Low-Profile Mortgage Rules

Confidential FilesThe national average home price just broke another record, hitting $391,820 according to CREA. That will not go unnoticed in Ottawa.

Speculation could now build as to whether the Department of Finance will restrict mortgages further in order to slow the market.

We’d submit, however, that there is no need to wonder if we’ll get new mortgage restrictions. It’s a given that more regulations are coming. The only questions are what rules to expect and when.

One area facing potential rule changes is mortgage securitization. It’s an esoteric topic for the average consumer, but one that could directly affect his or her finances.

Last month, the Department of Finance confidentially circulated a discussion paper to lenders. In it were ideas on further restricting securitization and mortgage insurance. Some of the policies, if enacted, could disproportionately disadvantage smaller lenders, impede competition and drive up mortgage rates.

Here are two such examples, according to sources:

A bid system for mortgage-backed securities (MBS)

Currently, approved lenders are allowed to issue a certain amount of government-backed MBS at predictable prices. (The MBS market lets lenders sell mortgages to investors to raise capital for new lending.) Ottawa is now reportedly considering allocating MBS based on supply and demand. The more a lender wants to pay for the government MBS guarantee, the more MBS it could issue (and the more mortgages it could sell).

This sounds great at first blush—making lenders pay a market price for the government backstopping their risk. It also lines Ottawa’s coffers due to higher guarantee fees. But there are serious downsides, not the least of which is enormous uncertainty. If you’re a small lender who can’t quantify the cost and availability of securitization in advance, you may need to build an uncompetitive premium into your rates. In a similar vein, it makes banks less likely to fund small lenders at highly competitive rates.

Worse yet, an auction market for MBS could let giant lenders (i.e., the Big 6 banks) game the system. They could do that simply by bidding up the cost of MBS, raising the funding cost of any MBS-dependent competitors. It would hike banks’ MBS cost as well, but MBS represents just a small portion of the Big 6’s overall funding mix.

In sum, a bid system would likely handicap small lenders, creating less competitive pressure for banks to price aggressively.

Note: This policy is on top of a slew of other restrictions that affect small lenders. One example has been CMHC’s tendency to offer smaller and smaller Canada Mortgage Bond allocations to lenders. Another is forcing banks and their independent securities arms to share one MBS allocation (that further affects liquidity for monoline lenders who rely on those securities firms for funding).

Term limits on bulk insurance

Small lenders rely on bulk insurance because it reduces the risk of their mortgages in the eyes of investors. (Government-backed bulk insurance protects lenders from defaults on mortgages with 20% or more equity.)

Lenders commonly buy bulk insurance for the life of a mortgage. Now, sources say the government is considering term limits on this insurance. In other words, a lender would need to rebuy the insurance at renewal. That could significantly increase renewal costs and (once again) compel small lenders to raise rates.


The type of changes above don’t make the front page of newspapers, but they should. If such policies were implemented, one lender we interviewed predicted a minimum 15-20 basis point rate increase at non-deposit-taking lenders. If rates were to rise 20 bps industry wide (not a prediction), it would cost a family with an average mortgage $1,600 more over five years.

This all begs three questions:

1. Why is the government doing this?

The Department of Finance (DoF) provided this statement to CMT:

“…Recently, financial institutions have used portfolio insurance for new (unintended) purposes, such as capital and liquidity management. The rapid growth of government-backed mortgage insurance for low-ratio mortgages and securitization programs has increased government exposure to the housing sector.”

“…We are seeking input from stakeholders on how best to implement measures announced in Budget 2012 (pg. 129) and 2013 (pg. 141) regarding the housing framework, such as portfolio insurance, and the administration of Canada Mortgage and Housing Corporation’s (CMHC) securitization programs following CMHC’s announcements on August 1 and 30, 2013, regarding National Housing Act Mortgage Backed Securities allocation rules.”

“Input from the consultations will help to inform the Government’s housing finance policy, including the establishment of limits on new issuance of National Housing Act Mortgage Backed Securities and Canada Mortgage Bonds for 2014.”

(Editor note: Keep in mind that small lenders don’t use portfolio insurance for capital and liquidity management—the government’s concern. They use it for the reason it was intended, to fund mortgages.)

2. If additional mortgage restrictions are truly needed (a separate debate), shouldn’t they apply equally to all lenders? The government created MBS and bulk insurance, in large part, to level the playing field between big banks and smaller competitors. These rules run counter to that aim. Moreover, the policies above would not significantly reduce the government’s mortgage risk (given all the underwriting restrictions already in place, and given the industry’s already exceptional loan performance).

3. Why is the DoF keeping these proposals so secret? Perhaps it’s early in the process but officials seem disinterested in public feedback. The DoF refused to provide a copy of its discussion paper to the media. That lack of transparency is something we find concerning.

What justifies all this secrecy? The DoF says:

“The consultation paper contains a number of detailed questions directed at financial institutions that participate in CMHC’s low-ratio mortgage insurance and securitization programs. The confidentiality around the consultation is intended to encourage financial institutions to provide detailed and candid answers to help inform government policy.”

“The confidentiality of this information will be protected. Policy decisions on these matters will be announced as they are made.”

No mention was made about providing an opportunity for public comment.

Canadian homeowners have a right to know how the small but powerful group of regulators in Ottawa intend to alter mortgage financing. In cases where their policies hurt family budgets and entrench the banking oligopoly without offsetting benefit, we must be able to hold them accountable.

Robert McLister, CMT

  1. Robert all of those actions will raise rates. Is that what the government wants or they want to take some air off the balloon? I think mortgage is not the problem – they goota look at it from the other way.
    I personally wonder if those regulators have mortgage themselves. Wouldn’t that be a conflict of interest when they are setting rules? At the same time if they personally do not carry mortgage then they will never understand the commoners.
    Do not forget there is an election coming in two years.

  2. This commentary is very concerning to the broker community. I only hope our interests and input is heard through CAAMP and IMBA. Ottawa should be thinking about the smaller monolines and the bigger banks in two different ways just like larger telecomm’s and new entrants. Towing the line on the big 6 will not do the common borrower any good. Please Ottawa don’t just get input from the big 6. Banks would love to get rid of mortgage brokers and slice up the competition to themselves.

  3. Rob, if the government places a limit of the amount of bulk insurance lenders can purchase, it will affect the major banks as well. IIRC, the banks use bulk insurance on low ratio mortgages extensively to mitigate risk. So if the banks now have to keep more risk on their own balance sheet, I think this will result in more stringent lending practices. Definitely good news for credit unions and some of the alternative lenders.

  4. Hi Lior, Stricter limits already exist on bulk insurance, which banks’ have used extensively for capital/liquidity management. Further changes (specifically those above) would no doubt affect banks as well, but to a proportionately lesser degree than their smaller competitors. It’s far easier for banks to shore up their balance sheets and access diversified funding options. Try raising deposits or issuing covered bonds, deposit notes, equity or sub-debt if you’re a non-deposit-taking lender…Pretty tough).

  5. Given Flaherty’s stance on housing and mortgages to date, I assume that his reasoning goes like, “BoC can’t raise the prime rate but the houing market is still not getting out of danger zone, so let’s see how we can raise mortgage rates without increasing the prime rate”. Of course that’ll cost borrowers extra, that’s the whole point, so arguing like it’s a downside (from that point of view, not necessarily mine) won’t go far in arguing against those measures.
    The question is just whether it’s possible to find measures of similarly rate-increasing impact that don’t put smaller lenders at an unfair disadvantage, and have CAAMP & Co. suggest those instead.

  6. Jeff Attwool makes a great point that CAAMP should be very focused on the preservation of monoline lenders as a competitive entity in Canada. This is not just good for mortgage brokers it is good for Canadian consumers. A greater degree of choice equals greater competition equals a better result for consumers in the long run.
    This dovetails with Rob’s comment about monolines using bulk insurance for what it was intended for: offering lower mortgage rates to consumers not offloading balance sheet debt to enhance profitability.
    Look, I support many bank lenders in my practise because I am driven to provide for the client’s needs and their desire for low rates. I also support monolines. But this I know for a fact: all monolines have is mortgages they must compete all the time it’s all they got. Banks are brilliant and powerful, they compete with each other relentlessly but generally only in cycles that match the real estate buying cycle; if monolines fade we will likely see less year round access to rate aggressiveness and that is not in the consumers interest.

  7. I think it is fair to say that the aggressiveness of banks to compete on rate was precipitated by the monolines who moved their market share up from a pimple on the back of the banks to a tiny boil. But surprisingly having competed initially with monolines in rate, the banks found they were picking up chunks of market share from other banks – a heady conclusion.This (discounting)wont go away, if the monolines depart, but as Butler noted, banks are very moody jumping in and out. In the future when they jump out, we will be left with higher rates, and a new heady feeling by these same banks that slowing down in taking on new business leads to higher returns. We need to keep the little guys, assuming they can remain competitive, not at the expense of the consumer, but to protect the consumer

  8. The best way for the DoF to introduce additional cooling measures would be to require the Bank of Canada qualifying rate to be used for all government backed mortgages. Many borrowers barely qualify based on a 3 point something 5 year rate. They are the ones that will run in to trouble on renewal. Take the marginal borrowers out and the system is safer. This approach would be neutral to monolines vs. deposit takers.

  9. The big risk is what will happen to all the homeowners with large debts if rates are substantially higher than they are now in a few years at renewal time. Engineering slightly higher rates now to keep the marginal buyer out of the market doesn’t really address that risk since the guy that can comfortably afford a $500k mortgage at 3% may be in serious trouble at 6%.
    If the DoF wants results they need to make changes that will have a real impact – like reducing the insured limit per region to the average cost of a typical starter home in that region.

  10. I am actually all for making more changes to mortgage insurance – privatizing it would be the best thing they could do. But they shouldn’t touch amortizations any more, or increase down payments in any way. I think if a change is coming, it won’t be until the middle of next year. Flaherty has already stated that he won’t be making any changes for now, and with that election all these commenters keep talking about, he’s not in a position to be irritating consumers or taxpayers.

  11. You miss the point. If politicians like Flaherty want to tax Canadians by indirectly raising mortgage rates, that’s one thing.
    But when his rash policies strengthen banks at the expense of competitors, that’s quite another.

  12. Ron, you have a lot to teach from your experience. I am coming from an insurance background and am learning from this group as to the issues.
    I do appreciate your expertise.
    If the big banks are lobbying to DofF to mandate rules that are nothing more than a dressed up pig to reduce their competition, brokers have but one choice – – stand united to educate the public on the issues of debt in general, and how the banks want consumers to move into the debt with the highest interest rates — charge cards.
    As mentioned by a linked in member on one of the groups (I think it was CAAMP), she had commented that Flaherty was not imposing reduced interest rate caps on charge card debt to the banks.
    If Flaherty is concerned with ensuring Canadians are secure, this should be an obvious move to enhance cash flow. Increasing mortgage rates slightly due to these insurance issues affects Canadians in a relatively minor way, but your point on making things tough on monolines is well appreciated. For the Canadian looking for the lowest mortgage rate due to other unsecured debt issues that seem hopeless (cannot bargain them down), the banks are having a field day.
    The bottom line from my perspective, it that brokers need to stand up to educate Canadians that at the end of the day, banks are looking to reduce competition and influence the government to make it tougher for Canadians to consolidate unsecured debt (primarly charge cards), and thereby making them suffer financially.
    Brokers need to be the voice of reason, and use their talent to help Canadian’s deal with debt properly, and in the process becoming the choice to turn to – – the choice that really helps them.

  13. Home sales should not be seen or looked at by itself. It should be seen as an indicator of what we cannot see. For example you can consider it as an indirect measure to the job market or the wages being offered in today’s job market. We would not have seen this drop, if people were employed, or the wages they were offered, were high enough so they would be accepted by banks for a loan. It is a chain that could generate a positive chain reaction. Do not expect an unemployed or an underpaid to be able to afford to buy a house in today’s market.

  14. Thankfully..in 2016 , as now having found this article, things appear to still be moving in the right direction and there are no immediate issues. Mortgage rates remain at an all time low-for how long?…we shall see.

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