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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.”
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    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.
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  • 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.
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  • 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.
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  • 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.
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  • 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.
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  • 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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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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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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In the media’s race to break down last month’s mortgage rule changes, accuracy has seemingly taken a backseat to fast-published, under-researched commentary.

Here’s a case in point, a Globe story that ran October 17. (And yes, I hate to criticize my own because the Globe has some extraordinary professional journalists.) But this particular story is drastically misleading by virtue of it omitting or mischaracterizing a slew of essential points, including:

  • A primary reason that banks support the new insurance rules:
    • Limiting which mortgages can be insured eliminates securitization options. That handicaps bank competitors, thus providing banks an opportunity for higher net interest margins. By no means is this the only reason banks support the changes, but it’s one that’s too important to overlook.
  • Why banks chose to offer low rates (like 2.99%) in the past:
    • The author’s insinuation that banks were somehow reckless or irresponsible because they advertised competitive rates is absurd. At the time that 2.99% made headlines, market rates had already fallen to levels that permitted such pricing. Are banks expected to ignore market forces and price themselves out of the game to slow housing? No. That’s not their duty, in any sense of the word duty.
  • The true level of default risk:
    • The author doesn’t mention that people who refinance must have 20%+ equity. People with 20%+ “skin in the game” will do everything humanly (and inhumanly) possible to avoid losing their tens or hundreds of thousands of dollars of equity. If they hit rough waters financially and their ship is sinking, they generally get off the ship (sell) or plug their financial leak some other way…before they lose their house.
  • Stakeholder motives:
    • Ad hominems are the most rampant fallacy in the housing debate. The argument typically goes something like this: Brokers make less money with more rules, so they can’t be honest about a mortgage rule’s true impact. The Globe writer plays right into this by charging mortgage finance companies and brokers with “griping” and making a “stink” about the changes. And he writes barely one sentence to explain the industry’s actual positions on these issues.
  • The competitive impact:
    • The author claims that “what’s been proposed isn’t so tough that it should decimate” bank challengers. Is that so? Well let’s see. Up to a third or more of most mortgage finance companies’ (MFCs’) residential business comes from refinances, extended amortizations, rentals and (to a lesser extent) jumbos. If MFCs are immediately less competitive on that much product, and it results in borrowers paying hundreds of millions more in interest every year, that ain’t something to celebrate…or ignore.
  • The business models of bank challengers should be “questioned”
    • Here’s a real beauty. “If some lenders’ futures are severely hurt by what’s on the table, then their business models ought to be questioned,” the author proclaims. Of course, he makes no attempt to explain said models.
    • Fine. Question them. But don’t just assume that they’re abnormally risky or non-value-added. If you want to see the effects of oligopoly pricing, where MFCs are marginalized, check out Australia’s mortgage market. There, four banks rule supreme over 90% of the market. “The figures tell us that the non-bank lenders are the most competitive when it comes to interest rates, yet they are being squeezed out of the market,” Mortgage & Finance Association of Australia CEO Phil Naylor told Your Mortgage magazine. Naylor, incidentally, has called on Australia’s government to review Canada’s mortgage model, which “guarantees competitively priced funding pools accessible by non-bank lenders.” Well, at one time it did guarantee that anyhow.
    • The facts speak for themselves. Securitizing lenders put enormous aggregate savings back into consumers’ pockets, and it’s made possible only by our sovereign’s guarantee. These savings offset all and any exposure borne by insurers and citizens, multiple times over, as has been demonstrated time and again.
  • Confusing prime and non-prime lenders (and the public):
    • The story mislabels prime lenders like First National as “alternative lenders” (“alternative lenders” is common parlance for non-prime lenders). 
    • Worse yet, the story charges mortgage finance companies with making “riskier loans.” Say what? Anyone covering this business should know that arrears rates for most MFCs are less than half that of major banks. Heck, even CMHC data confirms this if a journalist takes the time to look.

“I get it that our business is totally misunderstood by 95% of the media,” says broker Ron Butler, “but if you are going to devote this many column inches to something, at least take a stab at understanding the difference between non-bank ‘A’ lenders and non-bank ‘B’ lenders.” That’s not too much to ask.

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Keep calm and carry on

You’ve probably lost count of how many times you’ve heard that stale motivator after last week’s mortgage rule travesty. 

Brokerage heads are busy reassuring their agents, investors and lender partners that we brokers will persevere and get past this. Well of course we will.

But wouldn’t it be nice if broker leaders spent as much time publicly decrying these rules as they did publicly comforting themselves?

The truth is, we as an industry just got unapologetically shafted by a handful of anonymous policy-makers—policy-makers who sit insulated from the backlash and consumer repercussions in their cozy government office towers. 

There is absolutely nothing to be ‘calm’ about when:

  • broker lenders are forced to hike rates 15-25 bps and ditch products because of a bureaucrat’s stroke of the pen;
  • a world-class lender like First National has its market value hammered six days in row;
  • hard-working qualified Canadian families are told to pay enormously higher interest because—virtually overnight—they’re told they can no longer qualify for a refinance.

We brokers depend on product access. “What could be more damaging to the rank and file mortgage broker than telling their clients that 30-year amortization without a surcharge is only available from a bank?” asks broker Ron Butler. “…Why wouldn’t many consumers just go to the bank?”

Without choice and competitive rates, we’re just another mortgage seller pushing advice and service. Our industry cannot—and will not—grow on advice and service alone.

And the hits just keep coming. We get the next dagger in Q1 when bulk insurance premiums at least double, which will make broker lenders even less competitive. And the grand finale could come next year if/when regulators propose a deductible on insurance claims. Depending on how that’s implemented, some lenders may not survive it.

Keeping calm is not the answer. All that does is show regulators that we’re willing to take whatever rancid medicine they spoon down our throats. It makes them think they can restrict mortgage lending overnight, with virtually no consultation from consumer advocates or people who actually know how mortgage finance works.

Don’t just sit by calmly and tolerate bad policy that threatens your livelihood. Stand up for the tens of millions of Canadians who need mortgages and cost effective refinances. Stand up for the choice and cost savings we deliver as brokers. Tell the media how bureaucrats on the public payroll have unilaterally decided that well-qualified homeowners should pay more to renegotiate their debt—and have fewer options for managing their limited cashflow, despite absolutely no default data to support these moves. (And no, this doesn’t refer to overleveraged borrowers. Those folks should be curtailed.)
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Write about this on your blogs, write to the Finance Minister, sign this petition, copy @FinanceCanada on social media, volunteer for association policy committees, tell your MP and tell your broker network’s leadership.
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None of this is about broker self-interest. It’s about saving Canadian families literally tens of thousands in interest over their lifetimes, with no material increase in housing risk. It’s about standing up for government sponsorship of the mortgage industry, which has kept defaults low for decades, added billions to government revenue and fostered vital competition in a market dominated by six lenders.

Carry on, yes, but don’t keep calm.


This editorial solely reflects the author’s opinions and not those of this publication’s parent.

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One of the most touted value propositions we express as mortgage brokers is choice. Brokers can compare dozens of lenders whereby lender reps push only one brand: their own.

Having a wide array of lenders allows broker clients to enjoy more customized financing solutions. That’s important because one lender doesn’t fit all. A given bank, monoline or credit union may have punitive penalties, restrictive porting policies, poor blend and increase options and so on. Customers need choice, and our industry depends on it.

That’s why I’ve always found stats like this—from FSCO, Ontario’s broker regulator—to be surprising: Roughly one in five brokerages finance more than 50% of their mortgages with just one lender.

Now, some of this can be explained in cases where licensees must register as brokers under the Act, but essentially act as lenders. But many are just everyday brokers who choose to funnel the bulk of their mortgage volume to one supplier.

Maritz discovered a similarly eye-opening stat in 2011 when it found that 90% of the typical broker’s volume goes to just three lenders. That’s profound for an industry that promotes consumer choice.

This raises important issues:

  • Firstly, if you’re a broker who does over half your business with one lender and/or 90% of your business with three lenders, and you boast something like “We have access to more than 40 lenders” on your website, your marketing is deceptive at best.
  • It’s a sad commentary when full-time brokers are forced to route their volume mainly to 1-3 lenders in order to access competitive pricing and service. Most brokers would prefer to sell the best product and rate for each unique client, if they could. But too many can’t. They don’t have the deal flow to get those rates and products.
  • This reinforces how critical it is for lenders to embrace deal desks (a.k.a., Central underwriting hubs), so that up-and-coming brokers can access status pricing/products while ensuring lender efficiency.
  • Similarly, it underlines how vital it is that ALL brokerage networks operate professional deal hubs. It’s unbelievable that some national firms still don’t have them. Those who don’t are doing a massive disservice to their small and mid-sized broker members who are handicapped by their volumes.

One more thing on that topic. For you brokerages who run these desks, please don’t fleece your agents by pocketing the volume bonus and efficiency bonuses. Charge a flat, transparent and fair fee (e.g., 5-7 bps, minimum $100) that’s commensurate with your actual processing costs.

Lender access is sacred. Deal desks should be a service to agents, not a fat profit centre for broker networks, which already earn splits and/or franchise fees. If you superbroker owners out there want the bottom 80% of your agents to prosper, and you want to support young brokers entering the business, start thinking long-term and strategically on this issue.

Brokers may someday lose the rate war, but if we play our cards right, one battle we’ll never lose is product selection. We have to use this benefit to our advantage as an industry by helping smaller/newer brokers access more products efficiently, and with fewer volume commitments.

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Protecting housing smThe B.C. government’s “blame non-resident homeowners” campaign is now officially out of control.

Provincial leaders have just molested international homebuyers with a savage 15% land transfer tax. Worse, and incomprehensibly, they’ve applied it retroactively and with no compunction to purchasers already locked into contracts, people with no other way out besides losing their deposit. This is how the premier wants B.C. to be judged by those outside our borders.

Of course, there are other countries with protectionist real estate practices. But there are also other countries that levy 80% marginal tax rates and jail women because they forgot their burkas. Taking cues from other nations is not, by default, sound.

Given the knee-jerk nature of this tax (the market got all of eight days’ notice to prepare for it), one wonders if B.C.’s premier ever pondered its hypocrisy.

Yesterday I asked a personal finance “guru,” who shall remain nameless thanks to her vulgar response, whether the U.S. should retaliate and force onerous taxes on Canadian snowbirds. It’s a legitimate question.

Those who exclaim, “Yes! Protect hapless local Americans from marauding Canadian purchasers,” should think about that response for a moment. For if Canada snubs international buyers, we can’t argue against the same treatment for Canadians abroad. We have no basis to complain if other countries erect tax fences to shut our people out.

As important as it may be to stabilize home values, before exhausting other options and branding ourselves real estate protectionists, important questions should be considered:

  • How would we feel if the Americans slapped a demoralizing new retroactive tax on the half-million+ Canadians who own down south, and the millions more that will someday buy there?
  • How just is it for officials in Florida or Arizona or California to disadvantage and displace Canadians so locals enjoy cheaper homes?
  • How wise is it to discourage global investment in a country like ours, with its insufficiently diversified economy, and whose outlook deteriorates every time commodity prices drop 10%? (Note that many international investors and their executives, who invest and work in Canada, need second homes here.)
  • How much should pandering politicians put equity at risk for the 70% of Canadians who own homes, and the one in four seniors who depend primarily on home equity for survival?
  • Given the myriad of supply/demand factors driving home prices, to what extent does legal foreign buying (which likely accounts for just 1 out of 20 purchases long-term, most being high-end properties) really push up prices for working-class Vancouverites?

A key word there is “legal.” Fraudsters, money launderers and other criminal buyers must be chased down, fined, spend time in a 6’x9′ box and/or have their properties confiscated. 

By contrast, overseas buyers who respect our rules and buy a second home here should be welcomed with wide open arms, for their diversity, capital and contributions can be a net benefit to this great country. In so many cases they invest here, spend here, help fund the educational system here and support Canadian jobs here (and let’s not let student mansion owners distract from that message).

In cases where non-residents leave “affordable housing” vacant and don’t invest in and foster employment, perhaps that specific practice should be discouraged. But how short-sighted it is to lump all non-nationals into that same boat. 

At first blush, most people support higher taxes on Chinese, Korean, U.S., UK, Indian, Taiwanese and other non-Canadian buyers, and you can understand why. People are frustrated. They love Vancouver and they want a comfortable, affordable place to live in or near the city.

Heck, my wife and I lived in Vancouver for five years and we often wished we had enough money to buy a nice house near our workplace. But clearly, owning in a beautiful high-demand area in one of the world’s greatest cities was not our God-given right. Nor is it anyone’s.

Sometimes people who can’t afford something have to make hard decisions, like commuting an extra 45 minutes, changing jobs, living in a condo, migrating or otherwise improving their lot in life.

Without fail, however, both people and economies ultimately adapt to affordability challenges. But it takes forethought and time, and politicians focused on upcoming elections don’t feel they have that time. So we get short-term mindsets creating long-term policy—a bona fide travesty.

B.C.’s new land tax reeks of hypocrisy. If this country’s leaders want to be open members of the global community, and benefit from international trade, and protect our ownership privileges abroad, and attract foreign investment, we simply cannot send a message to non-Canadians that they’re less valuable to our society than we are. 


The views and opinions expressed herein are solely the views and expressions of the author and/or contributors to this site and do not necessarily represent the views of Mortgage Professionals Canada, or its advertisers or stakeholders.

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…Robots are racing to replace mortgage brokers.”

Like it or not, we’re going to see more and more headlines like this.

This particular story comes from the UK, where British entrepreneurs have a head start on automating mortgage services.

On this side of the Atlantic, brokers seem largely unconvinced about robo-lenders eating their lunch. This recent ilovemortgagebrokering.com podcast is one example. “Am I concerned that I’m going to be disrupted out of a job by an app? I am not,” said co-host Dustan Woodhouse, arguing that a human touch is needed because mortgage clients have unique requirements and large sums of money at risk.

Co-host Scott Peckford added, “The people who focus on giving advice and can add value to a transaction are still going to have lots of work…Not everybody wants to do E*Trade.”

No doubt, most successful established brokers take comfort that their existing high-touch model and referral sources will continue streaming a fountain of business. But it’s a different future facing many newer agents. I’m talking about those who operate run-of-the-mill low-tech brokering practices without the benefit of large tappable client databases. For them, automated mortgage systems (and their deep-rate discounts and online decision support tools) may pose greater danger.

Then again, some in our business pooh pooh the entire premise of automation slashing rates and commissions. They hold that mortgages are too complex to be widely automated, suggesting that most consumers need (and will gladly pay a premium for) one-on-one advice.

Well, somehow firms like Betterment have figured out how to code self-serve platforms and amass up to $5 billion in customer assets. And they’re doing it in just as complex a business: investment management and asset allocation. They’d probably be the first to tell us that AI is easier to program for prime mortgages, where fewer variables go into product selection.

How much brokers worry about all this will vary on the uniqueness of their business model, their technology, their referral networks, their database size and so on. Fortunately for our profession, things like non-prime underwriting, lender follow-up and mortgage fulfillment (i.e., the closing process) are harder to automate, assuring a place at the table for traditional brokers with Alt-A files, “B” deals, time-sensitive conditional purchases, portfolio rental financing, commercial financing, etc.

If “A” business is your meat and potatoes, however, the world is about to get more interesting. “Your referral relationships aren’t going to dry up in the next 6 months,” writes mortgage technology expert Jesse Passafiume. “…but there will be an increasing number of digital savvy competitors that earn business—your business. The time to adapt is now.”

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Justice FBA few months back, B.C.’s mortgage broker regulator fined and banned Jorawar Singh Gosal from the broker industry for 10 years. Mr. Gosal admitted to doctoring a client’s income documents to get his mortgage approved.

Given Gosal’s admission, we asked FICOM if it had referred his case to the authorities for prosecution (hoping it would say “yes”). Unfortunately, FICOM’s spokesperson couldn’t speak to the specifics of the case, citing legal reasons.

He did say this: “As a matter of course, in any file where there may be potential criminal activity or breaches in other regulatory areas, we refer files to the appropriate agencies, regardless of whether or not they choose to pursue the information.”

So that’s good. We’ll infer that FICOM sent Gosal’s case to law enforcement.

Make no mistake, altering documents to deceive a lender for personal gain is a criminal offence.

According to the Department of Justice:

Subsection 366(1) of the Criminal Code prohibits forgery, which is where a person “makes a false document, knowing it to be false,” with the intent that the document should be acted on as though it was genuine.

Under section 321 of the Code, “false document” is defined to include: a document “that is made by or on behalf of the person who purports to make it but is false in some material particular”. The offence of forgery is complete, where the person who makes it knows it is false, and where they intend that some other person act on the document believing it to be genuine.

Subsection 368(1) prohibits the use of a forged document as though it were genuine. The offences of making a false document and using a false document are both punishable by a maximum of 10 years in prison.

Under section 380 of the Code, fraud comprises two elements: (1) deception or some other form of dishonest conduct, coupled with (2) deprivation or risk of deprivation of another person’s property. Mortgage-related fraud is subject to the Criminal Code and is punishable by a maximum of 14 years in prison, where the value of the fraud was over $5000, and by a maximum of 2 years where the value was less than $5000.

So, given all this, we could assume Gosal was investigated by law enforcement and that they’re taking all appropriate measures. Or can we?

So far there’s been no formal charges laid that we could find in court records. Perhaps it’s just a matter of the criminal investigation needing more time.

Mortgage Fraud_FBWhat we do know is that consent orders are not enough. Document fraud usually gets handled internally in the lending industry, without the benefit of public exposure (which would strengthen deterrence). When it is referred to law enforcement—which by no means happens in the majority of cases—it’s all too often not pursued due to “insufficient resources.” That’s exactly what keeps the back door open for bad apple brokers.

Weasel agents need to be eradicated from our business, not only for the risk they cause lenders and borrowers, but for degrading consumer confidence in our profession. Regulators need to reward whistleblowers, like the OSC now does, and make offenders pay for those rewards.

It’s time to make examples of such embarrassments to our industry. Criminals fear jail time more than a $4,000 fine and a licence ban (which should be a lifetime ban, by the way, not just 10 years).

While we’re on this topic, whatever became of those alleged fraudsters who sent bad paper to Home Trust? Nary a peep about whether any of them were charged. That’s unfortunate. Really…and truly…unfortunate.

 

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Falling interest rate FBLots of brokers out there criticize rate buydowns. They argue that buydowns cause a “race to the bottom” in mortgage pricing.

If that’s how you feel as a mortgage broker, take solace. The race isn’t far from the finish line.

Online mortgage rates have already plunged to levels where some brokers now earn just 35 basis points in compensation (or less), even on five-year fixed terms. That’s one-third of what most brokers make.

At these revenue levels, only a minority of exceedingly efficient large-scale brokers will succeed long term in the deep discount market. As more independent mega-brokers sign on directly with funders (à la True North Mortgage) and/or negotiate $50-$100 million volume deals with lenders, that’ll become all the more true.

Adding to this trend is the virtual certainty that more lenders will launch DTC (direct-to-consumer) call-centre models and sidestep originator commissions. And, of course, our major banks won’t be left behind. CIBC has already flashed a glimpse of the future by negotiating rates on borrowers’ smartphones and bypassing traditional mortgage specialists.

Thus far, the rest of the broker industry (those without deep discount models) seems largely unfazed by these developments. Canada’s top mortgage agents— the 20% that do 80% of the volume—have profitable existing books of business and established referral sources. In their view, they can sufficiently sell their value to clients. Moreover, their volume has yet to take a serious hit.

Then we have the lean-minded so-called “order takers.” These are online shops willing to work for 35 bps. These are the guys who have started to move the market for all brokers—regardless of experience, referral sources, salesmanship, advertising, value propositions or what have you.

I increasingly hear from $200- and $300-million producers who are losing deals over 5-basis-point rate differences. This is something that rarely happened to them in the past, but it’s occurring with more regularity today.

As time goes on, brokers will hurry to find solutions to this problem when, in fact, one key solution is the same as it always was: dollarization.

In industry terms, dollarization is the practice of articulating the value (in dollars) that customers receive from your advice and assistance. It’s an effective strategy given the commoditization dilemma, but it’s not easy to execute. 

The question you’re trying to answer as a broker is: What is it worth to someone, monetarily, if I find them the optimal mortgage?

“Optimal” refers to the mortgage with the lowest cost of ownership and the best customer experience. Getting a theoretically optimized mortgage is worth something to people because it saves them time and money (interest cost, penalties, refinance rate surcharges, conversion rate surcharges, reinvestment fees, discharge fees, etc.).

But here’s the rub. Identifying the lowest cost of borrowing for a particular client takes serious work and analysis. It entails something like this:

  • asking the right interview questions upfront
  • understanding a client’s five-year plan
  • calculating the probability of certain life events occurring in that timeframe
  • objectively comparing features and restrictions for several mortgages
  • mathematically ranking which mortgage (or series of mortgage terms) are the best value over five years
  • explaining that to consumers in a way they understand (and believe), with hard numbers to back it up, and
  • ensuring the customer doesn’t take that knowledge and go elsewhere.

Note: We focus on five-year time horizons because: a) mortgage terms over five years are not cost effective at today’s rates, and b) predicting the future beyond five years approaches futility.

In an era where online rates are often 20+ basis points below median broker rates, failure to optimize people’s financing and dollarize that service may become a death warrant. It boosts the odds that customers evaluate you on price, and price alone. And that’s a bad outcome for the more than 95% of brokers who don’t/won’t have the buying power and side deals to compete on rate.

When the “race to the bottom” is officially over, those who prosper against the Walmarts of the mortgage industry will be the professionals who can persuasively explain why their higher rates are not just padded profits. Many quality full-service brokers believe that their service to prime borrowers is worth an extra 20+ bps. In most cases, it’s not. But it’s not worth just 1-2 bps either, and effective dollarization can get that across to folks.