CMT has a long record of critiquing government rule changes in the mortgage business. It’s a check and balance on a bureaucratic system that sometimes “forgets” to consult stakeholders and discounts the consumer repercussions of its policies.
But it would be a mistake to misinterpret this as advocating for the status quo.
On the contrary, Canada’s mortgage regulators have kept our housing market from going completely off the rails. Specifically, they’ve been prescient and wise in reversing lax lending policies, including:
- Zero-down insured loans
- 100% rental financing
- 95% insured refinances
- 95% stated income financing
- Insured interest-only financing
- High-ratio HELOCs
- Insufficient minimum credit scores
- Inadequate documentation requirements
- Qualifying high-ratio variable and short-term borrowers at inadequate rates
- Allowing insured cash-back down payment mortgages
- Unnecessarily high maximum debt ratios.
Policy-makers at the Department of Finance, OSFI, CMHC and the Bank of Canada should be applauded for their role in these measures. We don’t say that enough.
If needed, and I stress the phrase “if needed,” the government could take additional steps to cool overvaluation (in the few regions it exists) and improve borrower quality. It could do that by:
- Raising minimum credit scores
- Lowering maximum debt ratios for below-average credit scores
- Lowering maximum debt ratios for low-equity borrowers
- Incentivizing development and reducing developer red tape to alleviate the supply constraints (a central driver of overvaluation)
- Publicly publishing individual lenders’ arrears rates
- Adding new insurance surcharges for lenders with arrears rates in the worst X-percentile
- Requiring more public data disclosure from default insurers (e.g., Why on earth does CMHC not disclose TDS buckets, like what percentage of its borrowers have TDS ratios over 40% and an LTV > 90%?)
- Increasing insurance premiums on borrowed and gifted down payments.
- Increasing insurance premiums and MBS guarantee fees where they are not actuarially sufficient (albeit they’re already more than actuarially sound in most cases).
There’s a lot that’s been done, and still a lot that could be done, to make Canada’s housing market safer.
But one thing that should never, ever occur is policy that penalizes low-risk Canadian families with higher borrowing costs. No one wins in that scenario. And that’s exactly what the regulators have done by:
- steadily reducing the liquidity of, and access to, NHA-MBS
- not maintaining CMB allocations adequate for lender needs
- eliminating insurance on low-risk refinances
- imposing capital requirements that are overkill in many cases
- overcharging for MBS guarantees
- eliminating long-amortization options for those who can qualify at a standard 25-year amortization
- forcing insurers to charge surcharges in Canada’s most liquid real estate markets
- restricting bulk insurance access
- eliminating important securitization outlets for insured mortgages (e.g., ABCP)
- limiting access to low-cost insured financing for low-risk borrowers with higher-value homes
- not fostering covered bond access for smaller and mid-size lenders
- hamstringing banks by keeping covered bond limits below internationally accepted levels
- not fostering private RMBS markets sooner
- promoting loss sharing, which (depending on how it’s implemented) could hammer the final nail in small lenders’ caskets.
…and this probably overlooks many more such myopic policies.
How lenders sell and fund mortgages has never been the problem in Canada. It’s bad mortgages that are the risk.
Without question, we owe it to taxpayers to keep government-backed mortgage exposure in check with judicious underwriting, and regulators have enforced just that (over-enforced in some cases).
But the government also owes it to taxpayers to use the AAA credit rating Canada has been blessed with to lessen families’ borrowing cost burden.
This doesn’t mean lenders should give fringe borrowers more options. Definitely not. Under-qualified borrowers should see their options further restricted, and soon. That’s how to create a safer mortgage market and slow overvaluation at the same time.
But never, ever, should policy-makers force a prudent 800-credit score borrower with 20% equity and a secure employment to pay more for her mortgage.
That’s exactly what’s happening today, because of a shotgun regulatory approach that shoots to kill consumers’ options, and asks questions later.
Canada’s mortgage regulators should be simultaneously: (a) applauded and (b) held accountable. Citizens constantly hear the former in carefully planned CMHC speeches, Department of Finance press conferences and Bank of Canada Financial Reviews, but there aren’t many people doing the latter.