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?

  1. Great coverage Rob. Really insightful on the mortgage funding side. This is the kind of info mortgage brokers need to pay attention to. We all have some small limited way we can try to influence government policy whether by calling our MPs directing political contributions or just at the ballot box and this is the information we want to have to make those calls.

  2. Mr. McLister, what you present is called a logical fallacy called a false dichotomy…

    “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.”

    You haven’t made the case why it should be taxpayers who should shoulder a “housing finance bailout” (in your mind, a remote possibility). Canadian families could continue enjoying low interest rates while a private financial institution could provide the guarantees which the CMHC currently provide. Australia does it…. other countries as well. The only difference is that funding costs would be higher for a private company because CMHC relies on the full faith and good credit of the Government of Canada.

    People directly and indirectly employed by the real estate and mortgage financing industries should learn to get off the government teat.

    1. Bo, What you refer to is in fact, quite a valid dichotomy. The record shows that funding costs and liquidity are adversely affected as sovereign guarantees are pulled back. Compare the assets and taxing authority of the Canadian government to the world’s largest private insurers (scratch that, default insurers cannot tax) and it’s easy to appreciate why mortgage capital markets would impose higher risk premiums on a more privatized system.

      On your last statement, because you’ve posted here before and lest you be tempted to use this fallacy again, let’s say this once for the road. The motivation here is in no way related to generating more commissions. This author pays his rent fine as it is. As one who speaks in a logician’s tongue, perhaps you’ll recognize your statement as an appeal to emotion, sprinkled with a dash of Bulverism and ergo decedo.

      In any case, misdirection shouldn’t distract from the matter at hand. That is, that the mortgage market is slowly being dismantled with Ottawa’s stated goal being “de-risking” the system. Policymakers may have good intentions, or they may want to cover themselves politically, or both. Either way, the DoF has barely acknowledged the price of its actions all while discounting the existing system’s long-proven stability. By withdrawing government support of housing finance (in the context of today’s highly regulated market), the DoF might as well just raise homeowner’s taxes and pad CMHC’s reserves with the revenue. The economic result would be similarly bad.

      1. Don’t forget that we are now required to verify income for the self employed (the fastest growing employment sector in the economy – the so-called black market) using CRA validated NOA’s thereby making us unpaid tax collectors for the federal government.

      2. If the Government of Canada backstops residential mortgages, then why not Brokerage margin accounts? Why not automobile loans? My margin account costs would be a lot lower and my car payments would be a lot lower…
        CMHC started as a very limited program to help returning WWII veterans buy a house – a laudable goal… but it has morphed into a financial monster. I’m happy the Conservative government is finally trying to disentangle itself from the potential mess.. From 2005-2011, CMHC had been captured by real estate interests who were determined to use the crown corporation to help their industry. CMHC insurance for developers? Sure, no problem. CMHC insurance for vacation properties? Sure, no problem. The foxes ran the chicken coop.
        Your contention that there is minimal risk for the Canadian taxpayer based on history is just that… historically based. I’m concerned about the unpredictable future. The reality is the Government of Canada has 900B of contingent liabilities in the housing market… at a time where interest rates will have to normalize… eventually or we’re in a Japan deflation scenario.

        1. Bo, You can answer your first question by comparing the economic and social value of a home, a car and a margin account.

          On your last point, our “contention” was the same 6 year ago, a time when today was the future. And like today, our position was not only based on history, but on the present. And presently, there has never been a time in Canadian history when lenders were more regulated, monitored and conscientious as they are today. $900 billion sounds imposing but it’s not that number that matters because it could be $2 trillion (and likely will be). What matters is the size of the risk relative to its offsetting benefit, its probability of fruition and the country’s ability to absorb that risk. And Canada (today) is in excellent shape on all three counts.

  3. In answer to your question Rob: “reducing taxpayer exposure” is mainly political rhetoric?

    Nice job. Great info. and insights not found any where else.

  4. Rob,

    Appreciate your coverage and most of the comments except this..

    “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.”

    Maybe we can ask US, Spain, Portugal, Ireland, Greenland etc.. if the tail risk is “incalculably small” or not. Besides, as a taxpayer, I am happy that these changes are bringing a “users pay” type policy. Why should the mortgage risk be socialized to all tax payers for incriminate borrowing and consequently lending? The basis of your argument suggests that all taxpayers are borrowers, which is not the case.

    1. Jun, The countries and pre-crisis era that you’re referring to don’t match up with today’s regulatory climate in Canada — not even close. There are endless comparisons one can refer to online that explain the differences, or you can search our archives for related content.

      To the second point, the overwhelming majority of taxpayers are, have been or will be homeowners. For the fraction that aren’t, they too all benefit economically from a strong housing market and from consumers spending their income on things other than interest. Mortgage risk is socialized because — statistically and economically — it’s a good risk to take. And the government is the best party to assume that risk because its costs of doing so are the lowest. If theoretically there was zero risk of a government housing bailout, most everyone would agree that a state-sponsored system that helps people own homes sooner and keeps mortgage costs down is clearly positive. It’s mainly a question of how much risk we’re willing to accept for these benefits. And I have yet to see any Canadian evidence to suggest we’re currently taking on too much risk. The minute I do, I’ll change my tune.

  5. To the folks who trot out the “look at the US, Irish, Spanish or Icelandic (not Greenland) property bubbles” please understand very clearly these were mortgage underwriting and securitization disasters. There is not the tiniest similarity in Canada then or particularly now and during the last 4 years to the way mortgages were underwritten in those countries at the height of their bubbles. So please, just stop it, it’s silly. The question of overvalued properties in Canada (which there SURELY are) and whether or not the Feds should underwrite lower interest rates through mortgage insurance can be debated but pointing at the property value bubbles in these other countries in 2008 a direct comparison is just dumb.

    To Rob’s point even if there is a call on the claims reserves of CMHC, Genworth and CG, these companies were built to take a claims hit and survive and the Canadian banking industry can take a default hit and survive so in terms of the public good (and having QUALIFIED Canadian borrowers owning homes with competitive interest rates IS good public policy) why sacrifice good policy on the alter of “hands off” neo-conservatism?

  6. The bears have been re-hashing the what ‘shoulda and still ‘couda for close to a decade now.

    They seem to revel in ceaselessly warning of a housing melt-down, that is forever on the cusp.

    As a final resort to all that is illogical, I particularly enjoy the platitudinous yet still popular among die-hard bears, analogies of the real estate market to Dutch tulip mania circa 1637.

  7. April 28, 2015

    My guess is that mortgage brokerage industry’s habitual Canadian residential
    real estate bears (editor Rob & Caamp CEO Mr. Murphy) will not be happy (& disagree with BOC Governor) who recently said:.. “.. Mr. Poloz was more direct. “”We don’t believe we are in a (housing) bubble,” (BOC deputy Governor) Ms. Wilkins was asked Tuesday whether she expects a “soft landing” for Calgary’s housing market. Real-estate prices and sales in Calgary, the financial hub of the energy patch, have weakened noticeably amid the swift decline in crude prices.” We don’t do any predictions for any particular market,” Ms. Wilkins said, “and we are not expecting whatever transpires in Alberta to create spill over” that would pose financial-stability risks to the rest of Canada. Mr. Poloz said housing construction is in line with demographic growth. He added that Canada didn’t have the characteristics common with asset bubbles in recent history, as witnessed with tulips and stocks.” A bubble is something which is self-sustaining through speculative activity,” he said. “People are only buying that thing with the belief that it will be worth more the next day or the next year, not because they actually want it.”
    That speculative ingredient is missing from Canada’s housing market, Mr. Poloz said. He added that during the recovery after the global financial crisis, housing, along with the energy sector, “did most of the work of keeping us out of recession.” Consumers purchased residences sooner than they expected to take advantage of rock-bottom interest rates.” It would be very unusual to come through all that and not have a degree of overvaluation. We have that in every business cycle,” he said.
    I would add that I have never seen an asset bubble with 60 % owner/investor equity. That is average residential LTV in Canada @ 40 %. Also, Average Canadian is 5th wealthiest in world. So, we have more assets than just our homes. Who knew?

    When total level of all taxes paid by Canadian homeowner costs more that housing food & shelter combined, That is Canadian consumer yoke in my opinion. Governments are over indebted by and large, it is the exception, the consumer who hasn’t used credit (including mortgage debt) within their means

    David Johnston, CFP, M.T.I.

    1. Real estate bear. Well that’s a new one. Been called a housing pumper but never a bear. Maybe this will finally buy me some street cred with Garth Turner and David Madani! Here’s to hoping. Thanks David!

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