Rule Changes: More After-Effects

Disaster recovery plan FBRandom thoughts on this week’s mortgage rule madness…

Who’s Left Standing in December

It’s unclear which insured-lenders will still do refinances, rentals, super-jumbos ($1 million+) and 26- to 35-year amortizations come December. As we’ve seen, some lenders have already announced their (hopefully temporary) withdrawal from these categories. Lenders I spoke with today were scurrying to arrange purchase agreements with balance sheet lenders to create liquidity for these mortgages. It’s going to be a week or two before we know the bank’s appetite. They won’t rush to load up their balance sheets with non-standard mortgages. That, we know.


The Demand Effect

Will Dunning, chief economist at Mortgage Professionals Canada, tells BNN, wait until December’s CREA housing data is in before speculating on how the DoF’s rules will sway home prices. That interview.


Market Reaction T + 2

It’s 2/365ths A.D. (After Debacle), and investors have spoken again. For a second day they dumped stock in insurance-dependent lenders. In the process, untold millions in market value were obliterated.

These are ultra-high-quality lenders, managed by good, honest people, underwriting rock-solid low-arrears mortgages and saving Canadians billions (literally). They don’t deserve this in any way.

Lender stocks II

Most banks are outperforming the market.

Bank stocks II

Time for Perspective

As bad as these changes were for consumers and lenders, we all know that Canadian lenders are run by extremely resourceful people. Some lenders may die off or consolidate if the Department of Finance doesn’t relent on its decree, but many will find a way to keep doing these uninsurable deals at higher interest rates.

I had a chat with Gary Mauris tonight, head of Canada’s largest broker network. Here was his take:

I’d like to suggest and encourage all industry participants to exercise patience until we have clear, accurate information and the industry has done a thorough evaluation of the material impact. We as an industry have gone through numerous policy changes in the past, and have weathered the global credit crisis. These regulatory changes will no doubt be disruptive in the short term, but our industry is resilient and we will adapt and continue the valuable service that we provide Canadians. It’s important that we continue to focus on all the positives of our industry and avoid getting caught up in the negative rhetoric that only draws attention and damages the good work and many advances that this industry has achieved. Anytime there are headwinds in an industry, there are also opportunities. Now is the time to highlight our expertise, help the public navigate the changes and be financial thought leaders during this time of temporary uncertainty.


  1. After Debacle…so good. Rob, as always, great information and insight.
    The market decimating First Nat and Street Cap is crazy.
    I’d be buying that FN stock in a hearbeat…next week.

    We can hope that the dust settles quickly, and that solutions both short and long term will be found.
    But dropping such a bomb with such little time for Monolines to prepare is staggering.

    And now, we wait. Lenders are very quiet. Insurers are very quiet.

    1. Why would you buy FN shares when the new mortgage insurance regs imply the growth trajectory of FN’s mortgage book will be flat to negative?

      Bank share is going to increase isn’t it? Isn’t RY, with the largest gravitational force, a better play?

      1. All depends on the price which you’re willing to pay. Frankly, Home Capital Group and Equitable Group at less than 7x earnings each appears to be the best opportunities.

        1. You’re referring to trailing earnings, Frank?

          Forward earnings are expected to be lower.

          XFN, or similar, is a better prospect than any of the non-bank shares.

          Don’t fall in love with an idea, it won’t love you back.

        2. In the event of a housing downturn, I don’t see how any housing-related lender or insurer won’t be affected. Say, the mortgage book for both companies will fall (which isn’t true for either company, not even Home’s which has been bogged down with the income verification issue from last year), the multiple to earnings that you’re paying right now is simply ridiculously low. Btw, consensus expectations on Bay Street are for earnings to grow at both companies.

        3. Frank we are not in a housing downturn scenario. We are in a scenario where monolines have large (ie. 50%) portions of their book that would not qualify for insurance under new regs.

          To insist that this set of conditions is bullish for monoline prospects strains credulity.

          As for consensus expectations, well, actions speak louder than words.

        4. I agree that the new regulations will likely have a dampening effect on monolines, insurers and possibly lead to less liquidity in the securitization market. Home and Equitable, however, are balance sheet lenders.

        5. First National is lower 4 days in a row. That says it all. If I were them I’d file suit against the Finance Dept and subpoena internal policy docs with an eye for collusion with the banks.

          PS. To Frank: Home and Equitable insure all their ‘A’ mortgages.

        6. Daft, I’m aware that they do. However, most of the insured mortgages on their balance sheets have terms of 1-3 years, which already use the higher qualification rate in measuring mortgage affordability. So the new mortgage insurance rules won’t change how they do business too much.

        7. Frank,

          We were talking about FN, not HCG and Equitable.

          And these regs WILL change how all lenders do business. Big banks benefit the most, they are the winners.

          This blog’s host, and industry execs, have said as much.

          So why push water uphill? Back the winners.

        8. @Frank – don’t forget that the monolines won’t be able to refinance their own book of mortgages – they will have to send the client elsewhere for a refi.

  2. Financial thought leaders? That’s rich. Don’t you mean parasitic middle men? Your volume is going out the window — now what?

  3. Thanks Rob, great information and keeping us up to date. Such undeserving punishment on excellent reputable lenders who give this country choice, service, and a competitive edge. as each hour goes on I really wonder if the Dept of Finance really knew what the ripple effect and aftermath would be? Gary as usual has enlightening and sound advise for our industry.. We need to manage by fact. Keep up the good work Rob

  4. So far it seems that the big banks are winners after these rules finally come into the effect. And the next step for them will be increasing the mortgage originations fees and of, course other fees, and passing them onto the consumers. No wonder, big banks were advocating for tightening the mortgage rules for a long time. When there is no competition, there is no limit on increases. I guess we all know who are the losers here!

  5. I’m not an industry insider, and never have been, but I thought I was following the housing and mortgage industry fairly studiously. Please allow me to share some thoughts.

    I didn’t know that a lender could write a low ratio cash-out refi for debt consolidation on a 30 year amortization, or a 30 year refi of a prior 30 year loan and then buy portfolio insurance covering that loan to securitize. As a taxpayer, I don’t like being the ultimate backstop of that kind of business.

    Yes, default rates on these loans may be low now, but mortgage insurance isn’t like life or fire insurance, with predictable annual loss rates. It’s more like hurricane insurance, with ten or twenty years of fat profits followed by a deluge. Who defaults when home prices are rising?

    Investors worldwide are clamouring for yield. Securitized subprime auto loans, CMBS and junk bonds are all trading at low spreads over government debt, and Canadian banks are issuing eurobonds paying 0%. So I put it to you that if these monolines were writing rock solid loans at an appropriate interest rate given the capacity, collateral, credit rating and character of their borrowers, they’d have no trouble securitizing those loans without insuring them.

    With prices in some major markets rising at 10-20% per year, absent wage or price inflation in other areas of the economy, and in a time of slow growth in population, productivity and employment, a disinterested observer might suggest we’re in a mortgage credit bubble. I think the Department of Finance and the Bank of Canada know what they’re doing.

    Thank you, and good luck.

    1. Portfolio insurance can only be applied on low-ratio mortgages.

      As far as I’m aware, the Canadian taxpayer has never had to backstop CMHC or any of the private mortgage insurers. The arrears rates on their mortgage book has always been low, and during downturns when losses do tick up, the insurers are more than capable of withstanding it due to huge capital levels.

      1. Ralph, I am an industry insider. Did you stop to think that 7 of Canada’s provinces’ GDP are built on the real estate industry and what the unintended consequences would be when the market for real estate heads into negative growth? There are two things that are going to tailspin this country into double digit recession, increased unemployed and slower immigration. These rule changes likely negatively impact both of these key drivers.
        Secondly. If people can’t refinance to renovate, they pay higher unsecured debt costs. Unsecured debt will increase. This is what the government should be regulating, credit cards and unsecured loans.

        Bottom line, this current regulation attacks competition and the oligopoly wins. Customers’ costs go up when you remove competition. Furthermore, the banks are the abusers of the government-backed mortgage insurance for capital relief. This is a known fact. e.g. The number one bulk insurance user in q2 was BNS.

        The prime mortgage lenders (not the alternative funders or non prime banks) have higher performing prime mortgage portfolios than the banks. See 90 day CBA rates versus First National, MCAP and Merix, who have much better performing portfolios. Why? No balance sheet to hide garbage mtgs. Their underwriting criteria isn’t based on anything but the mortgage qualifications and they’re not duped into considering other products. They ARE the specialists.

        So don’t kid yourself and read inaccurate, uneducated, headline hunting press articles.

        The waterfall effect of these recent changes will be significantly negative on our economy and customer pricing.

        1. Hi, and thanks for the response. I appreciate that the housing sector has been the dominant driver of the economy for almost a decade now. But here’s the thing: Home prices in the GTA and the Lower Mainland can’t keep going up at double digit annual rates when wages and productivity are only growing at low single digit rates. The obvious way to slow home price increases is to reduce the amount of mortgage credit granted, both to young first-time homeowners and to their parents who fund down payments using their own home equity. Less mortgage competition, higher mortgage rates for borrowers and some people now qualifying for less credit are not unintended consequences of the new regulations; they’re the whole point.

        2. “Did you stop to think that 7 of Canada’s provinces’ GDP are built on the real estate industry”

          And you consider that a healthy thing?

    2. “if these monolines were writing rock solid loans at an appropriate interest rate given the capacity, collateral, credit rating and character of their borrowers, they’d have no trouble securitizing those loans without insuring them.”

      Ralph you really have no idea how the market actually works do you?

      1. Quite right @daft, Ralph does not have a clue. A total amateur that has been bloviating like an idiot against the real estate market for almost a decade. So sad.

        Hey Ralphy, still èsplainin to the inlaws why you are just another angry renter…….thought so.

        Ha ha ha!!

  6. Remove CMHC and see who would be lending in this monster of a housing bubble with debt to income ratio of 170%? Why don’t you mortgage brokers take all the risk and lend at 2.5%? You vested interests have made mad money on this Ponzi scheme.

    1. You are a vested interest. The question is if the housing market is so strong and stable then why won’t lenders take all the risk and lend money @ 2-2.5% with little to no money down? The fact is the housing markets in the GTA and Vancouver is beyond a bubble. 170% debt to income is proof of that . In fact the US debt to income ratio just before their housing market crashed didn’t even hit 160%. Without CMHC or the taxpayer taking all thelse risk ; no lender would lend a penny in this bubble without asking for a huge down payment and rates @ 7-10%.

      1. Tony,

        Thank you for spewing pure ignorance. Major banks already lend with no taxpayer backing in the covered bond market. They issue EU covereds at zero coupons so obviously it’s not the mortgages that investors consider risky.

  7. Conspiracy theory…think the big banks with their campaign contributions manipulated federal governments to put in new rules to drive everyone else (monolines, brokers) out of business? Does parliament in Ottawa really run things? hhhmmmm….

  8. I am not an industry insider. If I read the headline correctly, reducing mortgage risk is not DoF objective behind the new mortgage rules. Its objective is to cool down the price at GVA and GTA under the assumption that mortgage industry is becoming risky with higher real estate price. When everybody believe that higher real estate price was mostly built up by new wealthy immigrants, you know the assumption is just plain wrong. Simply put, most of the local residents who would have 170% debt to income ratio, are tenants, are not potential home buyers in near future. Of course there would be unintended consequence, since DoF did not consider the interest of mortgage industry, existing home owners, new immigrants, and the other local residents who would have healthy debt to income ratio.

  9. Does a minimum 600 credit score, to qualify for insurance, reduce the ease with which a new immigrant may obtain a mortgage?

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