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.


Tamsin McMahon penned a rather alarming story about mortgage fraud on Friday. The number of crooked practices she compiled, regardless of their anecdotal nature, was both impressive and unsettling.

You couldn’t blame readers of that story for concluding that Canada’s mortgage market is on shaky ground thanks to widespread fraud. But a pile of anecdotes don’t paint the whole picture.

The story cites Canada Guaranty data that “one in 10 mortgage applications…have some element of fraud.” (That quote apparently originated from a First Canadian Title finding a while back.) Ten per cent is a sizable number in a country with 5.64 million mortgage households. You’d think all that fraud would translate into an avalanche of mortgage defaults.

Thankfully, it doesn’t. Arrears have trended lower for six years and now sit near the lowest on record. Moreover, the number-one factor driving them is unemployment, not fraud.

Of all the accounts in McMahon’s story, one that stands out was from Genworth’s Stuart Levings, who noted that early defaults (those occurring within the first year a sign of fraud and/or underqualified borrowers) has dropped by half since 2008. That’s tremendous progress in a short period, especially since home valuations continue to mount.

Mortgage fraud will never drop near zero, but it may very well drop further. High-profile cases and accompanying media attention have helped light a fire under policy-makers and regulators, more of whom are now requiring lenders and brokers to report all fraud instead of sweeping it under the rug. Stricter rules will help, like Ontario’s Regulation 188/08, section 14.2, which prohibits brokers from ignoring suspicions of fraud.

If we as an industry feel this is a bigger problem than arrears numbers suggest (a debatable point), then regulators must take charge. They need to:

  • reinforce that mortgage misrepresentation is a criminal offence
  • aggressively investigate and publicly censure mortgage originators who submit bad paper
  • force lenders to report all suspected fraud
  • notify borrowers when their applications have been flagged as fraudulent
  • improve information sharing among lenders
  • be prepared to adjudicate a truckload of cases

Will all of this happen? Probably not any time soon.

It’s a good thing then that just a small slice of fraud ultimately leads to defaults and losses.


Financial transparencyHow would you like to know what your mortgage broker is earning on your mortgage?

In B.C., you may soon find out. The mortgage broker regulator there plans on doing what no other major province has done: force mortgage brokers to disclose how much they’re earning from lenders on your mortgage. We’re talking exact dollars and cents.

As a borrower, many will love this concept, if for no other reason than satisfying their curiosity. Many others will use compensation information against brokers to negotiate, by asking their broker to give up some commission to “buy down” their interest rate.

It’s a proposal that has brokers in B.C. white-hot angry with their regulator. But FICOM feels an obligation to forge forward with this plan anyway. To find out why (and how), we spoke to Chris Carter, Deputy Registrar of Mortgage Brokers at FICOM to get the regulator’s position.


CMT: Chris. Thanks for sharing your thoughts with our readers. First off, can you tell us how many consumer complaints FICOM has received in relation to the matter of undisclosed compensation?

Chris Carter: The issue here is clear disclosure of conflicts of interest to consumers and a growing public expectation of transparency in their dealings with the financial services sector. Consumers of financial products are more vulnerable than consumers of other products. Products are complex, intangible and future oriented. Consumers place a high degree of reliance on advisers to help them make an informed decision. A clear and easy-to-understand description of a mortgage broker’s interest in the transaction reduces the risk that advice to the consumer is compromised by the broker’s own interest in the transaction.

CMT: FICOM believes that hidden compensation increases the risk that brokers steer consumers into mortgages that are not in the consumer’s best interest, and I agree totally. But how exactly should consumers use the disclosed dollar amount of compensation and perks to decide if a broker is not acting in their best interests?

Chris Carter: It is up to consumers how they use the information. We have confidence that given the facts consumers will make wise decisions that are in their own best interests.

CMT: Brokers seem to view this as a major rule change with repercussions for their business. You noted that, until recently, FICOM was not seeking comment from industry stakeholders; albeit you mentioned FICOM would receive those comments. Typically, the industry is formally invited to comment on key changes affecting their business well in advance. Any particular reason why that custom was not observed in this case?

Chris Carter: We are observing that custom, and are actively consulting with MBABC, CAAMP and directly with leaders in the B.C. mortgage broker community on how best to implement the changes. The Registrar has received legal advice that the changes are necessary, and has accepted and is acting on that advice.

CMT: Invariably some consumers will focus on finding the broker who accepts the lowest compensation. Are you worried that this might cause some consumers to place less weight on advice — advice that reduces their cost of borrowing in other meaningful ways?

Chris Carter: Those consumers have made a decision to work with a mortgage broker, and in doing so clearly place a high value on the advice a mortgage broker provides. If a consumer subsequently decides that the compensation a broker receives from a lender is the most important criteria in making their decision, that is the consumer’s choice. Consistent with a mortgage broker’s value proposition, that consumer should and would still receive the best advice.

CMT: Since lenders generally pay the same base compensation, base compensation differences are typically not enough to sway a broker’s recommendation (or create a conflict of interest). As such, wouldn’t it be enough to instead disclose:

  1. Extra compensation? For example, why not simply force brokers to disclose all consideration, perks and compensation over the standard 100 basis points on a 5-year fixed?
  • The percentage of a broker’s volume that he/she has sent to the chosen lender in the last 12 months?
  • The types of compensation and perks received, and how they are calculated?

Why would all of the above not be enough to solve the “hidden compensation” issue and bring conflicts of interest to light?

ficom_logo-300x89Chris Carter: The law in British Columbia requires that brokers describe to the borrower any direct or indirect interests the broker, or a related party, has or may acquire in the transaction. All of the above would be captured by that requirement.

Describing conflicts in terms that consumers can easily understand reduces the risk that brokers provide advice that is not in the consumer’s best interest. Disclosure that frames the interest as a hypothetical (for example, contingent commissions), uses industry terminology (for example, bps), or is vague and imprecise (for example, non-monetary benefits) and is not easy for consumers to understand.

How would a broker disclose a volume bonus that is contingent on her hitting a certain volume target within 12 months, if the future volume to that lender is unknown?

Chris Carter: We are consulting industry on precisely that type of question. A draft bulletin and improved Form 10 and Form 11 have been shared with CAAMP and MBABC, and we expect that the associations will identify both potential implementation challenges and solutions for our consideration.

CMT: Do you believe this rule could drive down broker compensation if consumers use this information as negotiating leverage?

Chris Carter: As mentioned earlier, it is up to consumers how they use the information. FICOM does not regulate the compensation that mortgage brokers receive for their work.

CMT: You mentioned that disclosing a dollar figure helps consumers judge the value of their broker’s services. Do you believe consumers have the expertise to put a value on advice that could save them thousands of dollars in prepayment penalties? If they cannot value something like that, how can they truly assess a broker’s value?

Chris Carter: We would expect an average consumer would use information from a variety of sources to judge the value they receive from a broker, including how well the broker communicates that value and the merits of the mortgage options under consideration. Under an improved Form 10, consumers would have additional information at their disposal to judge the value of a broker’s services.

CMT: You noted that judging value entails assessing “cost versus performance.” If the lender pays the broker, how does the consumer compute the true cost they’re paying for the broker’s services?

Chris Carter: As mentioned above, consumers are likely to use a range of factors to judge the value they receive from a broker. Clearer disclosure of conflicts of interest provides industry with an opportunity to better inform consumers of the value of their services.

CMT: How can a consumer value the broker’s performance if that performance is contingent on certain events? For example, if a broker recommends a mortgage with a favourable blend and increase policy, the full value of that broker’s performance will only be realized if the consumer increases their mortgage before maturity and saves money because of my advice. So even if a consumer judges the cost, they can’t accurately judge a broker’s value, can they?

Chris Carter: Consumers will likely continue to judge a broker’s performance in much the same way they do now by the quality of their service and advice. In the scenario you outline, you will have provided your best advice to the consumer and clearly described your conflicts. Your ongoing relationship with the consumer and communication of your value proposition is yours to manage.

CMT: Has FICOM considered any adverse side effects of disclosing the exact value of compensation? If so, what potential side effects were contemplated?

Chris Carter: We have heard many viewpoints about the potential impact of the change. The change is necessary to align industry practices with the law in British Columbia, as mentioned earlier, and we are in ongoing consultation with industry about how best to implement the change. Consumers place great value in the services of mortgage brokers. Your success is testament to that. [A good broker’s] advantage is that [he or she] works in the best interests of the consumer and is not beholden to any one lender. Clearer conflict-of-interest disclosure strengthens that advantage and provides consumers with even greater confidence in [the broker’s] service offerings. By embracing change in British Columbia, industry has an opportunity to send a strong signal that it believes in its value proposition and understands the importance of transparency in its interactions with consumers.

Editor’s Note: Our thanks to Mr. Carter and FICOM for providing this open dialogue. CMT’s take on this issue will appear in an article to follow.


RRSP HBPBorrowing RRSP funds to buy a home would no longer be restricted to first-time buyers under a Liberal government, the party announced today.

Liberal leader Justin Trudeau has proposed that restrictions on the Home Buyers’ Plan (HBP) be loosened to allow greater access to the program for those facing challenging or unexpected circumstances.

“We will modernize the existing Home Buyers’ Plan so that it helps more Canadians finance the purchase of a home,” says the Liberal’s housing policy. “We will allow Canadians impacted by sudden and significant life changes, such as job relocation, the death of a spouse, marital breakdown, or a decision to accommodate an elderly family member, to access the program and use money from their Registered Retirement Savings Plan to buy a house without tax penalty.”

The plan would not change the maximum withdrawal limit of $25,000, however. Some call that a mistake as the HBP has failed to keep pace with rising home values. Since the HBP started in 1992, home prices have rocketed over 200%, while the withdrawal limit has risen just 25%. That’s the very reason Conservatives recently promised to raise it to $35,000.

“I think our proposal to extend the capacity to invest — to draw from your RRSPs…responsible amounts to help the cost of a new home — is something that will help Canadians in concrete ways,” he was quoted as saying. “The reality is that too many Canadians cannot afford to buy a house.”

Like the Conservatives, the Liberals are also promising to “undertake a review of escalating home prices in high-priced markets — like Vancouver and Toronto — to determine whether speculation is driving up the cost of housing, and survey the policy tools that could keep home ownership within reach for more Canadians.”


Hundreds of millions of dollars are lost to mortgage fraud each and every year. That cost and a recommendation from Ontario’s Minister of Finance has prompted the Financial Services Commission of Ontario (FSCO) to step up fraud prevention.

One of the regulator’s strategies in this fight is education. To meet that goal, FSCO recently issued a fraud prevention checklist developed in cooperation with industry stakeholders (see it here; see the FAQs here).

If you’re a mortgage agent, it should be required reading. Not only does it help protect your clients, your lenders and you as a mortgage professional, but it outlines some regulatory requirements that may surprise you.

When we read FSCO’s new fraud checklist, it sparked immediate questions. So we asked FSCO for guidance, which it helpfully provided in the feedback below.


CMT: Best practices aside, what are the actual regulations in Ontario that require mortgage agents or brokers to actively identify fraud in their mortgage dealings?

FSCO: Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08 has a number of sections requiring brokerages to take actions to identify possible fraud:

  • Section 10 [speaks to] the duty to verify the customer’s identity;
  • Section 11 [speaks to] the duty to verify the other party’s identity;
  • Section 12 does not allow a brokerage to act for a borrower, lender or investor if the brokerage has reasonable grounds to believe the mortgage or its renewal is unlawful;
  • Section 13 requires a brokerage that has reason to doubt the borrower’s legal authority to mortgage a property to advise each prospective lender at the earliest opportunity;
  • Section 14 states that if a brokerage has reason to doubt the accuracy of information contained in a borrower’s mortgage application or in a document submitted in support of an application, the brokerage shall so advise each prospective lender at the earliest opportunity. The requirements in section 13 and 14 continue after the borrower enters into the mortgage agreement (after it is signed).

CMT: Your FAQs note that “regulations that are going into effect on January 1, 2016, which require that mortgage brokers, agents and administrators not ignore suspicions of fraud.” Do you have more details on that?

FSCO: Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08, section 14.2, which will go into effect on January 1, 2016, states:

“14.2 A brokerage shall not act, or do anything or omit to do anything, in circumstances where the brokerage ought to know that by acting, doing the thing or omitting to do the thing, the brokerage is being used by a borrower, lender, investor or any other person to facilitate dishonesty, fraud, crime or illegal conduct.”

Mortgage Brokers and Agents: Standards of Practice Ontario Regulation 187/08, section 3.1, and Mortgage Administrators: Standards of Practice Ontario Regulation 189/08, section 10.1 have similar requirements for brokers and agents and administrators.

CMT: One of the suggestions is: “Verify driver’s licences with the Ministry of Transportation.” How does a broker do that? Is there a website that validates drivers’ licenses, or do brokers have to call the Ministry of Transportation (MTO)? And what info will the MTO disclose given privacy rules?

FSCOFSCO: There is a website: It states, “You can order a 3-year uncertified driver record for any driver with an Ontario driver’s licence.” MTO will provide “a 3-year uncertified driver’s record containing driver and licence details, and lists conviction information, any applicable demerit points, and suspensions.” This should enable brokerages to verify that the driver’s licence provided as identification is not a forgery.

CMT: Your guidelines say “FSCO will not consider a client’s signature on disclosure documents, on its own, as sufficient proof the client was adequately informed about the mortgage and its risks.” This means the broker must also make other verbal disclosures, correct? What other types of steps does this require a broker to take, by law (not just best practice)?

FSCO: FSCO expects the mortgage brokerage to ensure the client understands the information that is being disclosed so that the client can make an informed decision. Having a client sign a disclosure document that he or she has not read or does not fully understand does not fulfill this obligation. Ensuring that the client understands the mortgage product being offered is part of the brokerage’s duty to ensure the mortgage is suitable for the client. Section 24(1) of Regulation 188/08, Mortgage Brokerages: Standards of Practice requires that a brokerage ensure that mortgage products it presents to a client [are] suitable to the client, having regard for the client’s needs and circumstances. To do so, the mortgage broker or agent must document his or her assessment of the mortgage products available and then demonstrate how the recommended mortgage product, its structure, its features and its risks meets the client’s needs and circumstances.

FSCO: One thing that brokers might question is the expectation that they must ensure a client has read and fully understands a disclosure, assuming that the disclosure:

a)  Is written in clear English and is not misleading; and

b)  Has been signed by the client which, barring notice from the customer to the contrary, generally implies agreement and understanding of the terms.

FSCO: In addition to wanting mortgage brokers to ensure a client has read and fully understands the disclosure documents, we also want mortgage brokers to have a good sense that the products they’re selling are a good fit for the client. As a mortgage broker and client go over the disclosure documents, the broker should have a good idea whether the client can afford the mortgage products being sold. We don’t want a client to be put in a situation where he or she will fail, or be put in financial peril. We want brokers to be confident that the products they sell meet the needs and circumstances of the client.

Special thanks to FSCO and its Senior Communications Officer, Malon Edwards, for assistance with this story.


There’s another set of mortgage rules coming this summer. CMHC sent out a notice recently with implementation dates for three policies related to OSFI’s B-21 guideline.

We knew this stuff was coming but these rules could nonetheless make it harder to get low-ratio insured variable-rate mortgages, self-employed mortgages and 100% financing.

Here’s what’s happening:

  1. The qualifying interest rate for low-ratio variable and fixed terms of less than five years will officially become the Benchmark Qualifying Rate (currently 4.64%). This change only applies to transactionally insured mortgages, not bulk insured mortgages, says CMHC. Effective date: “As early as possible after June 30, 2015, and no later than December 31, 2015.”
  2. Lenders will officially be required to obtain “third-party verification” of income for all borrowers, “including substantiation of employment status and income history.” CMHC did away with “stated income” financing many moons ago, but the private insurers still offer a form of non-traditional income verification (see Genworth’s program and Canada Guaranty’s program). We don’t yet know if/how their programs might change. For CMHC’s part, this announcement “is simply [meant] to add additional clarity and re-affirm CMHC’s position,” spokesperson Charles Sauriol says. Effective date: June 30, 2015.
  3. Cash-back down payment mortgages will be eliminated unless the borrower can come up with 5% down on their own. Ever since OSFI’s Guideline B-20 killed these products at the banks, this type of 100% financing has only been offered by a small number of credit unions. Effective date: June 30, 2015.

With this last rule, you might be wondering why people can borrow their down payment from a 20%-interest credit card but not derive their down payment from lender-provided cash rebates.

“To differentiate the two—in other words, use of lender cash backs versus borrowed funds to satisfy minimum equity requirements—lender cash-back mortgages are typically associated with higher interest rates charged to the borrower,” says Sauriol. That “translates into a larger insured loan amount and in the event of a default, into potential additional risks for the mortgage insurer.”

“In cases where funds are borrowed to satisfy minimum equity requirements, the borrowing is outside of the insured loan amount and is also factored in the total debt service ratio, and therefore taken into account for borrower qualification purposes.”

The end result is that the insurer incurs less severe losses on default (e.g., after five years, the loan balance being insured can be 3% to 4% less if the down payment was borrowed).

Unfortunately, borrowed down payments can also result in higher interest costs and/or payments for the homeowner, depending on what interest rate and amortization applies to the borrowed down payment. In cases where this makes it tougher for the borrower to debt service, that could theoretically increase the probability of default.

Sidebar: It appears none of these rules prevent a lender from offering an unsecured line of credit for the borrower’s down payment. It should be noted, however, that lenders scrutinize applications very carefully if someone is borrowing his/her down payment.

OSFI’s B-21 is Finalized: Update 2

On Thursday, the Office of the Superintendent of Financial Institutions (OSFI) announced its complete B-21 guidelines for underwriting insured mortgages. But it didn’t stop there. The banking regulator also tweaked some of its B-20 guidelines, rules that shook the mortgage market when they were initially released in summer 2012.

This time around, OSFI’s actions will have far less impact on the housing market. 


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.”


Collateral Pitfalls Disclosed

Collateral-MortgageBanks are improving their disclosures on the drawbacks of collateral charge mortgages.

Effective January 31, 2015, the Department of Finance says banks will start warning individual consumers about the implications of collateral charge mortgages “before entering into the mortgage loan agreement.”

The DoF says “consumers require sufficient information in order to more clearly understand the costs and consequences of a collateral charge mortgage relative to a conventional mortgage.”


Lenders’ Worries

Housing bubble conceptNot many lenders go on record forecasting a housing bubble, but what they say in private surveys is another matter.

FICO, a consumer analytics firm, released poll results on Tuesday that show just how concerned lenders are about housing overvaluation. But its data, which was picked up by multiple media outlets, featured responses primarily from U.S. respondents. The opinions of Canadian lenders, alone, haven’t been fully reported.

Today, however, we got our hands on Canadian-specific data, and it revealed some surprising expectations.