A delegation of mortgage industry leaders went to Ottawa this month. Its mission: to educate lawmakers about the implications of the latest mortgage regulations.

The event, organized by Mortgage Professionals Canada, was its first-ever Parliament Hill Advocacy Days. In just over two days, the group participated in more than 30 meetings involving more than 100 members of parliament, senators and senior policy staff.

The association’s core message centred on the economic ramifications of the new policies that came into effect last fall and January.

Face-to-Face Progress

“Many of the MPs could describe stories from their own riding of homebuyers who were affected by these changes,” said Paul Taylor, President of Mortgage Professionals Canada. “Others were less familiar with our issues but were appreciative of us bringing them to their attention. In all cases, we were delivering messaging to support the channel, to support choice and accessibility for the Canadian consumers we all serve day to day…”

Among those who participated in the effort were familiar industry names like Boris Bozic (Merix Financial), Eddy Cocciollo (Mortgage Centre), Jared Dreyer (VERICO Dreyer Group Mortgage Brokers), Claude Girard (Laurentian Bank), Dan Putnam (CLMS), Amanda Roy-Macfarlane (AMBA), Hali Strandlund (Fisgard Asset Management), Michael Wolfe (AMBA) and Dustan Woodhouse (DLC), among others.

The group conveyed to parliamentarians the recommendations that Mortgage Professionals Canada has publicly put forward, including asking the government for a moratorium on further rule changes for the next 12-18 months, as well as revisiting its anti-competitive position on refinancing.

Boris Bozic, CEO of Merix, said one of the key concerns was the new stress test rules and the need for any changes to be applied to all mortgage types (not just insured mortgages), and all financial institutions. “If the government is truly concerned about debt levels being incurred by Canadian homeowners, the stress test should be applied equally,” he said. “This would ensure that Canadian homeowners continue to have choice, and allow Canadian borrowers to benefit from competition.”

Overall, the group was pleased with how their position was received by members of parliament and other government officials.

“Our concerns were heard and appreciated by all the MPs we met with, irrespective of party affiliation,” Bozic said. “They all committed to raising the issue with their colleagues and sharing our recommendations for slight modifications to the new rules imposed on our industry and middle-class Canadians. Time will tell if the Department of Finance will be receptive to the modifications we suggested.”

Dunning Takes on the DoF

Mortgage Professionals Canada’s chief economist Will Dunning also made a submission to the Standing Committee on Finance in which he presented his analysis of the flaws with the government’s changes and the risks they pose.

“The policies announced on October 3 will reduce housing activity and weaken the broader economy,” Dunning said. “Even in the very best of economic times, a policy that will weaken the economy should be undertaken only after thorough discussion.”

He noted that the Trump presidency raises economic risks for Canada, which he argues justifies rescinding the government’s changes to mortgage insurance. Here’s Dunning’s analysis.

The Next Steps

In an update posted on its website, Mortgage Professionals Canada outlined the expected timeline for the Standing Committee on Finance to finalize its report and recommendations for the Minister based on the testimonies it heard concerning the mortgage changes.

The report isn’t expected to be tabled and made public until at least July or August. In the meantime, the association says the industry “needs to remain active in educating MPs, officials, and the Minister of Finance on how these changes will increase interest burdens, obstruct competition and harm local economies across Canada.”

The mortgage industry has another shot at having its voice heard this Wednesday when DLC President Gary Mauris and our own Editor Robert McLister meet with Deputy Bank of Canada Governor Larry Schembri. The Bank of Canada routinely consults with the Department of Finance on housing issues and Schembri aims to better understand our industry’s perspectives on its policy changes. We’ll keep you posted on that meeting.

By Steve Huebl


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.



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.




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

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

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

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

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

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

MPC’s Recommendations

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


B.C. mortgage brokers have eight months to prepare for one of the biggest procedural changes ever to hit their industry. The province’s regulator, FICOM, has released its controversial broker compensation disclosure guidelines, and they take effect June 30, 2017.

The new rules make brokers list all monetary interests and benefits they receive when arranging a mortgage. “Any interest which has a monetary value must be expressed as a dollar amount” to consumers, the regulator states.

“…We are disappointed by this announcement,” said Paul Taylor, President and CEO of Mortgage Professionals Canada, in a statement Tuesday. “From the onset, we have encouraged open consultation and dialogue with the regulator and undertook extensive efforts to ensure our collective voice was heard. It is clear that the industry’s concerns and directional evidence on the negative implications were not taken into account.”

FICOM, for its part, believes that broker interests (compensation and incentives) create potential conflicts, albeit it hasn’t received any specific complaints of such conflicts from consumers (that we’re aware of). In a letter Tuesday, the regulator said, “The guidelines encourage industry to think about conflicts, identify conflicts, and describe conflicts in a way that is easy for consumers to understand.”

According to FICOM, a broker’s direct interests in a mortgage include, but are not limited to:

  • Base commissions
  • Known volume or efficiency bonuses
  • Loyalty or rewards points
  • Broker fees.

FICOM says typical indirect interests include:

  • Expected trailer fees, if the borrower renews the mortgage with the lender at maturity
  • Expected trailer fees or other compensation payable during the term of the mortgage
  • Potential volume or efficiency-based bonuses
  • The amount of volume-based compensation paid by a lender to the mortgage brokerage (firm)
  • Lender compensation paid to the corporate head of any network or franchise entity to which the mortgage broker is related or associated, based on aggregated volume for the network
  • Fees paid by a lender to a network, franchise or mortgage broker for any purpose related to mortgage transactions being directed by that firm or associate or related party to that lender (including but not limited to access fees and fees paid by a lender to be identified as a preferred lender)
  • Reduced desk, franchise or network fees, or similar, payable by mortgage brokers based on achieving certain targets, such as volume, with a preferred lender of the firm
  • The ability to offer preferential pricing to borrowers in future mortgage transactions based on volume or efficiency-based targets being met
  • Any benefit arising from achieving a certain status or designation with a lender
  • Beneficial ownership interests in the lender or the borrower

Other notable points:

  • Commission splits between sub-mortgage brokers and brokerage firms must now be disclosed
  • Fees paid by technology providers, like D+H, to broker networks do not have to be disclosed
  • Sub-mortgage broker salary (paid by the brokerage) does not have to be disclosed

We’ve talked about the pros and cons of these changes before, but in a nutshell we expect:

  • Savvy consumers will use this new information to negotiate better deals (i.e., ask for some of the broker’s now fully disclosed compensation, by way of rate buydowns or cash rebates)
  • Many consumers will be confused by the disclosure since there are limited benchmarks to compare a broker’s interests to what is “normal”
  • Some borrowers will choose the wrong provider based largely on a broker’s compensation, and not the broker’s service, advice and product recommendation (U.S. research supports this)
  • Some deep discount brokers will invite consumers to contrast their compensation to that of “full-service” brokers—and use that as a competitive edge
  • Lenders may not be thrilled as their confidential brokerage compensation agreements (which predate these new rules) become industry knowledge  
  • Lenders will find it harder to keep preferential broker compensation and rate deals secret from other brokers
  • Broker networks may be under increased pressure to share the newly disclosed incentives that lenders pay them with agents.

I’ve spoken with superbroker bosses who feel these guidelines could ultimately harm the broker industry, and consumers, by shrinking margins to a point where it’s unfeasible to provide in-depth advice and service to consumers. Other brokers brush it off, maintaining that most consumers won’t see the disclosures until right before they sign, and/or know how to interpret them. 

With respect to timing, FICOM says the “Form 10” (which contains these disclosures) must be given to borrowers “at the earliest opportune time before they sign:

  • the mortgage; or
  • any ancillary agreement with the mortgage broker or lender, including but not limited to an agency agreement with the mortgage broker, that commits the borrower to the mortgage transaction.”

Here are the full guidelines and FAQs.


Consultation-FB“…Lenders have, as I’ve said in the past, no skin in the game and therefore the incentives are misaligned with good risk management.”

This quote, from CMHC CEO Evan Siddall, encapsulates policy-makers’ narrative on Canadian mortgage underwriting. This is what the public is reading about Canada’s housing market—and it worries them, but it shouldn’t.

(Siddall later told me that he misspoke, and that lenders do have skin in the game, but “not enough.”)

Siddall asserts that lenders are prone to moral hazard. “You would not design an insurance system with the insured having something more at risk.”

He adds, “Canada’s mortgage insurance system is one of very few, if any, insurance systems without a deductible.” He says our housing market is “not a well-designed system,” asserting that “a lender should not offload so much of its risk.”

“This is about aligning interests to face an unknown future with a more ‎robust system. It’s more about regime design, not current conditions.”

And so, he and the Department of Finance have what they think is a solution. After two years of CMHC preparing us for this inevitability, regulators have released a proposal whereby lenders eat more losses on government-guaranteed mortgages.

Here’s what we know about it so far, based on high-level industry conversations and yesterday’s announcement from the Department of Finance (DoF):

  • How risk sharing will likely work: Lenders would file a claim with the insurer when a borrower defaults, the insurer would pay 100% of the lender’s claim (if eligible) and then bill that lender for its share of the loss in the following quarter.
    • This would leave securitization investors insulated from risk, a wise move that avoids utter destruction of the NHA MBS market.
  • How much loss would lenders share: The amount would equal roughly 5% to 10% of the outstanding loan principal. That’s $15,000 to $30,000 on a $300,000 mortgage.
    • We’ll bet on the lower end of that 5-10% range for two reasons: a) Anywhere near 10% would be hugely disruptive for lenders, and b) regulators like to sometimes throw out big numbers so the market is thankful when they impose a smaller number.
  • How would it affect competition: The DoF writes, “Lender risk sharing could change competitive dynamics in the mortgage market.” Could? Whomever drafts this stuff has comedic talent. Reducing insurance coverage will hammer competition even further, potentially costing Canadians hundreds of millions in extra interest each year.
    • Here’s another statement from Friday’s release that might have been drafted by Captain Obvious: “Small lenders with fewer or less cost-competitive funding sources may…be less able than large lenders to absorb or pass on increased costs.”
      (I’m sure some policymakers would suggest we’re making implicit assumptions about the future here; that need not be true. But I don’t see how an RBC and a small monoline lender could possibly weather these changes equally.)
    • Insurers and funders buying mortgages will now have lender counterparty risk (i.e., risk that the lender won’t be able to pay its share of claims). Potential outcomes:
      • Insurers may increase premiums disproportionately for smaller, less capitalized lenders.
      • Funders may buy mortgages from smaller lenders at much less favourable prices, limiting their ability to compete.
    • How might consumers fare: Here’s what we expect:
      • Mortgage rates will shoot up as lenders try to offset this new cost, and as bank challengers become less able to undercut the banks.
      • Lending will partially dry up, or incur material surcharges, in rural, remote, high-unemployment or economically undiversified areas.
      • Insurance premiums may drop (one potential bright spot in all of this).
    • How much could rates jump: In short, meaningfully.
      • The DoF writes, “Preliminary analysis suggests the average increase in lender costs over a five-year period could be 20 to 30 basis points.1 (That’s over five years.)
      • Preliminary estimates from four lenders we spoke with are that the DoF’s estimates are laughably low, that the rate increase required to offset these changes is at least 15-20 basis each year.
      • The DoF suggests rates could rise more for “loans with lower credit scores in a region with historically higher loan losses.”
    • When would this take effect: We’ll get more clarity on this by Tuesday, but the final regs could be out before next summer, and it might take another 1-3 quarters to implement.


Is This All Justified?

Canadians are taking on too much debt. No question about it. And extreme housing prices in Toronto and Vancouver are flashing a red alert.

But this proposal isn’t about that. According to the feds, it’s about future underwriting quality and aligning lender incentives.

The government and CMHC charge that lenders don’t have enough reason to avoid risky lending. Yet, to the best of our knowledge, the Department of Finance has never publicly released any data to support this. 

In fact, CMHC’s own numbers peg insured NHA MBS arrears at a paltry 0.28% for banks (five times lower than in the U.S.), and a microscopically low 0.11% for mortgage finance companies (MFCs). 

The Charges Against Lenders

Officials claim that lenders aren’t sufficiently motivated to underwrite prudently, yet the government possesses the ultimate hammer already: It can deny insurance claims if lenders don’t underwrite to the exact specifications the DoF itself has created.

Officials say that lenders can’t be trusted to avoid moral hazard, but the government can easily compel regulated insurers to audit lenders and police underwriting effectiveness. Heck, if they’re not audited enough, audit them more.

Officials assert that arrears data are a “rear-view” indicator, but we’ve had decades of low arrears. How many years of rear-view indication do we need before we can start believing it?

Officials charge that the housing finance system hasn’t been tested yet, but what kind of test was the worst financial crisis since the Great Depression?

Officials warn that debt-to-income is at an all-time high, but lenders must already decline heavily indebted borrowers that don’t meet federal guidelines.

Officials downplay equity as a risk mitigator, but who loses money on a 75% LTV bulk insured mortgage?

Officials argue that MFCs get a free ride on taxpayers’ backs, but Ottawa is riding on lenders’ backs at the same time, through lender-paid insurance premiums, securitization guarantee fees, socioeconomic homeowner benefits and a more robust economy that generates higher tax revenue.

Officials charge that indebted borrowers are a risk to the mortgage system, but credit quality has soared since 2007 with 81% fewer sub-660 credit score borrowers, reports Genworth.

Officials suggest MFCs are “unregulated” and prone to fraud, but you don’t get arrears rates averaging 1 in 300 by turning a blind eye to fraud. (Of course, “unregulated” is a gross mischaracterization since, by virtue of their securitization activities, MFCs are subject to bank and insurer underwriting rules in B-20 and B-21.)

Officials argue that these moves encourage the further development of a private mortgage funding market, but where is this mythical market they speak of, what is Ottawa doing to cultivate it and how will it address the huge spread differences between bank-sponsored covered bonds and uninsured RMBS from lenders without investment grade credit ratings?

Officials say there’s excess risk to the economy, but withdrawing insurance support risks future liquidity crises, surging interest costs, less discretionary spending, employment losses in the economy’s #1 sector, a further entrenched bank oligopoly, falling equity in people’s #1 asset, wealth-loss effects and so much more.

Officials claim government-backed insurers have too much risk, but why not increase insurance premiums like every other insurance company in the world when risk is unacceptable? (Hint: It’s because insurance premiums are already actuarially too expensive for the true risk. That’s a fact by the way—if you believe CMHC’s own regulator-approved stress tests.)

Mandate Creep

The government has overstepped its mandate by stripping Canada’s world-class mortgage finance system of liquidity. Its incessant attacks on competition and mortgage choice can only result in higher costs for consumers, and the purported benefits don’t counterbalance these costs.

Consider taxpayers’ risk:

  • Ottawa guarantees roughly $774 billion of insured mortgages.
  • Arrears have averaged less than 1 in 300 (five times less than south of the border).
  • Average equity on CMHC’s insured mortgages is 46.8% (contrary to public perception, insured mortgages are not all high-ratio) and just 1 in 5 CMHC-insured borrowers currently have less than 20% equity.

Consider taxpayers’ reward:

  • CMHC has returned $20 billion in profit to taxpayers since 2006.
  • Insured lenders have saved consumers over $3 billion of interest in that time frame.

This is a question of cost-benefit, and Finance has simply not made its case. 

Suppose for a moment that Canada’s housing market gets annihilated. Imagine a U.S.-style housing catastrophe where an astronomical 6% of all prime insured mortgages go in arrears, with a 33% loss on each—again, insured mortgages have built-in equity buffers so 33% may not be realistic. That amounts to a $15-billion hit on insurers. (In reality we must assign a probability to a housing crash, so implied future losses are potentially less than this.)

But wait. CMHC alone has $16+ billion in capital plus more in unearned premiums. Moreover, Moody’s research pegs insurer losses in a U.S.-variety crash at less than half our estimate, or $6 billion.

Will a tail event burn through insurers’ capital someday? You bet your sweet bippy it will, just like the most expensive hurricane of all time (Katrina) ate a chunk of Allstate and State Farm’s capital. But you don’t complain about tail events if you’re in the insurance business. You price for them.

So let’s review. The current system has yielded over $23 billion in benefits to Canadian families and, housing armageddon notwithstanding, nothing is coming out of taxpayers’ pockets. 

Are Regulators Pulling the Wool Over Canadians…?

Objective data provides no economic rationale to dismantle what is arguably the most stable housing finance system in the world. Loss sharing is “a solution in search of a problem,” explains First National’s Stephen Smith, and he’s dead on.

Even banks—who could gain on rivals if this rule passes—challenge Ottawa’s rationale. “We don’t understand what a deductible is intended to achieve as a policy outcome,” Canadian Bankers Association policy expert Darren Hannah said. “If it’s supposed to be something to improve the quality of underwriting, well the quality of underwriting is already very strong.”

And, by the way, the government is not proposing “risk sharing” here. It’s proposing “loss sharing.” There’s a difference, because arguing that lenders incur no risk is an uninformed position that ignores their exposure to claims denial, loss of “approved-lender” status, loss of funders, loss of securitization conduits, loss of investors, losses for default management costs, loss of irrecoverable lender-paid conventional insurance premiums and loss of vital renewal and servicing revenue.

Penalizing lenders and consumers will not reduce defaults materially because lenders themselves are not a significant reason why borrowers default. Defaults are a function of unemployment, economic shocks, housing price shocks, overindebtedness, personal disposable income, interest rates, borrower confidence, loan-to-value ratio, loan amount, loan purpose, mortgage age, mortgage term and rate type—most of which can be underwritten for.

If a small group of mostly unelected policy-makers want to nonetheless force Canadians to pay thousands more for a mortgage, at least foster securitization alternatives that alleviate the disproportionate burden on small and mid-size lenders, and preserve consumer savings through competition. 

As it stands, the DoF is picking favourites, issuing press releases embracing competition while simultaneously destroying it, and costing consumers far more than they’ll ever save.


Sidebar: Yours truly doesn’t purport to be Merlin the Mortgage Policy Wizard and have all the answers. So if you see things differently, give us your take here. Just one humble request, and that is to keep posts civil and supported by fact. We won’t waste readers’ time by publishing comments that are rude or baseless.

Sidebar 2: Special thanks to the class acts on the Department of Finance and CMHC media relations teams. We’ve widely and publicly questioned their organizations’ policy choices but the professional folks over there always cooperate when we need answers.

1 A very rough estimate of the amount rates have fallen due to competition from brokers and insured lenders, and $1.8 trillion in mortgage volume over the past decade. A Bank of Canada study in 2011 found that “the average impact of a mortgage broker is to reduce rates by 17.5 basis points.” This, interestingly, approximates the broker’s advertised savings today (i.e., if you compare the lowest advertised 5-year bank rate, minus 10 bps discretion, and the average rate advertised by 100 of Canada’s most prominent mortgage brokers, as tracked by


Disaster recovery plan FBRandom thoughts on this week’s mortgage rule madness…

Who’s Left Standing in December

It’s unclear which insured-lenders will still do refinances, rentals, super-jumbos ($1 million+) and 26- to 35-year amortizations come December. As we’ve seen, some lenders have already announced their (hopefully temporary) withdrawal from these categories. Lenders I spoke with today were scurrying to arrange purchase agreements with balance sheet lenders to create liquidity for these mortgages. It’s going to be a week or two before we know the bank’s appetite. They won’t rush to load up their balance sheets with non-standard mortgages. That, we know.


The Demand Effect

Will Dunning, chief economist at Mortgage Professionals Canada, tells BNN, wait until December’s CREA housing data is in before speculating on how the DoF’s rules will sway home prices. That interview.


Market Reaction T + 2

It’s 2/365ths A.D. (After Debacle), and investors have spoken again. For a second day they dumped stock in insurance-dependent lenders. In the process, untold millions in market value were obliterated.

These are ultra-high-quality lenders, managed by good, honest people, underwriting rock-solid low-arrears mortgages and saving Canadians billions (literally). They don’t deserve this in any way.

Lender stocks II

Most banks are outperforming the market.

Bank stocks II

Time for Perspective

As bad as these changes were for consumers and lenders, we all know that Canadian lenders are run by extremely resourceful people. Some lenders may die off or consolidate if the Department of Finance doesn’t relent on its decree, but many will find a way to keep doing these uninsurable deals at higher interest rates.

I had a chat with Gary Mauris tonight, head of Canada’s largest broker network. Here was his take:

I’d like to suggest and encourage all industry participants to exercise patience until we have clear, accurate information and the industry has done a thorough evaluation of the material impact. We as an industry have gone through numerous policy changes in the past, and have weathered the global credit crisis. These regulatory changes will no doubt be disruptive in the short term, but our industry is resilient and we will adapt and continue the valuable service that we provide Canadians. It’s important that we continue to focus on all the positives of our industry and avoid getting caught up in the negative rhetoric that only draws attention and damages the good work and many advances that this industry has achieved. Anytime there are headwinds in an industry, there are also opportunities. Now is the time to highlight our expertise, help the public navigate the changes and be financial thought leaders during this time of temporary uncertainty.



Stocks downIf you want to know the winners and losers in Monday’s surprise mortgage rule announcement, peek at lenders’ stock performance.

Traders collectively decided, at least in the short-term, that the visible future is dimmer for second-tier lenders than for their big bank competitors.

The stock prices for most Big Bank challengers took it on the chin today. Here’s the scorecard for a sampling of them, as of Tuesday’s close:

Lender stocks

Most major banks performed decidedly better:

Bank stocks

Stock prices are partly emotion-driven so let’s see how things shake out in the next month or so. But the immediate opinion of those with money on the line is that Canada’s Big 6 are less impacted by the coming insurance restrictions.

More fallout from earlier today:

  • Investors handed Genworth (Canada’s second largest default insurer) its biggest intraday selloff since August 2009. The company estimated that:
    • Roughly a third of transactionally insured mortgages, mostly for first-time homebuyers, would “have difficulty meeting the [government’s] new required debt service test.
    • About half of its “total portfolio new insurance written would no longer be eligible for mortgage insurance under the new low-ratio mortgage insurance requirements.”
  • Multiple monoline lenders (including some of the biggest) announced that they were suspending new refinance, rental and/or business-for-self (BFS) originations. Expect more of that to come, unfortunately. These companies are now left wondering how they’re going to finance mortgages that can no longer be insured (mortgage buyers prefer insured product). They simply cannot lend under that uncertainty.

By Steve Huebl & Rob McLister


Sledgehammer FBThe Feds clearly wanted to crack the housing market, and they may have finally done it, with a sledgehammer.

New Department of Finance (DoF) rules will hit the mortgage market hard, but consumers will take the brunt of the blow. The two big changes:

1) Effective Oct. 17, the qualification rate will now apply to all high-ratio insured mortgages, even 5-year fixed terms. On Nov. 30 it applies to insured low-LTV mortgages as well.

2) Regulators are banning a wide array of mortgages from being insured, effective Nov. 30.

One big non-bank lender didn’t mince words when describing today’s DoF’s announcement. “This is a crisis,” the executive told CMT. The lender estimates that up to 40% of its insured volume could vaporize near-term because of these rules. Even if it’s half that among non-banks industry-wide, this appears to be a devastating blow to mortgage competition in Canada.

Background: Non-bank lenders rely on default insurance because it (in the DoF’s words) “supports lender access to mortgage funding through government-sponsored securitization programs.” Banks don’t depend on insurance to the same extent (at least not on conventional mortgages) because they don’t have to sell their loans to investors.

You’d think that with such a drastic policy change that stakeholders would be thoroughly consulted. Nope. Lenders I spoke with had not even a hint this was coming.

So what happens now? Here are our top 10 predictions:

    1. Housing prices will tumble as a sizable minority of first-time buyers and those with higher GDS/TDS ratios no longer qualify for the mortgage amount they want.
      • Forcing all insured borrowers to prove they can afford a payment at the posted rate (4.64%) will remove up to 15-20% of buyers from the market, say lenders.  
      • “This will impact more than 50% of borrowers’ [mortgage] limits, among those who select 5-year fixed rates,” said Mortgage Planner Calum Ross. “As unpopular as this may be to say, however, I fundamentally believe this is the right move by regulators. The fact they allowed such a large disparity on the qualifying rate for such a long time was, in my opinion, not a prudent lending decision.”
      • Others argue that 5-year fixed borrowers with 10%+ down payments could have refinanced and re-amortized after five years anyhow (to reduce their payments and mitigate a 200+ bps rate increase). Mind you, a 200+ bps hike in the next five years would probably cause a recession, so it’s unlikely at best.)
    2. Non-deposit-taking lenders could be forced to sell a wide array of loans to balance sheet lenders at a premium. They’ll be forced to pass those funding cost hikes directly through to consumers. These include refinances, amortizations over 25 years, non-owner-occupied properties and mortgages over $1 million—all the stuff that can no longer be insured and securitized.
    3. Broker market share will fall.
      • It’s Christmas in October for the banks. Among other things, they’ll gain refinance, jumbo mortgage and rental business from the monolines.
      • That business boost will reduce their reliance on the broker market. In fact, don’t be surprised if a Big 6 bank exits the broker channel by this time next year.
    4. Mortgage availability will drop in high-valued regions like Vancouver and Toronto and rates will rise nationally.
      • This liquidity drop is partly because of the insurance prohibitions, and partly because of higher capital requirements for insurers. This latter measure was announced previously and is expected to take effect in Q1. Word on the street is that bulk insurance premiums (which average roughly 40+ bps now) could at least double.
      • As competitors raise rates, banks will likely take that opportunity to hike their own rates. And they’ll probably do it nationally because regional pricing presents internal challenges.
    5. Banks will also have to qualify conventional borrowers at the posted rate on all terms.
      • OSFI tells us, “…Our update to [Guideline] B-20 is going to reflect the announcement made by the Department of Finance today about [the] “Mortgage rate stress test…” But it adds, “We are still reviewing the guideline, and have not yet made decisions in this regard.”
      • That suggests monolines could potentially be at a disadvantage for a while, unless OSFI encourages banks to adopt a standard 5-year posted qualifying rate sooner.
    6. Market share for near-prime lenders will rise yet again, especially for refinances.
      • Consumers, of course, will pay significantly higher interest for these lenders’ flexibilities.
    7. There will be a mad dash to refinance under the old rules prior to October 17th, when the new qualification rate comes into force.
      • Expect most lenders to stop taking such deals by mid-next week.
    8. We’ll start hearing more economists forecast a Bank of Canada rate cut due to the GDP hit from these rules.
      • Two big pillars of Canada’s growth, oil and housing are now on the ropes.
      • As we’ve written before, this is probably the worst time to send a message to foreign investors that they’re not welcome in Canada’s housing market. Canada needs their investment and most politicians and policy-makers appear shockingly blind to this.)
    9. Non-balance sheet lenders could apply rate premiums to amortizations over 25 years since they can no longer be insured. That’s no small point. Mortgages with amortizations longer than 25 years accounted for over half of all portfolio insurance underwritten by CMHC through June.
    10. Morneau

      Finance Minister Bill Morneau

      MBS yields will fall as supply drops and pool risk improves (more on that from Bloomberg). Yay, some good news in all this.

In the long run, the DoF’s move adds housing stability (at what cost is the question). But most of the 70% of existing homeowners who value their equity may well curse regulators in the short run.

The sad part is that borrowers in the majority of the country are clearly paying a price for Vancouver and Toronto’s excesses. “What I find most frustrating is that this change penalizes the wrong segments of the market,” said Tyler Hildebrand, a mortgage planner at One St. Mortgage. “Housing policy continues to be set on a national basis without any consideration for regional implications. Real estate is a local business; it should be regulated on a regional basis.”

Of course, the government also announced it’ll prevent non-residents from claiming the capital gains exemption—which is primarily targeted at Vancouver and Toronto. (This is a reasonable move. Here are more details on it). But this measure was a distraction from the other rule changes, and trivial by comparison. Non-resident buyers who buy to flip tax-free are simply not a major price driver nationwide. 

All of this adds to the layers of mortgage regulations imposed since 2008. And, to make matters worse for the lending industry, the Department of Finance has reaffirmed its decision to evaluate lender risk sharing. Charging lenders deductibles on default insurance claims could be an utter disaster for less capitalized non-bank lenders (and hence mortgage competition and consumers), depending on how it’s implemented.

With mortgage tightening finally starting to impact high-valued markets, this new round of rules has come too late, with too little forethought and too many consumer repercussions. It’s effects are so wide-reaching, so sudden, that something has me thinking it’s a conspiracy against non-bank lenders.

But no. I trust Canada’s regulatory system much more than that…I think.


Canada’s banking regulator wants mortgage default insurers to put more money between themselves and taxpayers, especially for mortgages they insure in riskier cities.

The new rules, detailed today by OSFI, will force government-backed insurers to bolster their capital on mortgages in certain areas. Effective January 1, 2017, this could make mortgages more expensive for insurers and consumers alike.

“When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside,” said Superintendent Jeremy Rudin. 

In a report today, BMO Capital Markets referred to these changes as “modestly tougher capital requirements.” It said that “through a phase-in mechanism” the new rules “essentially apply to new business only.”

You can bet your last basis point that insurers are already looking at ways to offset these new costs. Borrowers could be stuck with steeper premiums, higher interest rates and/or more rigid underwriting. That’s especially true if they have:

  • Lower credit scores
  • Higher loan-to-values
  • Longer amortizations.

I’m hearing insiders speculate that this could even lead to regional premium variations. So I asked OSFI if it’s possible that a borrower in Toronto might be asked to pay a higher insurance premium than a borrower in, say, London, Ontario. OSFI replied: “It is up to the institutions to determine how they will manage the new requirements.”

As of Q2, Toronto, Vancouver, Edmonton and Calgary would have exceeded OSFI’s valuation thresholds and forced insurers to cough up more capital on mortgages in those cities. OSFI is using census metropolitan areas (CMAs) to define the regional boundaries.

The following map shows Toronto’s CMA, for example. If regional variations came to reality, someone in Guelph, Barrie and Oshawa could pay smaller insurance premiums than borrowers in Toronto, Mississauga and Markham.

Toronto CMA. StatsCan

Genworth Canada, the country’s largest private insurer, is already setting expectations for higher premiums. In a statement today it said:

The Company expects that the capital required for certain loan-to-value categories may increase and this could lead to a corresponding increase in premium rates. In addition, for those regions that are impacted by the supplementary capital, premium rates could also increase.

CMHC reviews premiums annually. We wouldn’t be surprised if it announces higher premiums by the first few months in 2017 or before.

Even premiums on low-ratio mortgages may rise. That could be a problem for certain monoline lenders who depend on buying transactional insurance to fund (securitize) their mortgages. More expensive low-ratio premiums could put them at a further competitive disadvantage to big banks that don’t rely on low-ratio transactional insurance.

OSFI confirmed for us that, “The same calculation formulas will be used for all mortgages whether insured individually or as part of a portfolio.”

Rising premiums aren’t the only fallout here. It could also get incrementally tougher for some borrowers to get an insured mortgage. Insurers may now try even harder not to incur losses on mortgages that entail higher capital costs. That could mean marginally more declines and fewer guideline exceptions.

In some cases, however, insured mortgages might actually require less capital than today. OSFI says, “All else being equal, the capital requirement for mortgages associated with borrowers with better credit, and that pay their mortgages off quickly, will be lower. Also, under the new framework, mortgage insurers will no longer have to hold capital for mortgages that have been fully paid off.”

OSFI’s proposed changes are up for public comment until October 21.