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Market share FBThe Globe and Mail reports that “unregulated lenders” now own a 15% share of Canada’s mortgage market, according to a Finance Department memo it obtained. That sounds somewhat concerning as a layperson, doesn’t it?

It sounds like Canada has some drunken, unrestrained Wild West lending going on. You can hear Joe Public thinking, “These yahoos must be selling those insidious teaser rates and doling out those NINJA (no income, no job, no assets) mortgages that sunk the U.S. market in 2008.”

That’s unfortunate…because it’s not true.

Right off the bat, let’s dispense with the term “unregulated” as it applies to prime mortgage lending. It’s complete baloney (I’d rather use another term but kids might be reading).

Virtually all prime non-bank lenders are regulated. They must conform to:

  • Federal regulations that apply to the banks providing their funding
  • Federal regulations that apply to insurers providing their default insurance and securitization
  • Provincial regulations applying to mortgage brokerages, administrators, etc.

On top of this, non-deposit-taking lenders must withstand the regular audits and scrutiny of their OSFI-regulated bank funders and investors.

All told, this puts them under a microscope that’s just as intense as the major banks, if not more so. Anyone who thinks banks would risk their capital and reputation by funding them otherwise is woefully misinformed.

Note, of course, that the aforementioned regulations do not generally apply to private subprime lenders. Those lenders account for roughly 1 in 16 mortgage originations, according to CIBC (see its chart below). Yet, they present arguably no material systemic risk because they’re predominately investor- and self-funded, require higher borrower equity, and price and underwrite commensurate with their risk appetite. (Incidentally, the rise in private lending is directly attributable to policy-maker’s own actions — i.e., stricter federal lending guidelines.)

Source: CIBC, Teranet

Source: CIBC, Teranet

The Globe further reports, “The government memo estimated that about 90 per cent of the business of unregulated lenders is subject to federal mortgage rules, which include meeting the strict underwriting standards set by CMHC and the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.”

The message here is that non-deposit-taking lenders have countless checks and balances and ample supervision to assure their stability. That’s vital because, as the Department of Finance is quick to point out, they’re “enhancing competition in the mortgage market.” Moreover, they account for roughly half of broker originations.

So let’s not allow news stories without context to send the wrong idea about non-traditionally regulated lenders. They and their mortgage broker partners are overwhelmingly responsible for keeping rates and prepayment penalties down, and that keeps more money in Canadians’ pockets.

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Laptop Online FBThe growth of rate comparison sites over the last six years has paralleled the surge in online mortgage shopping.

With the burgeoning demographic of web-savvy mortgage consumers comes greater demand for decision support tools. More than a few firms in our space are presently developing technology to help borrowers compare rates, costs, features and terms.

The latest example comes from RateHub.ca, which just got a grant from the National Research Council of Canada’s Industrial Assistance Program (NRC-IRAP). RateHub will receive up to half a million dollars to develop personalized online product recommendations for its site users. (By the way, this funding is available to other industry participants as well, but the qualification process is not easy.)

RateHub says its technology will allow users, among other things, to enter detailed financial information and receive personalized mortgage product recommendations. The site will develop tools for credit card, savings account and insurance comparisons as well.

“The benefit to the mortgage shopper is being able to go online at their convenience and find a product that is suited to their individual situation,” RateHub CEO Alyssa Furtado told us. “It will make the at-home, online research process much more accurate and seamless. As mortgage brokers know, not all borrowers are created equal. We want to improve the online experience, and take specific borrowing circumstances into consideration, such as investment properties, those with income from freelance work, etc., to help the user find what they are looking for and deliver a tailored rate and product.”

This naturally begs the question: Could automated mortgage recommendations ever replace the advice of a mortgage professional?”

Furtado doesn’t go that far, at least publicly. She sees the increasing range of tools available to web-based consumers as complementary to the services of a broker rather than being in direct competition. alyssa-furtado

“They can and do work hand-in-hand,” she said. “We know most consumers start their mortgage research online, and there is an expectation by the average user to be able to find the information they are searching for [online].”

“A mortgage broker will always have offline experience and be able to offer offline services that benefit the (more knowledgeable) mortgage buyer, like being able to negotiate on behalf of the customer.”

The risk is that consumers blindly gravitate to the lowest rate, or that the comparison technology leaves out key contract considerations.

Those concerns aside, the ability to better filter mortgage options online saves people time and makes for smarter borrowers. That’s clearly a win for consumers as information power leads to more effective negotiating and lower borrowing costs. 


Sidebar: Here’s some technical research if you want to read more on the cost of information asymmetry in Canada’s mortgage market.


By Steve Huebl & Robert McLister

 

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RMA and BFGBroker Financial Group (BFG) and Real Mortgage Associates Inc. (RMA) announced today that they plan to unite. The two brokerage companies say they’ll enter a joint share purchase agreement and take ownership in the other.

The reported benefits of the deal are sharing of technology, administrative resources, payroll, compliance and corporate relationships. Of course, with mortgage revenue being volume-based, the combination should also help the two garner slightly better compensation from certain lenders. “The industry pays on volume,” says BFG CEO Joe Rosati.

Both firms are relatively small as far as broker networks go. The companies haven’t disclosed their volume but we hear it’s in the $1.5 to $2 billion neighbourhood, combined. By teaming up, the two will also improve their economics with financial partners for greater cross-sell opportunities.

Both organizations will continue to operate their separate brands. Some might think that focusing finite resources on one brand would be wiser, but Rosati says the two firms don’t want to disrupt their brokers’ branding and operations.

The advantage that BFG heralds most is its “Scarlett” broker technology, with its CRM, digital marketing and back-office functionality. (Here’s a look at “Scarlett.”) “A partnership with BFG gives RMA access to a piece of technology that is vital to the future growth of our organizations,” said RMA President David Yuzpe in the company’s release today.

Brokerage consolidation is well underway in the mortgage business. This deal is just the latest example and the trend will only intensify. In a thin-margin industry that measures profits in basis points, scale can make or break a business model. The big boys (e.g., DLC, VERICO, Mortgage Alliance, TMG, etc.) are all looking to capture the highest producing agents. Hence, smaller shops may increasingly try to protect themselves and bulk up, to make their offerings more compelling. In that vein, this combination appears to be a sound move for both BFG and RMA.

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Divorce FB The nation’s biggest credit union, Vancity, is pulling out of the mortgage broker channel.

The Vancouver-based company sent an email to notify brokers this morning. It has been in the mortgage broker channel since 1991, when it acquired Citizens Trust Company. The channel was administered through Vancity’s subsidiary, Citizens Bank, until 2007 when it was transferred directly to Vancity.

When asked why it was leaving, John Derose, Vancity’s Director of Mobile Sales, explained:

As a member-owned financial co-operative we place a high priority on building strong relationships with our members. The business we generate through our mortgage broker channel often does not allow the best opportunity to build these relationships and we want to focus on those channels that do.

We are able to make this move in large part because our mobile [sales force] capacity has grown significantly since the 1990s. Historically, people have used brokers to get mortgage support and advice at the times and locations that suit them best. Now, with our mobile capacity, we have an expert capability to do this in-house.

Finally, the industry as a whole has been moving towards greater transparency and our members and prospective members can always see our rates posted on Vancity.com. This allows people to determine the best rates without necessarily having to use a mortgage broker.

Vancity did have some success with brokers. Reportedly its Victoria, B.C. market penetration was thanks in large part to broker-originated customers.

That aside, and while it’s sad to see a big brand name leave the market, Vancity was truly a marginal player in the broker space. It has been for a long time. As of the first quarter, it was only the 27th largest lender in the channel according to D+H data, a ranking it’s been more or less stuck at for years. Vancity’s overall broker market share was a mere speck at one-tenth of one percent.

Part of that is because of service issues, say Vancouver brokers we interviewed off record for this story. The other part is price competitiveness. Its broker rates have been absolutely horrendous in the last year. Its 5-year fixed, for example, has been over 3.00% for months. Meanwhile, it’s openly advertising 2.79% on its website for the general public.Vancity

Clearly the company didn’t want much broker business and we suspect this decision was in the back of its mind for a while. “The mortgage broker channel represents less than 5% of our overall mortgage portfolio,” said Derose. “We are confident we can replace this business through our branches, our call centre and through our mobile mortgage specialists.”

Naturally, brokers have a different take.

“I think it’s regrettable for a couple of reasons,” said Paul Taylor, CEO of Mortgage Professionals Canada, the country’s main broker industry association. “For our member brokers and the growing number of consumers who choose to use a mortgage broker, Vancity will no longer be an option to consider. With the difficulties many consumers are already facing in the real estate market in Vancouver, less financing options is not a good thing.”

Taylor went on to add, “It is also a disappointing that Vancity couldn’t find a way to make their broker relationships work for them…As other new entrants to the mortgage broker channel are finding, brokers offer a great way to access portions of the marketplace that direct marketing often doesn’t reach. Their individual customer relationships also ensure product suitability when presenting options, simplifying internal underwriting and approval processes.”

One of the new entrants Taylor is referring to is Manulife Bank. The bank invested millions of dollars to enter the broker channel earlier this year, and has reportedly been pleased with its performance to date. Brokers currently account for roughly one-third of all mortgage originations in Canada.

“I hope Vancity revisits this decision soon and reconsiders its position,” Taylor added. “As broker market share grows, it’s difficult to understand why any lender wouldn’t want to be a part of it.”

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Analysis FB

It looks like it’s going to get harder (and/or more expensive) to get approved for a mortgage—if you’re not a strong borrower, that is.

The nation’s banking regulator (OSFI) put banks on notice today that it’s stepping up policing of their underwriting practices. Here’s OSFI’s official letter.

“Risks associated with mortgage lending practices are, in general, adequately managed by Canadian financial institutions,” OSFI’s Annik Faucher told CMT. “…However we have identified areas that require close attention by mortgage lenders, and at the same time, increased scrutiny by OSFI. As noted in the letter released today, OSFI will continue its scrutiny in the areas of income verification, non-conforming loans, debt service ratios, appraisals and loan-to-value (LTV) ratio calculations, and institutional risk appetite.”

When asked how often OSFI came across imprudent or unduly risky underwriting, Faucher said, “We would not be able to give you a specific number, but as we note in the letter, OSFI is indeed aware of a number of incidents where financial institutions have encountered misrepresentation of income and/or employment.”

Here’s more of what we’ve gathered thus far…

On why OSFI made this announcement:

  • Banks have already been under increased scrutiny since OSFI’s B-20 underwriting guideline took effect in 2012. Among other things, OSFI’s actions have resulted in stricter approval guidelines, more compliance audits, restrictions on securitized lending and more onerous capital requirements.
  • OSFI knows that the public and financial markets are growing more nervous about housing overvaluation by the day. It also probably realizes that both it and the Liberal government will be held partially accountable if any housing markets implode.
  • For these reasons, and due to its legitimate concern about overleveraging and overvaluation, OSFI wants to make a public statement that it’s doing its job of enforcing prudent risk management and protecting bank customers.

On the overall industry impact:

  • One might expect a slight drop in mortgage volumes at federally regulated lenders, other things equal, once lenders adjust to OSFI’s underwriting guidance.
  • Despite domestic lending accounting for about half of Big 6 bank profits overall, this development likely presents only a small earnings challenge.

On expected lender outcomes:110714_0511_OSFIsB21is1.jpg

  • Federally regulated lenders and lenders who source their funding from federally regulated lenders, will be impacted by this announcement.
  • Those lenders will respond in one or both of the following ways:
    • By tightening underwriting guidelines.
    • By making fewer exceptions to their underwriting policies.
  • Most provincially regulated lenders (i.e., credit unions) will not be directly impacted by this announcement when it comes to uninsured mortgages.
  • This could give certain credit unions a slight edge in low-ratio underwriting flexibility, for some period of time.
  • According to analysts we’ve spoken with, capital requirements will increase considerably on a percentage basis come November. However, the impact on an absolute basis should be small, but still large enough to trigger a slight reduction in mortgage discounting.

On how borrowers may fare:

  • Mortgage applicants, particularly foreign borrowers and self-employed applicants who don’t earn a traditional T4’d salary, should expect to be asked for more income documentation (e.g., tax documents, pay statements, bank account statements, etc.)
  • Some homeowners who can’t prove income in the traditional manner will be pushed into the arms of non-federally regulated lenders (credit unions, mortgage investment corporations and private lenders).
  • In turn, more of those borrowers will be forced to pay interest rate premiums, as federally regulated lenders have traditionally provided the lowest cost of borrowing in this market.
  • Lenders will make fewer debt-ratio exceptions. As a result, a small percentage of borrowers will see their requested loan sizes cut back.
  • In certain cases, homeowners with rental income will not be able to use as much of that income to qualify for their mortgage.
  • Lenders may no longer be able to rely on the 5-year posted qualifying rate (currently 4.74%) when measuring a borrower’s debt ratios. If this qualifying rate is raised, it will further restrict credit (maximum loan amounts) for borrowers with above-average debt loads.
  • Some lenders may start calculating and relying on more conservative lending values, as opposed to normal appraised values. This could slightly reduce the equity available to homeowners, a key consideration for those who want to refinance up to 80% of their property’s value (the current refi limit for prime mortgages).

Questions

One of the key questions remaining:

The qualification rate is currently established as the mode average of the Big 6 banks’ 5-year posted rates, as determined by the Bank of Canada. That number is presently 4.74%, about 250 basis points above the typical 5-year rate.

But OSFI isn’t satisfied with that. It says: “Relying on the prevailing posted five-year mortgage rate to test a borrower’s ability to service its obligations in a rising interest rate environment does not represent a sufficiently conservative stress test.”

If OSFI requires a higher qualification rate, that’ll make it harder for many borrowers to get a variable or 1- to 4-year fixed term. We’ve reached out to the regulator for clarity on this point and will update this story once we know.

Update — 6:09 p.m. ET:

Here’s OSFI’s response to the question on whether the qualification rate will be set higher:

Each application is unique, and the qualifying rate is something that financial institutions should look at and ask if it is appropriate as a minimum level to ensure ongoing mortgage affordability. As for future changes, as noted in the letter today, OSFI will be reviewing its Guideline B20 more broadly to ensure it is aligned with prudent industry practice and Canadian housing market realities.

Update 2 — 11:49 p.m. ET:

Here was OSFI head, Jeremy Rudin’s, response when BNN’s Andrew Bell asked if he’d increase the mortgage qualification rate:

“..We’re more inclined to reinforce [a] principles based approach..rather than pick a qualifying rate..”

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First quarter 2016 was one of the most unexpected quarters in memory for broker channel market share.

If you had to sum it up in one sentence: the largest players ceded a fat slice of the pie to smaller lenders.

In fact, the top five broker lenders combined posted their lowest market share reading since we began tracking this data six years ago.


READ MORE

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Brexit FBWhat a day in the markets. Britain surprised the world and walked out on the European Union.

In response, markets crashed around the globe—sovereign bonds aside.

Here’s a quick rundown of the Canadian implications…

It’s Not the End for the UK/EU

UK’s parliament must still vote to exit the union, albeit that’s expected to be a formality. Britain must then remain in the EU for two more years, and it’s not impossible for the country to change its mind in that time. Barring that, there’s the possibility that the EU and UK negotiate an alternative trade deal. After all, roughly half of UK trade is with the European bloc.

More Accommodative Central Banks

The UK’s Treasury expects its GDP to be a whopping 3.6% lower in two years. Economic fallout and uncertainty (including uncertainty about who might leave the EU next) will curb foreign investment and slow monetary tightening worldwide. That includes in the U.S. where rate hikes are now improbable for much longer. At the very least, “This dramatically lowers the probability of a hike this year,” said TD earlier.

Canada’s Bonds More Appealing

A more dovish Fed, the downgrade in Britain’s credit rating and economic aftershocks all give Canadian bond yields more leash to run—lower, that is.

But mortgage rates are likely not about to fall off a cliff near-term. Canada’s inflation outlook will be more greatly impacted by things like negative sentiment and falling oil than any deterioration of UK trade. And those rate drivers could take time to play out.

As for specific numbers, “The economic ramifications for Canada are challenging to estimate,” says Bank of America Merrill Lynch, “…For now we have trimmed 2017 GDP growth by 0.2 percentage points to 1.7%.”

Mortgage Rate Path Altered Slightly

There’s a possibility we could see higher risk/liquidity premiums built into mortgage rates, especially variable rates. But make no mistake, there’s nothing long-term bullish for rates in this news.

For us to see any material fixed rate cuts, the 5-year yield will need to drop closer to its all-time low of 0.40%, or below.

As for the prime rate, Brexit talk will surely inspire more economists to push rate-hike projections into 2018. At the moment, OIS prices imply a 1 in 3 chance we’ll see a BoC cut this year.

More Fuel for Canadian Real Estate?

UK instability could boost international demand for Canadian housing, believes Mortgage Professionals Canada CEO Paul Taylor. “…The uncertainty it causes in the European marketplace now only exacerbates the Toronto and Vancouver foreign investment elements of the overheating housing market.”

A cheaper loonie could add even more fuel to that fire.

“Hopefully policy-makers will move quickly to address this issue and not delay for the full StatsCan study to be completed,” he says. “I fear at that point it may be too late.”

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TNM Store FBTrue North Mortgage (TNM) has been an innovator since the company began in 1999. It was the first independent mortgage broker to create a national footprint of retail mortgage stores, an early leader in targeting online consumers through rate comparison websites and one of the first to leverage the buydown rate model.

It has now made another first as a discount broker by launching its own CMHC-approved lender. Named THINK Financial, the company sells insured mortgages exclusively to True North Mortgage customers. The Calgary-based lender approved its first deal on May 24 and has five full-time employees.

We caught up with the company’s CEO, Dan Eisner, for a rundown on this new project.

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CMT: So, Dan, do tell, why did you want to go through all the trouble to start your own lender?

Dan: The same reason we do anything. To improve the customer experience while providing ever lower rates. This is not to say that our current lenders don’t provide a good customer experience or poor rates. But as a lender/broker combo we can control the customer experience to a greater extent and thus ensure a superior experience for the good credit clients we attract. In the past, much of TNM’s success hinged on hiring salaried high-quality mortgage specialists and Realtors. The majority of TNM employees are former mortgage underwriters with years of experience in the mortgage industry. This means we can operate without the need for BDM teams, tradeshows, sponsorships and other costly broker promotions.

Think Financial MortgageCMT: How long did it take you from the time you first decided to implement the idea to the first approval?

Dan: That’s a hard answer to pin down. We first starting tackling the problem in 2013. We didn’t get really serious about it until the end of 2014. Our submission to CMHC took place in 2015.

CMT: Knowing all that you do about the process, how happy are you with the decision? Will the rate savings be worth it?

Dan: We are happy so far, but these are very early days. Things like this can take years to play out.

CMT: Who is servicing THINK Financial’s mortgages after closing?

Dan: MCAP.

CMT: As a CMHC-approved lender, you need at least two funders (one primary and one backup), correct? Can you talk about the funding model a bit?

Dan: Yes, we are a CMHC-approved lender, and yes, we have more than one funder as required. This designation we have allows us to underwrite and sell mortgage directly to funders/investors. Any mortgage issued by THINK Financial is sold to a funder in much the same way as First National or MCAP operates. In the end, something like 90% of the mortgages in Canada end up sitting on the balance sheet of one of the big banks in Canada.

CMT: What kind of capital did you have to put up to make this lender possible? Did this require bringing on new investors?

Dan: We exceeded the CMHC and Canada Guaranty required $5 million in capital by a good margin. Less than 10% of the shares of True North Mortgage are owned by third parties and we are proud to say that greater than 40% of the employees in True North Mortgage are owners.

CMT: At the moment, you can only submit high- and low-ratio transactionally insured mortgages to CMHC—no bulk insured business—correct?

Dan: True.

CMT: How long until you can submit bulk insured deals to CMHC?

Dan: Two to three years in regards to CMHC, however, we have already commenced low-ratio portfolio insured deals with Canada Guaranty. Right from the start Canada Guaranty has been a strong supporter. They took the initiative to review the historical performance of deals brokered by True North Mortgage and judge us by the results. Clearly they were pleased with what they found and thus offered us low-ratio bulk insurance at launch, along with high-ratio.

CMT: What type of challenge does it present when a new lender has to wait two years to submit bulk deals to CMHC?

Dan Eisner2Dan: It is a significant hurdle for a typical new lender entering the market. From my understanding, the private insurers rarely work with brand new lenders…until they have seen [multiple years of] strong audit results. As a result, a typical new lender is left with CMHC as their only option. Although it is possible to submit low-ratio deals to CMHC while on probation, the transactional cost of doing so is prohibitive. Thus most new lenders are left to offer high-ratio deals only. Being a high-ratio only [broker channel] lender does not put you in good stead with many mortgage brokers and thus the resulting submissions will be of lower quality. In the case of Think Financial, we were able to provide both high- and low-ratio by having two insurer partners.

CMT: Thanks, Dan. Anything else you’d like to add?

Dan: Although it is very early we are pleased to see that our new lender has driven substantially more calls and many of these clients are ending up with mortgages from our current stable of lenders outside of THINK Financial. Of the $63 million we got approved in the last two weeks, less than 15% ended up at THINK Financial.

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Our Take…

On the Product: The company’s primary product is a full-featured 5-year fixed called “The Works.” It’s currently marketed at 2.29% (according to the website) and has a normal penalty and 20/20 prepayments. All of the firm’s mortgages are registered as standard charges.

THINK Financial also plans to roll out a no-frills mortgage (called “The Skinny”). The product will feature aggressive pricing and be portable, but it will have no prepayment privileges and come with a penalty that’s the higher of 2.75%, the IRD or 3-months’ interest. With those limitations, the rate will have to be exceptionally low as it will be easy to sell against. Then again, in the online arena it often only takes a 1 bps lower rate to generate phone calls. Some customers completely overlook the rate details in the beginning.

On Other Brokers Trying the Same: True North Mortgage originated $1.1 billion in mortgages in the last 12 months. It has the scale necessary to pull off its own lender. For other brokers considering such a move, note that funders may be hesitant to support direct broker relationships unless they can expect hundreds of millions in annual originations (although some may entertain less initially, if there’s a big upside).

On the Lenders’ Perspective: This isn’t something that thrills lenders as they’d prefer brokers don’t compete head on. One worry is that they’ll get a lower quality of insured business from brokers who have their own lenders. The thinking is that a broker will keep its best deals in-house, since insurers put new lenders under intense scrutiny for arrears. But in True North’s case, the quality of business is above industry norms to begin with. Moreover, we suspect that Eisner, clearly an astute operator, is not about to jeopardize the company’s valuable lender relationships.

On What This Signifies: In this author’s view, True North would not have done this if it couldn’t price at least 5-10 bps lower than its existing lender relationships allow. Client experience aside, this move is mainly an answer to severe online price competition, a factor that’s becoming more pronounced with 44% of online consumers now using rate comparison sites. Other big brokers also see this writing on the wall. So, while this may not be a major industry trend, expect a handful of other $1 billion+ independents to follow the same path.

 

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Andy CharlesI had a chat with Canada Guaranty CEO Andy Charles today. Like most industry leaders, he’s concerned with maintaining stability in Canada’s high-value housing markets.

As a mortgage default insurer, Charles knows a thing or two about risk mitigation. So we asked him for his take on raising minimum down payments in order to create a risk buffer and slow real estate valuations. He made three points of note:

  1. Regulatory changes over the last several years have made the first-time homebuyer a modest player in the overall housing market:“The changes made to the high-ratio mortgages (first-time homebuyers) the past several years (reduced amortizations, debt servicing restrictions, etc.) have served to significantly reduce the size of the first-time homebuyer segment. It now represents just 30% of Canada’s housing market with the significant majority of home financing utilizing conventional mortgages.”
  2. Increasing the minimum down payment would materially hurt Canada’s smaller urban housing markets:“Raising the minimum down payment to 10% would have the unintended consequence of negatively impacting housing markets in almost all other areas of the country. Home prices are soft and either flat or moderately decreasing in almost every city in Canada other than Toronto/Hamilton and Vancouver/Victoria. Housing markets and first-time homebuyers in Montreal, Halifax, Calgary, Edmonton, Winnipeg, Regina, and Saskatoon, not to mention other smaller cities, would very likely experience negative economic impacts due to increasing the minimum down payment at a national level.”
  3. GTA/GVA price increases are not being driven by the first-time homebuyer:“The large increases in single-family home prices in the GTA/GVA markets are not being driven by the first-time homebuyer with a 5% down payment. The 5% down payment segment of borrowers are generally not purchasing single-family dwellings in the GTA and GVA markets, as a very significant portion of these homes are priced above the $1 million value restriction for high-ratio purchases. Raising the minimum down payment in these markets would have very little, if any, impact on the trajectory of GVA/GTA single-family house prices in the foreseeable future. The average mortgage size of the first-time homebuyer is approximately $300,000.”

Charles added in closing:

“While I share the concerns regarding these specific markets, we take the view that raising the minimum down payment will penalize the first-time homebuyer, risk dampening already soft housing markets in most of the country, and will do little to help achieve the desired public policy of moderating the price growth in the GTA and GVA markets.”

Charles is one of an increasing number of industry leaders publicly weighing in on mortgage policy as of late.

 

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Rising down payments FBThe CEOs of National Bank & Scotiabank, Louis Vachon and Brian Porter, made headlines this past week by suggesting that Ottawa raise the minimum down payment. Reportedly, they want people to put down at least 10% on all homes under $1 million.

Today, Canadians must lay out at least 5% on purchases up to $500,000, plus 10% on any amounts between $500,000.01 and $999,999.99. It’s a reasonable policy that lessens risk on higher-priced homes in torrid housing markets.

When hearing bank bigwigs opine on down payments, one has to wonder how long it’s been since they were first-time homebuyers. Today, the number one reason young Canadians don’t buy homes sooner is the current equity requirements. Over two-thirds of CMHC insured buyers, for example, can only scrounge up 5.00% to 9.99% down payments.

Were regulators to heed these bankers, it would force untold thousands of young Canadians to rent (or keep their parents company) significantly longer. That’s despite their qualifications as borrowers and despite any social/economic ramifications. And for what? To protect banks’ earnings? To curb Toronto / Vancouver housing while setting back buyers in the other two-thirds of the country where values are stable or falling?

How about these banks mitigate their own risk? They can do that by continuing to approve people who can clearly service their debt, irrespective of equity. It’s a crazy concept, but it might just work.

Take someone who earns a stable income, has demonstrated their ability and willingness to maintain pristine credit and is not over-extended with debt. That person has earned the right to own. The fact that they’ve saved only 5%, and not 10%, does not make them a high-risk borrower. Any systemic risk they do pose is mitigated with default insurance, which they pay for.

A flat 10% down payment is not the answer. It doesn’t achieve the correct goal. The goal of further regulation should be to keep higher-risk borrowers out of the market, not to keep all borrowers without an arbitrarily set down payment out of the market.

The Department of Finance should really be targeting borrowers who finance higher-value properties (non-starter homes) with smaller-than-average down payments, higher-than-average debt ratios and lower-than-average credit scores. One way to do that is by lowering the maximum allowable debt ratios on those borrowers—i.e., on borrowers exhibiting “layered risk.” If another economic shock does come along, these are the folks most likely to stop making their mortgage payments.

It would be so much more productive if the Porters and Vachons of the world elaborated on their logic when making public statements about mortgage rules. One would think (hope) they have internal numbers—like stress test results, arrears trends, etc.—to back up their arguments. As it stands, today’s publicly available data does not support Canada-wide down payment hikes for well-qualified young buyers.

When policy-makers see their subjects (bankers) asking for tighter equity requirements, they listen. In this case, hopefully they don’t listen too closely.