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

After meeting with economists on Friday, he told reporters:

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

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

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

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

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

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

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

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

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

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

Finance is accepting comments on loss sharing until the end of February. If interested, you can send opinions here: risksharing-partagedesrisques@canada.ca

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

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

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CD Howe surveyThe “sustained low interest-rate environment” has caused a “significant minority” of Canadians to take on more mortgage debt than they can comfortably manage. That was the conclusion from a recent study by C.D. Howe.

Out of all the study’s findings, the one garnering the most headlines was the percentage of homeowners with a mortgage debt-to-disposable income ratio in excess of 500%. That number has rocketed from 3% in 1999 to 11% in 2012 (the latest data available). That’s upwards of half a million households.

That led the study authors, Craig Alexander and Paul Jacobson, to suggest that the federal government “may want to consider further policy actions to lean against the shift towards significantly higher mortgage burdens.” This is despite their conclusion that “the majority of Canadians have been responsible in their borrowing.”

Coincidentally, this study came out right before the Finance Department raised minimum down payments. That measure addressed some of Alexander and Jacobson’s concerns, but not all. They note that highly mortgage-indebted households are more likely to be

  • in the lower-income quintiles
    • i.e., not buying the $500,000+ homes targeted by the new down payment rules
  • younger Canadians who have recently entered the housing market
    • the average first-time buyer’s purchase price is $293,000, says the DoF, again, less than $500,000
  • from provinces with the biggest housing booms.

Also concerning is the fact that roughly 1 in 5 mortgage-indebted households have less than $5,000 in financial assets to draw upon if they lose their job or face surging interest rates. Worse yet, 1 in 10 have less than $1,500 in financial assets and are considered “extremely vulnerable to a negative economic or financial shock.”

“This represents an inadequate financial buffer,”  say the study’s authors, “as the Statistics Canada Survey of Household Spending indicates that average mortgage payments are more than $1,000 a month, before taxes and operating costs.”

All of this speaks to two risks. The first is obviously the financial risk to the borrowers themselves. Even if arrears rates stay contained as expected, no one wants families backed into a debt corner, doing things like racking up unsecured debt to finance secured debt.

The second risk is systemic (i.e., what happens to our financial system if default rates are higher than anticipated?). Default insurers claim they can withstand a U.S.-style housing sell-off without dipping into taxpayer pockets. (By the way, we are assuming/hoping that insurer’s stress tests rest on adequate assumptions.) But the mortgage market would nonetheless endure painful market volatility, huge risk premiums and illiquidity. These effects would be (will be) exacerbated if debt ratios continue moving in the wrong direction.

Hence, if home prices in T.V. (Toronto/Vancouver) continue climbing in 2016, the DoF may not be finished it’s policy tightening. Lowering maximum debt ratio guidelines and increasing minimum credit scores (especially for borrowers making small down payments) could get more attention in Ottawa.

But Alexander and Jacobson wisely recommend that any new mortgage rules be targeted. The last thing anyone wants are weak markets getting weaker with a national policy intended to rein in T.V. lending.

Moreover, given enough time, natural economic forces would address some of the imbalances we’re seeing, specifically

  • higher prices would curtail demand
  • higher rates would crimp affordability, and hence prices (best not hold your breath on this one)
  • higher incomes would improve affordability and debt ratios (for many)
  • housing supply would catch up with demand (maybe not in the major single-family urban markets, but definitely with multi-family units and suburban housing)

But policy-makers are likely not content to let the “invisible hand” correct household debt risks on its own. So keep an eye on this chart through the first half of 2016. It may have magically predictive properties for new mortgage rules.

National Average Home Price


Other notable findings from the survey:

  • B.C. has gone from a primary mortgage-to-disposable income ratio of 250% in 1999 to 375% in 2012 (Remember that’s an average, so many are above this ratio)
  • Ontario’s average mortgage-to-disposable income ratio rose from nearly 200% to around 350%
  • The share of young households (age 25 to 34) with ratios above 300% has increased by almost 27 percentage points
  • 14% of those aged 25 to 44 have ratios above 500%, along with 16% of those 65 to 75 years old vs. just 5% of those aged 45 to 54

Ultimately, debt service ratios (a.k.a., affordability ratios) are far more predictive of losses than debt-to-income ratios, and Canada’s average debt service ratio isn’t far from its long-run average. But we may never realize how close some people are to the edge until interest rates or unemployment spike.

Oliver Meets With CAAMP

Finance Minister Joe Oliver met with the Canadian Association of Accredited Mortgage Professionals (CAAMP) on Friday. The meeting covered a range of mortgage hot-topics.

CAAMP President & CEO Jim Murphy tells CMT, “CAAMP’s key messages were to provide consumer choice, for example the need to support smaller lenders and monolines, a view that we have had enough regulatory changes and the economic importance of housing and real estate finance in terms of jobs and tax revenues.”


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Flaherty in Closing

Since 2008 Finance MinisterJim Flaherty has dealt the mortgage business plenty of pain for promised long-term gain. So when news broke Tuesday that he quit, a wave of relief spread throughout the industry.

Jim-Flaherty-Mortgage-Rules

That relief was quickly replaced by concern about what his replacement Joe Oliver might have planned. (Our guess: probably not too much at this point.)

Speculation aside, this week’s Globe column reviews some of Flaherty’s impact on Canada’s mortgage landscape.


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Mortgage Changes from the 2014 Budget

Budget. Business Concept.The just-released 2014 budget has both good and not-so-good news for mortgage consumers and the industry at large.

It contains a variety of new mortgage-related measures, the crux of which are designed — says the Department of Finance (DoF) — to “increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.”

Here’s a snapshot of what’s changing:


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Ottawa to Ease Credit Union Transition to Federal Regulation

Credit-UnionsThe Department of Finance (DoF) wants to make it easier for credit unions (CUs) to switch from provincial to federal regulation. It issued this release today.

The DoF’s aim is to address the concerns of CUs, which are currently provincially supervised. Those concerns revolve around things like federal deposit insurance and restrictions on insurance sales.

From a mortgage standpoint, however, a move to federal rules would be a mixed bag.


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Someone in Ottawa is Getting Nervous

OttawaWe all read the news, including a certain someone who happens to have influence on Canadian mortgage regulations. Here’s what he might have been reading the past few days:

The Department of Finance has been trying to manage a “soft landing” in housing, but realty soothsayer Phil Soper sums up the market like this: “We expect no landing, no slowdown, and no correction in the near-term.” (Post article)

Do you get the sense that four rounds of mortgage rules are not moderating home values like mortgage deity, Jim Flaherty, expected?

And now he’s got another thing to worry about: potentially lower interest rates, which fuel debt accumulation.


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