt mortgage competition (since so many smaller lenders rely on low-ratio insurance for securitization and funding). A spokesperson replied, “…We are committed to continuing to offer competitive products to a wide variety of lenders”—to which we replied, that didn’t really answer the question. The spokesperson responded, “we have no further comment…” 

Hey, that’s understandable. It can be difficult to comment when your policies just set back competition by over a decade—in a $1.3+ trillion market.

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Homebuyers with less than 20% down are going to pay more.

CMHC is hiking mortgage insurance rates for the third time in three years. Premiums are jumping up to 0.65 percentage points on the highest LTV mortgages, effective March 17, 2017. Here’s the new premium table:

But high-ratio hikes aren’t the only story. Premiums on mortgages between 65.01 and 80% LTV are soaring too.

At 80% LTV, the premium is almost doubling to 2.40%. That will push up interest rates among lenders who currently pay this premium for their customers in order to securitize the mortgage.

CMHC had a conference call this morning about the increases. Here were some takeaways:

  • It says these premium hikes are due mainly to OSFI’s capital requirement changes, which took effect January 1.
  • OSFI’s new capital requirements include a formula based on LTV, credit score, location and other things. Oddly, this formula disproportionately targets (increases the costs for) mortgages in the conservative 65.01 to 80% LTV bracket.
  • Bulk insurance premiums have increased similar to the low-ratio transactional premiums, says CMHC.
  • The insurer says it has communicated bulk pricing criteria to lenders (although the securitizing lenders I’ve spoken with cite considerable obscurity in bulk pricing, which has led many of them to transactionally insure their mortgages instead).
  • Roughly two-thirds of CMHC’s business is in the 95% LTV category, said CMHC, and about 4% of its transactional insurance is used for low-ratio customers.

Steven Mennill, Senior Vice-President, Insurance, said that CMHC is “Not doing this to affect housing markets…” and doesn’t think it will have a significant effect on competition.

Mortgage finance companies would vehemently disagree. Higher premiums have already limited competition in the low-ratio market where MFCs must charge rates that are up to ¼ point higher on 80% LTV deals (compared to last fall).

Big banks, which don’t need to rely on insured mortgages for securitization purposes, now have more pricing power than ever—at least since the dawn of NHA-MBS. And no one should blame banks. They’re not writing these rules. But from a consumer standpoint, Joe Borrower is getting the shaft, which leads us to the legislated purpose of the National Housing Act:

“The purpose of this Act, in relation to financing for housing, is to promote housing affordability and choice, to facilitate access to, and competition and efficiency in the provision of, housing finance, to protect the availability of adequate funding for housing at low cost, and generally to contribute to the well-being of the housing sector in the national economy.” (emphasis ours)

The recent decisions by the Department of Finance, OSFI and CMHC appear to twist or flout these essential provisions of the National Housing Act.

Policymakers argue that such measures are warranted for the stability of the market. That’s a whole other debate, one that’s not well supported by any publicly available mortgage risk data (default rates, overall credit quality, equity levels, etc.).

Suffice it to say, Canada’s mortgage industry never required an unlevel competitive playing field to create stability. But that’s what these new premiums have now given us.

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Finance Minister Bill Morneau is suggesting that no new mortgage rules are on the drawing board.

After meeting with economists on Friday, he told reporters:

“We, as you know, were quite careful in considering the…situation around the housing markets across the country as we considered measures to ensure that, you know, the people’s bigPhoto Source: Wikipediagest investment was protected. We put in place some measures that we thought would better protect people by ensuring that the mortgages that they took on were appropriate for their situation.”

“We will remain focused on this area to ensure that those measures are having the desired impact. I can tell you that…we continue to focus on this area. The measures are, as we’ve seen, having some impact and we’ll continue to assure that Canadians are protected in the investment, which for most of them, is their biggest investment…their housing.”

When asked specifically if he had plans to restrict mortgages further, Morneau said:

“We continue to, to monitor the housing market and to make sure that the risks are appropriate for the market. We don’t have any measures under consideration at this stage, but we will continue to monitor to ensure that the housing market is stable and that people are protected in their important investment.”

Of course, one measure that’s still fully under consideration is regulators’ lender loss sharing proposal. On that, Morneau added:

“We, as you know, have been doing consultations…thinking about how we…share the risk in the housing sector. Those discussions have proceeded. We’ve had a significant number of submissions and…we’re considering those submissions now.”

“We’ve not yet come to any conclusions but we’ll be looking forward to following through on our considerations in having some news in the not-so-distant future.”

The likely translation: we’ll see Finance’s reaction to industry feedback on loss sharing this spring or summer.

Certain industry executives I’ve spoken with feel this consultation is merely the Department of Finance going through the motions. Many believe the department already knows how it wants to push through loss sharing.

But it’s only fair to give policy-makers the benefit of the doubt. We’ll wait and see how they address concerns about how loss sharing would further jeopardize Canada’s mortgage competition.

Finance is accepting comments on loss sharing until the end of February. If interested, you can send opinions here: [email protected]

“…Our goal will be to work to ensure that Canadians make the investments that make most sense for their families and protect them from risk,” Morneau went on to say. “That’s what we intend to continue to focus on, managing risk on behalf of Canadians.”

Indeed, the fundamental purpose of government is to protect its citizens. Of course, how higher rates and degraded refinance options “protect” qualified borrowers is a whole different question.

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Nearly half of Ontario’s first-time buyers say they’ll delay their home purchase as a result of the federal government’s new mortgage rules introduced in October.

As part of the government’s new stress-testing measures, buyers with less than a 20% down payment must now prove they can afford a payment at the BoC benchmark rate (currently 4.64%).

That change alone will force approximately 45% of first-time homebuyers to postpone their purchase while they continue building up their down payment, according to a recent Ipsos poll conducted for the Ontario Real Estate Association (OREA).

“It’s important to remember who’s being affected by measures that curb housing demand–a young family looking for more space, [or] a 20-something trying to get out of his parents’ basement…,” said OREA CEO Tim Hudak. “Rather than focusing on policies aimed at curbing demand, let’s consider boosting the housing supply or enforcing measures that make home ownership more affordable…”

Overall, the more stringent rules are expected to impact the plans of 79% of all first-time homebuyers in Ontario. Those who won’t be delaying their purchase say they’ll have to find additional funds to cover the larger down payment (27% of respondents), look for a less expensive home (34%) or look for a home in a less desirable city (22%).


Story by Steve Huebl & Rob McLister

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CMT has a long record of critiquing government rule changes in the mortgage business. It’s a check and balance on a bureaucratic system that sometimes “forgets” to consult stakeholders and discounts the consumer repercussions of its policies.

But it would be a mistake to misinterpret this as advocating for the status quo.

On the contrary, Canada’s mortgage regulators have kept our housing market from going completely off the rails. Specifically, they’ve been prescient and wise in reversing lax lending policies, including:

  • Zero-down insured loans
  • 100% rental financing
  • 95% insured refinances
  • 95% stated income financing
  • Insured interest-only financing
  • High-ratio HELOCs
  • Insufficient minimum credit scores
  • Inadequate documentation requirements
  • Qualifying high-ratio variable and short-term borrowers at inadequate rates
  • Allowing insured cash-back down payment mortgages
  • Unnecessarily high maximum debt ratios.

Policy-makers at the Department of Finance, OSFI, CMHC and the Bank of Canada should be applauded for their role in these measures. We don’t say that enough.

If needed, and I stress the phrase “if needed,” the government could take additional steps to cool overvaluation (in the few regions it exists) and improve borrower quality. It could do that by:

  • Raising minimum credit scores
  • Lowering maximum debt ratios for below-average credit scores
  • Lowering maximum debt ratios for low-equity borrowers
  • Incentivizing development and reducing developer red tape to alleviate the supply constraints (a central driver of overvaluation)
  • Publicly publishing individual lenders’ arrears rates
  • Adding new insurance surcharges for lenders with arrears rates in the worst X-percentile
  • Requiring more public data disclosure from default insurers (e.g., Why on earth does CMHC not disclose TDS buckets, like what percentage of its borrowers have TDS ratios over 40% and an LTV > 90%?)
  • Increasing insurance premiums on borrowed and gifted down payments.
  • Increasing insurance premiums and MBS guarantee fees where they are not actuarially sufficient (albeit they’re already more than actuarially sound in most cases).

There’s a lot that’s been done, and still a lot that could be done, to make Canada’s housing market safer.

But one thing that should never, ever occur is policy that penalizes low-risk Canadian families with higher borrowing costs. No one wins in that scenario. And that’s exactly what the regulators have done by:

  • steadily reducing the liquidity of, and access to, NHA-MBS
  • not maintaining CMB allocations adequate for lender needs
  • eliminating insurance on low-risk refinances
  • imposing capital requirements that are overkill in many cases
  • overcharging for MBS guarantees
  • eliminating long-amortization options for those who can qualify at a standard 25-year amortization
  • forcing insurers to charge surcharges in Canada’s most liquid real estate markets
  • restricting bulk insurance access
  • eliminating important securitization outlets for insured mortgages (e.g., ABCP)
  • limiting access to low-cost insured financing for low-risk borrowers with higher-value homes
  • not fostering covered bond access for smaller and mid-size lenders
  • hamstringing banks by keeping covered bond limits below internationally accepted levels
  • not fostering private RMBS markets sooner
  • promoting loss sharing, which (depending on how it’s implemented) could hammer the final nail in small lenders’ caskets.

…and this probably overlooks many more such myopic policies.

How lenders sell and fund mortgages has never been the problem in Canada. It’s bad mortgages that are the risk.

Without question, we owe it to taxpayers to keep government-backed mortgage exposure in check with judicious underwriting, and regulators have enforced just that (over-enforced in some cases).

But the government also owes it to taxpayers to use the AAA credit rating Canada has been blessed with to lessen families’ borrowing cost burden.

This doesn’t mean lenders should give fringe borrowers more options. Definitely not. Under-qualified borrowers should see their options further restricted, and soon. That’s how to create a safer mortgage market and slow overvaluation at the same time.

But never, ever, should policy-makers force a prudent 800-credit score borrower with 20% equity and a secure employment to pay more for her mortgage.

That’s exactly what’s happening today, because of a shotgun regulatory approach that shoots to kill consumers’ options, and asks questions later.

Canada’s mortgage regulators should be simultaneously: (a) applauded and (b) held accountable. Citizens constantly hear the former in carefully planned CMHC speeches, Department of Finance press conferences and Bank of Canada Financial Reviews, but there aren’t many people doing the latter.

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The government’s ongoing crusade against lenders is already proving costly.

Regulatory tightening over the last year has raised conventional mortgage funding costs by at least 25 bps, say lenders we’ve spoken with.

A ¼ point rate hike may not sound like a lot, but that’s $2,300 siphoned out of families’ pockets on a typical mortgage—over just one 5-year term.

If you’re a new buyer making an average down payment on the average Canadian home, regulators have just penalized you with $10,400 more interest over your amortization. (The average amortization is 18.8 years and the average first-timer’s down payment is 21%, according to MPC).

As usual, housing bears are jubilant over any reports of higher rates. They argue that steeper borrowing costs cut affordability, which lowers home prices, which save consumers more in the end. But that math, to put it in technical terms, is “whacked.”

For one thing, the fed’s new “stress test” makes many borrowers qualify at a higher 5-year posted, not the contract rate. And most people’s debt ratios are well below the stress test limit anyway. So raising the contract rate (which is what 2016’s insurance restrictions, capital rules, securitization fees and MBS limits do) has little effect on how much house most people buy.

Theoretically, a ¼-point bump in rates might keep only a few percent of borrowers out of the market anyway, and only temporarily (until they amassed a bigger down payment or more income).

Estimates of the price appreciation attributed to lower rates range from 15% (Bank of Canada) to over 34% (RBC Capital Markets). The latter’s research found that a 1 bps rate drop led to $266 in home price appreciation in Toronto.

Assuming the reverse were true, which isn’t necessarily the case, it would imply a $6650 price drop (over time) given a 25 bps rate hike. That might save a Toronto borrower $1,700 of interest, give or take, over a typical amortization. That’s a fraction of the extra interest they’ll now pay overall.

But then there’s the $6,650 of hypothetical savings resulting from the lower purchase price. Wouldn’t new buyers save that money?

Let’s assume they would. The problem, however, is that home values are a zero sum game. Someone else (the family who’s selling) would also lose that $6,650. Whose net worth is more important?

Even if home prices fell 5%—which wouldn’t happen because of a ¼-point rate hike alone—that would save our average buyer $4,900 throughout their entire amortization. That’s less than half the extra interest they will now pay thanks to the Finance Department’s evisceration of the default insurance and securitization markets.

And who’s to say home prices will even fall because of these rate surcharges? 3.5 million people are moving to the greater Toronto/Hamilton area in the next two decades. A ¼-point rate difference won’t stand between those families and a new home.

The facts stand on their own. When policymakers create higher funding costs for lenders, it is a “tax” on homeowners. In exchange for a notional reduction in the federal government’s risk exposure, consumers pay more. It does not make housing more affordable. 

Note: This doesn’t even touch on policy side effects like loss of lender competition, diminished MBS liquidity (a risk in times of financial stress), the consumer spending impact and so on.

So if someone tries to convince you that policymakers’ attack on mortgage lending benefits the 70% of Canadians who own (or will own) a home, tell ’em “Show me the math.” We’ve yet to see evidence that higher government-imposed borrowing costs benefit homeowners long-term.