Mortgage Rule Changes Hinge on Spring Market

mortgage-regulationsGovernment-imposed tightening of mortgage qualifications has clearly been a red hot topic.

Given the public debate over housing valuations, the Canadian Association of Accredited Mortgage Professionals (CAAMP) wants to ensure the government has all the facts before making any mortgage policy changes. As a result, CAAMP president, Jim Murphy, recently met with officials in Ottawa to deliver CAAMP’s latest research findings.

With all the media headlines about housing risk, “It’s important that the government base policy on data and not anecdotal evidence,” he told CMT.

Jim-Murphy-CAAMPMurphy says CAAMP’s message was “well received by Ottawa.” He adds that the policymakers want to “curtail credit growth” if truly necessary, and have prudent intentions.

“For now, don’t expect imminent rule changes,” adds Murphy. “They’re prepared to wait until (at least) the spring to make any policy decisions.”

Mind you, if home prices ascend strongly in the next few months, the government could then step in with new mortgage restrictions for the 4th time since October 2008.

CAAMP has been taking a visibly more active role in policy issues. It recently hired a government relations firm in Ottawa to assist with upholding the mortgage sector’s “collective voice as an industry.”


housing-constructionSidebar:  CAAMP recently released this analysis of the vital role that housing plays—directly or indirectly—in Canada’s economy. Here are highlights:

  • Housing accounts for approximately 8% of Canada’s employment.
  • It’s been responsible for 18% of job creation since 2006.
  • “A 10% rise in housing values might cause consumer spending to rise by 0.4%,” says CAAMP. (One may presume the reverse is also true.)
  • 2-3% of home sales nationally are for investment purposes. (The number is notably higher in major metros like Toronto and Vancouver.)
  • CAAMP says: “The biggest threat to the health of the Canadian housing and mortgage industry is a recession that results in job losses.”
  • Housing risk caused by “an unaffordable rise in payments…is a negligible risk in Canada…A more important risk is reduced ability to pay.”
  • “..In the event of a severe housing market downturn that brings substantial price reductions, there is a risk of a downward spiral (in the economy).”
  • “..We must avoid any policy changes that would artificially constrain housing activity or reduce the ability of lenders to provide mortgages to qualified buyers,” says CAAMP. “The last thing Canada needs is a policy-induced housing market downturn.”

Rob McLister, CMT

  1. >> Housing risk caused by “an unaffordable rise in payments…is a negligible risk in Canada…
    No one knows where interest rates are going. Claiming that the risk is negligible is clearly misleading.

  2. It’s not misleading at all. Average mortgage rates would have to rapidly increase 3-4% to create affordability problems for a meaningful number of people. The chance of that happening with our monetary policy and low growth is insignificant.

  3. Carney/BofC has shown time and time again that they will not let asset values fall by providing very accommodating policies.
    I fully expect interest rates to stay near the rock bottom level for the next 10 years given our joined to the hip nature with the US and the turbulent international markets.

  4. We must avoid any policy changes that would artificially constrain housing activity or reduce the ability of lenders to provide mortgages to qualified buyers … The last thing Canada needs is a policy-induced housing market downturn.
    I got a bit of a chuckle out of that statement — wasn’t the current housing market boom caused largely by policy changes? (removal of mortgage insurance cap, insured mortgages with low down-payments and long amortizations, low interest rates, etc.)

  5. Carney has also stated many times that he feels Canadian household debt is excessive and that housing valuations in some big Canadian cities are out-of-whack.
    In the end, the tools Flaherty has at his disposal (CMHC regulations) are much more fine-grained than Carney’s. It’d be interesting to be a fly on the wall during their conversations.

  6. Your views are absurd. If you look at the BoC’s Senior Loan Officer survey, tightening already started in Q3 2011. Pension funds are fleeing the bond market in droves as 5yr bonds are negative in real terms. In response, the BoC has been offsetting capital outflow by buying bonds since the 2008 crises. There is only so much the BoC can do from here on and if they continue to issue more bonds on behalf of Flaherty, Canada risks its credit rating, which in turn, will exacerbate the problem. There are risks in either direction—all your seeing is political posturing because nobody wants to take the blame.
    And stop changing your name Appraiser.

  7. “We have seen in the past year some softening in the Canadian housing market, in part due to the tightening of the insured mortgage market rules that we did earlier this year … That’s an appropriate result from that tightening, it will take clear evidence of a bubble in the housing market in Canada, which we have not seen.”
    Jim Flaherty, New York City, Oct. 06, 2011.

  8. •”The national average home price was up less than 2% year-over-year in January, ranking it among the smallest increases of the past year.”
    Canadian Real Estate Association, Feb. 15, 2012.

  9. You wrote “Pension funds are fleeing the bond market in droves.”
    Please share your data source on this. Are you saying the the BOC is buying bonds in offsetting amounts? There are no other buyers? I see no increase in yields or other clues to support your claim.

  10. Hit the nail on the head Joe Q.
    The boom in housing related industries is shown here as the FIRE + Construction sectors take up 27% of total GDP.
    http://2.bp.blogspot.com/-iOppu-Vb0qM/Tz7AO0QdCtI/AAAAAAAACTc/E6XelysrSho/s1600/Canadian+FIRE+and+Construction+Sectors+as+a+Percentage+of+GDP+Jan+1997+%E2%80%93+Nov+2011.jpg
    And the boom is also shown here as the percent of construction employment is over 7% of the labor force.
    http://2.bp.blogspot.com/-hpDrgdi7lsI/Tz6_hPyZH3I/AAAAAAAACTU/NkDLYpaKQGA/s1600/Percent+of+Canadian+Labor+Force+Employed+In+Construction.jpg
    And we should not forget housing investment as a % of GDP is over 7%.
    http://4.bp.blogspot.com/-bcWxxn7qxZE/Tz6_gOlZEBI/AAAAAAAACTM/QmPJK-GDydA/s1600/Housing+Investment+As+A+Percentage+of+GDP+in+Canada+1981+-+2011.jpg
    After one of the times housing investment hit 7%, western Canada had an epic crash in the early 80’s
    http://2.bp.blogspot.com/-7n3P7bjqaok/TzvyAMFR4WI/AAAAAAAACRc/lCzxYY-6y3w/s1600/western+canadian+house+prices.jpg
    And Toronto had an epic crash in 1990 after housing investment hit 7%.
    http://2.bp.blogspot.com/-17mHCE-2c-k/TzvyVTo0cLI/AAAAAAAACRs/RhfY1Wc1a5g/s1600/eastern+canada+real+house+prices.jpg
    I do have to wonder if CAAMP was against the removal of the mortgage insure cap, or against 0 down, 40 year mortgages.

  11. It doesn’t matter. What’s done is done. To throw new regs at the market and pull the rug out now is pointless and risky. The only way it makes sense is if prices keep going up from here.

  12. @BaySt
    Your not seeing yields increase because the BoC is buying bonds while pension/institutional funds area leaving the market. Who the hell wants to buy negative yielding bonds with no legislation to protect them as senior creditors?Pension funds know real inflation is not 2.3%.
    To answer your question follow this:
    Foreign International Securities (Net flows) Transactions:http://i39.tinypic.com/11c3z2e.png
    Bank of Canada Bond Purchases: http://i40.tinypic.com/2is277.png
    Government Bond Issuance: http://i42.tinypic.com/25gfjpx.png
    Notice on government bond issuance how treasuries have been decreasing while bonds are increasing; this is Canada’s ‘Operation Twist’ where short term treasuries are rolled over into long term bonds. The problem is the total outstanding balance is winding down, meaning, the BoC is losing firepower to purchase more bonds; therefore Flaherty must deposit more foreign reserves (via U.S. denominated bonds) into an EFA account; this will allow the BoC to expand their balance sheet (buying power).
    To my finding, Flaherty has already issued more global bonds. http://www.fin.gc.ca/n12/12-015-eng.asp The last time Flaherty issued US denominated global bonds was in August 2009 http://www.fin.gc.ca/n08/09-079-eng.asp. In chart two, you can see BoC bond purchases soar at that same time.
    Let’s be real here, because the entire world now understands what the financial system is; a giant Ponzi Scheme.

  13. The average increase in monthly mortgage payments that would cause mortgage holders to become “concerned” with their ability to continue making payments is $750
    source
    How high must rates go up for a $750 jump in payment? I think a lot?

  14. Hi Rob, I wonder if you could comment on the veracity of the following quote from Ben Rabidoux’s blog (The Economic Analyst) posted today. Thanks.
    “The problem is that with 15% of all mortgages originated through the broker channel being originated through explicitly subprime lenders (the highest on record), it strongly suggest that the marginal buyer is the main support of this current market.”

  15. That nice high equity rate CAAMP promotes so voraciously is subject not to 60-70% of mortgage holders absorbing higher payments, but to the 20-30% having to distress-sell.

  16. In the sentence you highlighted, they left out the word “billion” after the figure. See page 14 of the same report:
    “HELOCs total about $215-$220 billion.”

  17. CAAMP is either confused or intentionally misleading: housing markets drive (un)employment, not the other way around.
    If they were worried about employment, they would lobby corporate taxation (or something). Instead they tellingly lobby ease-of-credit.

  18. Hey emmi,
    Where do you get this stuff? I defy you to post data showing 20-30% of people with 42% equity will have to distress sell. Give us a little substance with your rants pal.

  19. Actually the opposite is true. Housing is not a primary determinant of employment unless prices crash.
    Things like demand for Canadian exports [including resources], population growth, government policies and domestic labour costs [relative to other countries] are what ultimately drive employment. Housing wealth effects and construction are an important driver, but not the main driver. It’s more accurate to say that housing depends on employment, rather than the other way around.

  20. That I can agree with, Econ101, which gets us back to CAAMP’s original statement – that the primary determinant in a housing market collapse is rapidly escalating unemployment. Sure, there are marginal high risk/low equity owners out there. We’ve known that for years now, and I don’t think the central banks and the government are really concerned about that part of the market. They are transient – they own a house when times are good and rent when times are bad. Their movement in and out of the market drive prices up or down, and are a trailing indicator of the market.
    Are these marginal borrowers in long term fixed rate mortgages or are they in variable rate mortgages, ie. will they crumble all at once or will it be a gradual crumble spread out over the next five years?
    I find it fascinating that the Harper government – which an small number of seats in the major urban centres of Toronto, Montreal and Vancouver – have no handle on the law of supply and demand in these markets. As someone mentioned, national house prices mirror inflation – around 2% – which is more or less normal. But in Toronto and Vancouver, they are up 5+% where supply dried up last year. The developers responded as they should and are working to increase supply which will stabilize the prices in the long term. Why does our ‘free market’ government seem to have trouble with this?
    There is too much conflicting information out there with no clear leadership or vision. The government is focused on what it doesn’t want to happen – which will only guarantee that it will.

  21. That’s an average across all mortgage holders — including those who bought 15-20 years ago — and a very selective quotation on your part.
    In this case, the very next paragraph in the CMT post you linked to indicates that 12% of mortgage-holders (1 in 8) would have financial difficulty with a rate increase of 1%.

  22. Just because 12% would have trouble with a 1% rate increase doesn’t mean 12% will default! Not even close. People will pay their mortgage before anything else. Have you ever lived in a cardboard box on the street? It’s not fun!

  23. Where did I say they would all default? I merely pointed out the misleading nature of Hasib’s post.
    While there are a lot of mortgage holders who can tolerate huge increases in their monthly payment, there are also a significant number who are already close to the limit of their ability to carry their mortgages, even at today’s low rates.

  24. Hi Appraiser,
    Can’t say that I’ve seen data to suggest that subprime lender share is at a new record in the broker channel. If it were, it would certainly be interesting.
    I emailed Ben but haven’t yet been able to confirm the sources he used. D+H was mentioned as one possible source—which seems logical since D+H pegs “Non Conforming/Subprime” lender share at 15.1% in the broker channel. But it was at 16.1% in December 2010.
    Moreover, a subprime mortgage and a mortgage closing with a “Non Conforming” lender are not always one and the same. For example, Home Trust is generally viewed as a non-prime lender but it also does prime mortgages.
    Data aside, tighter lending guidelines are forcing many “A” borrowers into the arms of “B” lenders. Examples include strong self-employed borrowers with assets and significant equity who (legally) don’t report income in a traditional manner. Many of these lenders get financing with non-conforming lenders versus the big banks–despite the borrower’s low default risk.
    As for “marginal buyers” being the “main” support of the market, I can’t envision how the above data could establish that.
    Cheers…
    Rob

  25. How is someone an “A” borrower if they can’t get a loan from an “A” lender? This is exactly what the whole “Alt-A” thing in the ‘States was about.

  26. One thing I’ve rarely seen mentioned is the impact of supply. In the GTA where some 6.5 million people live only around 50 thousand new single detached houses have been built over the last four years, which I believe is the lowest absolute number since some time in the 1980s. Over the same time frame there were around twice as many condos built. Since given a choice, most people prefer newer single detached houses to other housing options it isn’t surprising that that prices in Toronto continue to soar. There is a a basic mismatch between supply & demand – a classic outcome where governments impose excessive development restrictions.

  27. In light of the resent report from Equifax on mortgage fraud, It will be understandable if the Government tightens the rules.
    Any fraud hurts economic growth, but the impact of fraud within the housing industry can cripple even in the best of times

  28. Various “A” lenders have cut back on their “equity” and self-employed programs. As noted, a certain percentage of these borrowers are now using alternative lenders to get their deals done. Alternative lending is client/scenario-specific so it’s difficult to generalize, but many such clients are practically “A” borrowers from a default risk perspective. (i.e., good income, equity, beacons, and/or debt ratios, etc.) It’s often just a case of them not reporting income in a traditional fashion for one or more years.
    To your last point, “Alt-A” in the U.S. was notably different than “Alt-A” today in Canada. Income reasonability tests were almost non-existent, due diligence was a farce, LTV guidelines were way too liberal, there was a totally different securitization environment, etc, etc. Compare U.S. non-prime defaults with almost any Canadian non-prime lender. Take Home Trust as just one example. Its provisions for credit losses were spectacularly low–only 5 basis points on its entire loan portfolio for the whole year.

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