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Mortgage Policy Nuggets

The Conservative government touched on some new mortgage-related measures in its federal budget Tuesday. Among them…

More mortgage prepayment disclosure

The Department of Finance (DoF) plans to expand its “voluntary mortgage prepayment disclosure” initiative to non-federally regulated mortgage lenders. It’s a worthy consumer initiative, especially since

  1. some lenders fail in the verbal disclosure department, and
  2. too few Canadians truly appreciate the penalty cost differences among lenders, especially between the big banks and many smaller lenders.

Most non-OSFI regulated lenders will likely comply with the federal government’s ask on this (despite Ottawa’s lack of direct jurisdiction over them). Perhaps provincial regulators will also put additional pressure on credit unions and other provincially regulated lenders to better disclose their penalty calculations.

Reducing taxpayer exposure to housing

Following four rounds of rule tightening on insured mortgages, the DoF says “…There has been an appropriate and desirable moderation in housing market activity in most regional markets.” Yet, on top of these rules and its recent fee increases and issuance caps on mortgage-backed securities, Ottawa plans to “implement regulatory measures that:

  • limit the extension of portfolio insurance through the substitution of mortgages in insured pools,
  • tie the use of portfolio insurance to CMHC securitization vehicles, and
  • prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.”

Most of these changes were already expected. But that’s not the end of it. The Finance Department also promises to “assess measures to further reduce taxpayer exposure and risks to the long-term stability of the sector.”

Translation: It may get harder to insure and/or securitize mortgages, thus pushing up funding costs yet again. That could force lenders to maintain even fatter rate spreads, which in turn could suck more interest payments from the pockets of hard-working Canadians.

This is all in the name of reducing an incalculably small “tail risk” (i.e., a housing crash and/or mass mortgage defaults). The trade-off is very real, however. Taxpayers who are purportedly being “protected” from mortgage risk are simultaneously being forced to pay more interest to lenders for years to come.

That begs an important question. What is the greater evil: the remote possibility of a housing finance bailout, or the ongoing increases in financing costs caused by the government’s actions? These are real costs being imposed on Canadian families, despite impeccable loan performance and a slowing housing market in most regions. How interesting that that DoF chooses not to address this tradeoff.

Singing its praises

The government reminded us about the success of its new covered bond system, which has created a “fully private source of funding using only uninsured mortgages as collateral,” it says in the budget. “Outstanding [covered bond] issuance was over $60 billion as of February 2015.”

And the government absolutely should be applauded for this system. Banks can now effectively issue covered bonds with near-zero coupons in Europe. Unfortunately, only the largest of our lenders—mostly major banks—directly benefit from this program. Smaller lenders—which we rely on to make the mortgage market more competitive—are effectively shut out of the covered bond market due to the cost and scale required to participate.

The Finance Department adds, “Fees for CMHC securitization programs have been increased to narrow the cost differential with other funding sources and encourage development of private market funding instruments.” But there’s little sign yet of any viable non-CMHC sponsored securitization market for second-tier lenders.

Mortgage investors prefer a sovereign guarantee (who can blame them?), and scaling back that guarantee will cost us all. The question is, will it also save us from a bigger threat, or is “reducing taxpayer exposure” mainly political rhetoric?