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Last November the Department of Finance banned default insurance on single-family rentals. That was a near-knockout blow to the rental financing businesses of lenders who rely on securitization.

Since then, lenders who compete with the big banks have been forced to find new balance sheet funding. The extra cost of that funding has led a majority of lenders to jack up their rental rates by 15-25 bps. That’s up to $2,300 more interest that folks must now pay on a $200,000 rental mortgage.

Or do they?

While the rental businesses struggle at monoline lenders, some of the largest banks are apparently giving regular residential rates to many of their renewing rental borrowers. That’s a big problem for brokers, who often have no way of matching those rates.

It’s also a problem for consumers, who face a loss of competition in the rental financing market. They now have fewer cost-effective alternatives to the major banks, whose products often entail higher early breakage penalties. (Banks can’t be blamed for the Department of Finance’s actions so this is merely an observation, not a jab against them.)

What Now?

“I think transactional based brokers without a measurable value add—who are not differentiating themselves—are in big trouble, full stop,” says Calum Ross, broker and author of The Real Estate Retirement Plan.

But Ross says the challenges are far less of an issue for brokers “who offer full service financial planning and integrate the [rental] property into the [client’s] larger financial plan.”

“If you don’t have a clear value proposition, you are a commodity and commodities get used for price,” he says, adding that the new environment is destined to “cull the herd” of brokers. “The fact is, a more competitive [rental financing] market will cut margins and force us all to improve our game.”

Rental financing professionals must be able to demonstrate their ability to save clients more than that 15-25 basis points, he says. That amounts to just 10-15 bps on an after-tax basis since most investors tend to be at higher marginal tax rates.

But the challenges don’t end there. With anecdotal reports of broker-channel banks tightening up their internal rental financing criteria, rental lending options could continue to shrink in the “A” market. Brokers who specialize in income property financing may have to get increasingly comfortable with non-prime alternatives.

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MCAP 79 MortgageAs those in the mortgage business are painfully aware, Department of Finance rule changes have made low-ratio mortgage insurance far more expensive—well over 200% more expensive in some cases. For mortgage finance companies who rely on insurance for securitization, that’s a serious problem.

One of the more inventive solutions to this problem comes from MCAP, with its new “MCAP 79” mortgage. The product, which launched last week, comes with an eye-catchingly low 5-year fixed rate (as low as 2.29% at 65% LTV). There’s also a 1% fee, which can be capitalized into the mortgage. MCAP uses the 1% upfront fee to offset its insurance and capital costs.

The product has all of MCAP’s bells and whistles—i.e., 20% prepayment privileges, portability, a fair prepayment charge and a 120-day rate hold. It’s available on insurable owner-occupied purchases with LTVs up to 79%. The primary applicant needs a 720+ credit score and the maximum property value is $1 million.

Will Consumers Bite?

Triple-A quality borrowers aren’t used to paying a fee, regardless of how low a rate is. In this case, they’ll obviously want to know the total borrowing cost of MCAP’s 79 mortgage versus competing products.

We ran the numbers, and given:

  • a 65% LTV
  • equal payments, and
  • a mortgage held to maturity

…the effective rate of the MCAP 79 beats virtually all competing rates above 2.52%.

Assuming the mortgage is not broken early, the MCAP 79 is currently the best low-ratio 5-year deal from any broker lender. Albeit, breaking the mortgage early can change that because the 1% fee is non-refundable and there’s a $300 to $500 reinvestment charge in the first three years.

Time will tell how MCAP 79 performs in the marketplace. But whether it’s a hit or not, MCAP’s product team deserves a gold star for creativity. 

If it retains its cost advantage, and if brokers can get clients past the fee and sell the overall borrowing cost advantage, the product could see some success.

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Reputable NOA retrieval services are a fantastic tool for mortgage broker clients who want quick access to their Canada Revenue Agency (CRA) assessment for income validation.

But CRA has put the kibosh on third parties requesting for NOAs for this purpose. In fact, CRA says it was never supposed to happen in the first place.

“It has always been Canada Revenue Agency (CRA) policy that Form T1013, Authorizing or Cancelling a Representative, is not to be used solely for the purpose of obtaining a notice of assessment or income verification information for the taxpayer or a third party,” said Patrick Samson, a CRA spokesperson. “It recently came to our attention that Form T1013 was being used for income verification purposes, and this type of use is prohibited.”

“The purpose of Form T1013 is to allow taxpayers to authorize a tax preparer to manage their tax matters,” he adds. “The CRA has become aware that there are individuals and businesses who use Form T1013 solely for the purpose of obtaining the notice of assessment and charge a fee to their client for this service. This is not the intent of Form T1013. Taxpayers can get their notice of assessment and proof of income…from the CRA without any cost, in fast and convenient ways.”

“We have launched new services that allow taxpayers to verify their income through the CRA’s online and mobile services, which provide taxpayers immediate access to their NOAs and Proof of Income…Taxpayers can obtain their notice of assessment electronically through the My Account service.”

“In addition, through My Account and the new MyCRA mobile app, a taxpayer can request a ‘Proof of income statement,’ which can be received within days by mail. The My Account income verification statement also includes the taxpayer’s name, social insurance number and address information, all necessary to confirm the identity of the taxpayer.

“As an alternative to My Account, taxpayers can phone CRA to have a copy mailed to them…” Unfortunately, if a mortgage applicant can’t get My Account access, that solution may not help fast enough. “The processing time for requests by mail will take approximately 4 weeks,” says CRA.

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Mark Squire, Manulife Bank

Manulife Bank keeps padding its leadership roster. And its latest signing should get it to the playoffs.

Former National Bank broker channel head, Mark Squire, is now Manulife Bank’s Head of Mortgage Broker Services.

Squire, one of the channel’s more respected and broker-friendly executives, helped lead NBC from less than 2.2% market share in the broker channel in 2009, to 6.1% in Q2 2014. NBC peaked at #6 in the top 10 broker lenders.

That, of course, was before National’s HQ pulled the carpet out from under the broker channel by starting to favour its internal sales forces.

At Manulife, we suspect Squire will look to build a top-10 channel lender in short order (i.e., in several quarters versus several years). And he’ll go head-to-head with his old employer to do it. Both Manulife and NBC have similar marquis products: the Manulife One and the National Bank All-in-one.

Jeff Spencer, VP, Retail Sales & Distribution, sent CMT this statement about the hire:

“I am very pleased to have Mark joining our sales team and further increasing our bench strength in the Mortgage Broker space. We also have six new [former NBC] Business Development team members joining us who will exclusively support top-producing brokers in our soon-to-be-announced loyalty program. These new additions to our team have extensive broker experience and knowledge that will benefit our broker partners and existing sales team. We are very excited to add these new team members and further display our commitment to the Mortgage Broker space.”

In other news, as Spencer revealed, Manulife has a new broker loyalty program coming “very” soon. “We will be focused on individual relationships in the program,” he says, alluding to the fact there will be no (or limited) pooling of volume among brokers, in order to achieve loyalty rewards.

But that’s not all. “We see that the key producers in the industry recognize the need to create recurring revenue streams to build value in their businesses,” he added. “With that in mind, we are considering trailing commissions, especially given the long-term nature of Manulife One.” Trailers are a big lure for some brokers, but they’re also costly (hence why Street Capital ditched them in 2015). 

Last, but not least, the bank is planning a late-March pilot launch in Quebec. That’s great news for QC brokers as it currently only has a broker referral program there.

Manulife has thrown down a major investment in the broker space since it officially launched in March 2016. It’s also got a big balance sheet — an edge that can’t be overstressed with Ottawa slowly turning its back on securitization. With slightly better pricing and the rollout of more conventional products, its management could make it a channel superpower.

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More than three months after the Minister of Finance’s surprise unilateral blow to mortgage competition, the mortgage industry keeps fighting back.

“There’s no hope for getting through [to officials] if we can’t keep the pressure on,” DLC President Gary Mauris told CMT. He says his firm is spending “significant” resources to defend the industry’s position that consumers are being harmfully disadvantaged by the new rules.

Below are some of the various initiatives presently underway to reach policy-makers.

Parliament Meetings

On March 6 and 7, some of the biggest names in the broker industry will be in Ottawa attending the first-ever Parliament Hill Advocacy Days.

Organized by Mortgage Professionals Canada, participants include Paul Taylor, Boris Bozic, Jared Dreyer, Dave Teixeira, Dave Trithart, Eddy Cocciollo, Claude Girard, Mark Kerzner, Hali Strandlund, Dan Putnam and Michael Wolfe, among others.

“We have arranged a large number of meetings with MPs, parliamentarian decision-makers and key policy-makers,” MPC said in a statement. Its key asks to parliament:

  • Allow refinances to once again be eligible for portfolio insurance
  • Decouple the stress test rate from the posted Bank of Canada rate
  • Require all mortgages to qualify at the stress test rate, not just insured mortgages.

MPC continues to encourage concerned citizens and industry members to contact their MPs about the inequitable new restrictions. It has set up this page to make that easy.

Bank of Canada Meeting

Lawrence Schembri, Bank of Canada

The Deputy Governor of the Bank of Canada, Mr. Larry Schembri, has requested a meeting with DLC President Gary Mauris on March 22. Its goal: to hear more “perspectives on the impact of recent policy changes on the housing market.”

“The fact that they are listening and now have asked for our perspective, [via] the Deputy Governor is extremely encouraging,” says Mauris. The Bank of Canada directly advises the Department of Finance.

“I plan on taking hundreds of real-life stories with me to demonstrate the unfair, un-level playing field that these changes have created,” Mauris said in an announcement to his firm. “We are soliciting hundreds of stories from every broker network. We are going to edit, layout and provide submission binders to all MPs, CMHC, the Bank of Canada, etc.”

If you’re a mortgage industry professional and have a client or first-time homebuyer who’s been adversely and unfairly affected by the new policies, you can send that story to Mr. Mauris by March 15.

Finance Committee Hearings

Gary Mauris, DLC

Mauris also recently spoke in parliament about the rule change. He testified that DLC’s non-prime business has soared from 3-4% of originations three years ago to 12% now.

“The government is driving Canadians into higher costs,” he asserts.

Indeed, the more that Ottawa pulls back from the mortgage market, the more that safe prudent consumers pay. They too get caught in the “risky borrower” dragnet. (If anyone at the Department of Finance and OSFI had the good sense to consult practising home financing experts, they might have realized that sooner.)

Parliament’s Finance Committee is currently preparing a report that could be finalized in April. According to a person we spoke to who’s familiar with the process, the Liberals have a majority on the committee and can essentially veto any recommendations from the opposition that they don’t like. The Minister of Finance’s office may exert pressure on the Liberal MPs to toe the party line here.

After the report is finalized it will be tabled—i.e., publicly announced in Parliament. The Minister of Finance then has 120 days to officially and publicly respond to the committee thereafter. Our source suggests the report may not be tabled (and made public) before the summer, possibly July or August.

In the meantime, the industry will closely watch the Minister’s budget this month—hoping there’s a slight (and we do mean slight) chance that one or more of the rules will be relaxed.

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Below is the second and last instalment of our commentary on the February 13th testimony to Parliament by CMHC’s CEO. (See part I here)

In that hearing, Evan Siddall argues that the new rounds of mortgage insurance rules were necessary and their side effects were fully intended.

His supporting data for his assertions comes under fire, however, with one opposition MP claiming regulator arrogance was behind the rules and their hasty implementation.

Here are Siddall’s positions in his words, with some “alternative” viewpoints.


Siddall on whether the feds targeted Toronto & Vancouver

“…The October 3 changes were not targeted at escalating house prices in the Toronto and Vancouver markets.” There is “strong evidence of problematic conditions in the Canadian housing markets as a whole” and high indebtedness is a problem “across the country.”

Counterpoint:  CMHC notes that strong overvaluation exists in just four census metropolitan areas (CMAs) that it tracks—Toronto, Vancouver, Hamilton and Quebec City. There are 35 CMAs nationwide. Folks with high mortgage-debt-to-income are found mainly in three metro areas (Toronto, Vancouver, Calgary), says the Bank of Canada. Interestingly—Toronto and Vancouver excluded—Canadian mortgage payments are about 24% of median family income (i.e., reasonable). And despite the popular misconception, “The majority of consumers are actually decreasing their debt,” says Equifax. So we have mainly regional extremes exacerbated by a minority of debt-addicted consumers. Yet, the personal finance police in Ottawa claim that spiraling debt is a plague so nationally ingrained as to demand immediate blanket mortgage policy—policy that depresses the majority of already-stable real estate markets and strips all homeowners coast-to-coast of low-cost financing options.

Siddall on who’s impacted by the new stress test:

The stress test on borrowers ensures people can withstand higher rates, Siddall stated. It “will impact only borrowers who are or who would be highly indebted following the purchase of their house, regardless of where they live.”

Counterpoint:  The numbers don’t bear that out. Consider a family earning the average income, with average consumer debt, buying the average priced Canadian home with 20% down. If that family is qualified on a 5-year fixed contract rate, their total debt service ratio is under the 40% traditional guideline. This is not highly indebted.

Impose a 4.64% qualification rate, however, and suddenly they’re above the 44% TDS maximum, they no longer qualify for that same mortgage and they are now “highly indebted.”

With respect to the stress test, Siddall was silent on another key point. The stress test now makes it impossible for many Canadians to switch lenders and get the lowest possible rates. Why? Because some non-bank lenders—which used to offer the lowest conventional rates in Canada—must now upcharge if a borrower is even 0.00001% above the 44% TDS limit, which now happens all too often.

Siddall on Canada’s “high” homeownership rate:

“…We have among the highest homeownership rate at 69%.”

Counterpoint:  Canada is actually well down the list. In 28 countries of the EU, for example, the average homeownership rate is 70% and one-half have rates of 75% or more. (My thanks to economist Will Dunning for noting this data.)

Siddall on killing insured refinances:

“There were a number of business models that were substantially based on…refinancing.” Refinances are “not a housing need…that is a housing want…and still is freely available in the public markets but to the extent there is government support for it, that didn’t strike us as something the government should be supporting…“[Mortgage finance companies’] business has dried up because the government was involved in a market providing stimulus and the Minister of Finance decided to remove some of that stimulus.”

Counterpoint:  Those “business models” Siddall refers to were keeping rates competitive for all responsible well-qualified Canadians. Those “business models” were effectively regulated by multiple sources: OSFI, CMHC and the lender’s aggregators. Those “business models” have consistently maintained arrears rates of half of those at regulated banks, with even higher-credit-score borrowers than the big banks.

(OSFI does not directly regulate mortgage finance companies. But it does require bank mortgage funders to strictly enforce OSFI underwriting rules on these lenders.) 

Siddall on the evidence that portfolio insurance needed to be eliminated for refinances:

“The evidence is in economic crises throughout history, for the 46 financial crises for which we have data, the overwhelming majority of those (70%) were preceded by housing boom and bust cycles,” said Siddall, quoting from this book, which he cited as “evidence” justifying the portfolio insurance changes. (Economist Will Dunning challenges Siddall’s conclusions from that book here.)

“We were jeopardizing the economic future of Canada by promoting an economic cycle in housing markets that could result in a crash and unemployment for people.”

Counterpoint:  Did anyone notice that Mr. Siddall did not answer the question? That question was: “What evidence of risk was present to eliminate portfolio insurance on refis and rentals where there was a delinquency of 0.24% in the current portfolio?”

Another question also needs answering, and that is:  Would it not have been possible to preserve financing options and keep refinance costs low for well-qualified borrowers, while raising qualification requirements to weed out risky borrowers?

The implication that most refinancers are debt-crazed maniacs is absurd. MP Dan Albas mentioned, “Part of refinancing allows for people to be able to invest in their small business, it allows them…to survive a lockout or a strike…it allows them to be able to purchase a home from a spouse because of a divorce.” Canada’s federal mortgage guarantee promotes refinance options and maximizes interest savings for well-qualified homeowners, folks who essentially present zero, zitch, zippo risk to taxpayers. And that risk is carefully monitored and controlled because our lending overlords, CMHC and the Department of Finance, strictly enforce their own guidelines on lenders and borrowers.

Siddall on the Financial Crisis:

“I wouldn’t suggest that the financial crisis as it applied in Canada was a true stress test…We published stress tests that are far more aggressive than that…I would suggest that a single-digit decline in house prices is not a crisis.”

Counterpoint: A 3-point unemployment surge and one of the worst global recessions of all time is nothing to scoff at. But more interesting were the severe employment shocks in the 80s and 90s. Canada’s mortgage market weathered those economic disasters admirably.

But that’s not all. CMHC’s own “far more aggressive” stress tests show that CMHC could withstand conditions more hideous than the U.S. housing apocalypse, and not even run out of capital, and that was before the Finance Minister’s latest draconian insurance and capital tightening.

Oh, and Alberta’s unemployment just hit a 22-year high. Arrears there are currently just half their post-recession peak (albeit they’ll climb a bit more).


Source: tradingeconomics.com

Siddall on what keeps him up at night:

“The problem we worry about most…is unemployment.”

Counterpoint: MP Ron Liepert responded on this point, telling Siddall, “We have a situation in Alberta where we’ve gone through two years of job losses unprecedented in this country and foreclosures have barely changed. So how do you justify what you recommended to the minister based on exactly what’s been happening in Alberta for the past two years?”

Siddall on why low arrears don’t matter (enough):

“People in Canada will determinedly pay their home so the fact that our arrears rates are low is worrisome in the sense that someone will save their home by not buying a car, by not buying a fridge, by economizing on their groceries…What that does is it reduces consumption, and when we reduce consumption we reduce economic activity, and when we reduce economic activity someone loses their job. And that is what we’re concerned about.”

Counterpoint:  CMHC’s own data suggests just 1 in 5 borrowers have a GDS ratio above the traditional 32% guideline. So if those people are the problem, why not target them, remove them from the market and leave options for the remaining majority of cautious financially stable Canadians? Siddall didn’t touch on this.

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“Arrogant.” That’s how some critics are describing Siddall and his regulatory brigade. But arrogance can sometimes be confused with perspicacity, so we must be careful.

Nonetheless, it is statements like these from Siddall that make people wonder:

  • “…[Other witnesses] have people they represent and I would suggest that you may want to take that into account.”—Evan Siddall on the credibility of lender and broker testimony, Feb. 13 , 2017 (The implication: He’s got no angle. It’s the people who disagree with him who have an angle.)
  • “Never ask a barber if you need a haircut.”—Evan Siddall, commenting on whether lender concerns about the government’s portfolio insurance prohibitions were valid, November 18, 2016 (Sure, because it’s biologically impossible for folks in a profession to tell the truth about that profession, or offer practical insights about that profession. Is this right? P.S. Since we’re on the topic of logical fallacies, please, whatever you do, never ask a barber regulator if you need a haircut.)
  • “…The distortionary effects of portfolio insurance…in my view was stimulating excess credit and contributing to higher levels of household debt.”—Evan Siddall, November 18, 2016 (…his view…)
  • “We help Canadians meet their housing needs, not exceed them”—Evan Siddall (Rest assured: Policy-makers know what all Canadians need.)
  • “…Lenders have, as I’ve said in the past, no skin in the game and therefore the incentives are misaligned with good risk management.”—Evan Siddall, Oct. 4, 2016 (Implication: Lenders have little to lose and insufficient business sense to stay in business by underwriting prudently, despite overwhelming evidence to the contrary.)
  • “Some critics now accuse us of overlooking the ‘unintended consequences’ of our actions. In fact, the results of these policy changes were fully intended.”—Evan Siddall, Oct. 17, 2016 (Possible translation: We intended to damage the mortgage market and no apologies are required. If you don’t like the rules, deal with them.)

A sense of superiority often comes with power, and regulators have had virtually unfettered unaccountable power. 

“The policy somewhat smacks of a nanny state,” MP Albas told Siddall. “Some of the best advice I ever received was to think of people, not for them…It sounds like your agency is thinking for people.”

Is this what we want? Do we put our finances in the hands of bureaucrats who think for us all and make one-size-fits-all policy? If we do, it’s a given that Ottawa will emasculate one of the world’s most successful and most envied housing finance systems. And if they do, neither we, nor politicians who care, nor the mortgage industry of Canada, will ever let them forget it.

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For the first time in forever, D+H has a major threat to its mortgage software dominance.

Newton Connectivity Systems—the old Marlborough Stirling Canada, and a Dominion Lending Group company—is launching “Velocity.”

Velocity is a cloud-based desktop for mortgage brokers. In a nutshell, it lets brokers send applications to lenders, pull credit reports, store client documents securely, email conditions updates to applicants, route documents to lenders and send automated marketing emails and newsletters.

The platform launches March 1 and basic connectivity and deal submission is free to all brokers. A CRM add-on will sell later for $50 a month. The new front-end is built partly on Otto, technology that CEO Geoff Willis’s old firm brought to Newton. 

The biggest pain about the software’s predecessor (MorWeb) was that it didn’t connect to all lenders. But DLC President Gary Mauris says that prior holdouts (e.g., TD, Home Trust & CMLS) “are all fast tracking integration” and should be on the system in a matter of months—in some cases, year-end at the latest.

The other criticism, mainly from non-DLC Group brokers, is that they don’t trust DLC to not spy on their client data. We asked Willis about this point blank. He offered this assurance:

“The goal with Newton is to have it stand as its own company and we want to service the entire mortgage industry—not just DLC or a handful of other networks. It would be short sighted and morally—and perhaps legally—wrong for us to pass along identifying information to DLC or any other organization.

We are here to build long-lasting relationships with brokerages and lenders. So let me plainly say, Newton WILL NOT look at a user’s client information or use it in any way without the consent of that user.

The safe collection, transmission and permitted use of data is the key to effectively operating Newton, we take that obligation very seriously. In our terms of service found right on the Newton website now, there are restrictions with how we share client data both internally and externally. If a broker or brokerage is a Velocity user or a user of another third-party point-of-sale system, we will be making provisions in the future to remove that client data post completion, as you will have it in your database and our role of providing the connection bridge has been completed.”

“It is our intention to migrate all $38 billion [of DLC Group origination] over to Newton within the next 30 months,” says Mauris. (If that’s not a shot across D+H’s bow, we don’t know what is.)

D+H, not to be outdone, and probably not coincidentally, emailed this to the broker industry today:

“…D+H has made a strategic decision to strengthen its commitment to the mortgage business in Canada, which you’ll be hearing more about in the coming months. This commitment will be particularly relevant to individual mortgage broker professionals, especially as the digital transformation takes hold in our industry.”

The company goes on to say: “The lending experience of 2020, just 3 years on, will look drastically different than we know it today…”


Sidebar: Coming Newton enhancements include: calendar syncing, production statistics, reporting based on virtually any client data, automated rate sheets for Realtors and email click-tracking. In 2018, Newton plans to add automated NOA and bank statement retrieval (to verify income and down payment funds), Teranet Purview integration, a client portal for doc uploads, e-signatures and payroll.

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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.

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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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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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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