Commentary: OSFI’s Testimony

Are regulators oblivious to the consequence of their own mortgage policies? That’s what certain industry stakeholders and MPs suggested to Parliament’s Standing Committee on Finance this past week.

Well, observers can now decide for themselves, based on officials’ own comments—starting with those of OSFI Assistant Superintendent Carolyn Rogers.

Rogers testified last week. Below are a sampling of her statements, with commentary on each…

  • On the Destruction of Lending Competition: MP Dan Albas asked Rogers if the harm done to competition is a concern, stating, “We’re not just making life tougher for consumers, we’re also making the market less competitive.”
    National Bank Financial (NBF) substantiated that concern in an unrelated report this week, stating: “…We believe increased portfolio insurance premiums could materially impair residential mortgage origination capabilities of mortgage finance companies (MFC)…Increased premiums shift both pricing power and market share control to balance sheet lenders like the Big Six Canadian Banks, highlighting that further downside risk could emerge for MFCs…We believe increased portfolio insurance premiums could materially impair MFCs’ ability to originate residential mortgages in the 65% to 80% LTV ratio range, which we estimate at 35% to 45% of (their) total residential mortgage origination, including insured and uninsured mortgages.”
    Rogers, for her part, expressed no such concern. She responded to the MP’s question by acknowledging only that the government’s rules are having a “disproportionate impact” on bank challengers. Her testimony made little effort to elaborate on the serious “side effects” noted above. Nor did she make an attempt to help parliamentarians grasp the extent of those repercussions on consumers and lenders.
  • On Refinancing: Rogers stated that the new rule landscape “doesn’t preclude any one lender from doing refinancing.” This was either a tacit admission that she/OSFI doesn’t understand lenders’ funding challenges, or refuses to acknowledge them in public. For as every mortgage professional in Canada knows, there are indeed lenders who have lost their ability to offer refinancing to their customers. Most can still do refinances but with a serious rate handicap versus the major banks. NBF estimates that MFC rates on 80% LTV purchases and renewals have had to rise up to 30 bps due to premium changes alone. We’re seeing 15-50 bps rate premiums on MFC refis. A 15-50 bps rate disadvantage cuts the knees out from most securitizing non-bank lenders, pushing volume into the arms of OSFI-regulated lenders. This is solely the result of a deliberate government agenda.
  • One-sided Stress Tests: Rogers failed to elaborate on how her agency chose not to apply the new “stress test” to uninsured low-ratio mortgages. OSFI’s decision has created an enormous bank advantage over MFCs (which must apply the test to all mortgages, or incur much higher funding costs). OSFI could have coordinated with the Department of Finance to apply the same test to banks. This would seem logical given the Bank of Canada’s public warning that uninsured mortgage indebtedness (e.g., the ratio of uninsured borrowers with loan-to-income ratios over 450%) was rising to concerning levels. OSFI and/or the Department of Finance consciously chose not to subject banks to the same standard as insurers and (by extension) non-banks.
  • On the Policy-maker’s Intentional Failure to Consult Non-bank Stakeholders: Albas said he was told by officials in October that the government chose to only consult with the likes of major banks, despite roughly 2 in 5 mortgages being originated by non-bank lenders. Rogers had no answer to why policy-makers failed to confer with industry experts before making such game-changing rules.
  • On the Regional Aspect of OSFI’s Rules: Rogers stated that OSFI’s policies “are regionally neutral.” How this can be true when the new capital requirements specifically use location in their formula is anyone’s guess.
  • On Higher Resulting Mortgage Rates: Rogers essentially disclaimed responsibility for hiking costs on consumers, saying “Pricing decisions belong to the lender. We (OSFI) don’t set prices. We set capital requirements. And if lenders and insurers choose to pass the capital requirements on to consumers in the form of higher prices, that’s a business decision and not a regulatory decision.” Meanwhile, considerably higher funding costs have ravaged certain MFCs’ businesses, with some lenders reporting a 30 to 50%+ drop in year-over-year volume. Why? Because they had no choice but to terminate products and jack up rates, thus harming consumer choice. OSFI and the Department of Finance knew this would result from their capital changes, or at least they should have.

Rogers’ testimony omitted the true impact that OSFI’s capital changes are having in the marketplace, contained statements that could be interpreted as misleading, and failed to provide any substantive evidence justifying her agency’s changes. She delivered this testimony snidely at times, at one point scoffingly commenting, “I might have guessed…that was the source…” after it was revealed that an MP’s concern was related to a worry from mortgage firm DLC.

This hearing will cast serious doubt on OSFI’s credibility and motives. For as CMHC CEO Evan Siddall has stated, the market consequences of the government’s actions were “fully intended.” The rule changes thus appear to have been purposely targeted and premeditated based on false (or at least questionable) pretenses.

Government officials said in their testimony that they want consumers and the industry to be resilient to future potential shocks. That’s a worthy and necessary goal. But, we all must remember that the prior system:

  • was a product of extensive prior rule tightening (over 30 new lending restrictions since 2008 alone)
  • held defaults on MFC’s insured mortgages to half that of the major banks (MFC arrears were a minuscule 14 bps, said the Bank of Canada in December)
  • limited prime mortgage arrears to a paltry 45 bps during one of the worst recessions on record
  • was mostly based on a level playing field among lenders, unlike today.

Despite all this, regulators once again failed to share any meaningful evidence that Canada’s prior time-tested regulatory system:

  • was immoderately risky
  • justified OSFI’s and the Department of Finance’s devastation of non-bank lenders
  • justified forcing hard-working Canadians to pay thousands more in interest.

In his questioning, MP Albas suggested policy-makers were “spinning” their position, to convince Canadians these rules are in their best interests, while simultaneously taking away critical financing options and raising costs on Canadian families. Rogers’ testimony did nothing to counter this charge. In fact, her statements demand legislators’ immediate scrutiny on her agency’s one-sided decisions, to confirm the unparalleled cost of those policies justify OSFI’s purported benefits.

Commentaries reflect the views of the author and not necessarily the views of this publication’s parent.

  1. Keep poking them in the eye and you’ll get direct regulatory changes through CMHC, instead of these indirect OSFI moves.

    Is that the way you want it to play out?

    1. We must have missed your rebuttal of the story’s facts, Tomas.

      Numerous diplomatic channels are being employed to slow the Department of Finance’s destruction of Canada’s world class housing finance system. We for one are done with diplomacy on this issue.

      The days when federal regulators got a pass for unjust policies — policies that will increase Canadian families’ interest burden to the tune of billions — are over. We won’t be poking unaccountable bureaucrats any longer. We’ll be driving a wooden stake of truth right through the heart of their misinformation.

      1. Telling them what you want is giving them a detailed road map on how to confound you.

        You’re going to worse off in June. Well played.

        1. Don’t worry, the Conservatives will hand Trudeau and Morneau their walking papers in 2 years. All the brain dead desk jockeys who made these rules will be out of jobs.

    2. Sad to see this comment appear. I always believed in Canada that our government should be afraid to wrong it’s citizens not the have the citizens be afraid to disturb our government. More to the point: we should stay quiet and hope the regulator will not do more damage? How has that been working out so far?

  2. This is the most important post of the year. This is the clarity that has been so necessary. Thanks to Rob’s detailed reporting and completely accurate analysis, mortgage brokers now have the knowledge they need to proceed. It is crystal clear there has been a decision made among regulators to curtail the business of MFCs and mortgage brokers. There is no longer any need to argue that point. It was not an accident, an oversight or a misunderstanding, this attack was intentional. It is time to forget about trying to convince regulators to change their minds when the regulator is willing to mislead a parliamentary committee with her testimony.

    Now the path forward is clear. Political pressure and advocacy must be applied directly MPs and Ministers to cause them to instruct the Regulators to reverse their positions. Our Associations must adopt policy and strategy to cause this political shift to occur. It will cost money, it will require great effort and it will take time but it must become JOB ONE at the association level. Everything else can take a back seat.

    Let us hear from the Boards and the Executives, whatever their plan has been till now goes out the window and pure political action must be adopted. There must be a plan developed that narrows the focus of our message to 2 or 3 key elements and then brings our case to the public in a way that will will ensure that politicians instruct regulators to reverse key rule changes .

  3. Thanks Rob. I appreciate the clarity and well written post. Crucial information at a time when clarity is required and for our industry to take action and communicate this to our MP’s. Many MP’s truly don’t understand this new logic and they must be educated like we do with our clients.

    I agree with Rob Butler’s response as well. We all need to take action and get this information to our MP’s, so that our voice is heard to affect real change. If we stand idly by as we have in the past, we threaten our competitive edge that we and our leaders of the past have fought so hard to attain over so many years.

    I’m sending this link to our MP’s at all of our locations and follow up with an appointment/phone call with them. Don’t be afraid to send to yours. They will take an appointment, as they represent You!

    Will you do the same?

  4. Very articulate article- Thanks Rob, The average Canadian is unaware of the impact the Governments rule changes will have on their pocketbook. The middle class – the one’s the government sought out last election, will see any tax advantage eroded by the decreased competition and higher lending costs- Perhaps its time to educate the public as well as the opposition parties as to what has taken place

  5. Rob I appreciate the direct approach and support that and try to shine the flashlight of truth where I can as well – though not as eloquently.

    Carolyn Rogers, it can be safely said, has been a controversial figure both in her role at OSFI, and previously in her role as FICOM’s CEO where, among other things, she impugned the motivation of thousands of mortgage professionals by directly questioning their ethics as it relates to compensation and the impact of that compensation on their advice to consumers.

    Rogers’ time at FICOM and now at OSFI has all the hallmarks of a big government interventionist that salivates over additional regulation. Her time at FICOM, at least at a distance, implemented the ludicrous compensation disclosure changes and the loss of self-regulation among real estate professionals.

    CMT’s interview with her from May 16th, 2011 (found elsewhere on this site) was an eye opener as she discussed all of the “problems” that the internet posed for brokers / consumers such as a lack of ‘face-to-face’ meetings. Ms. Rogers wouldn’t know an industry disruption if it ran circles around her and waved a sign. From the outside looking in it appears as though she has controlling tendencies and may not be open to adapting based on industry feedback, as your article indicates. In fact, this is a direct quote from her time at FICOM when implementing the new disclosure rules in BC: “We have reviewed feedback received from industry in response to the open letter sent in January and _______appreciate all the comments.________”

    Even Ms. Rogers’ comments on license reciprocity indicated she’s no fan of open, competitive markets: “At a general level, FICOM supports reciprocity; however, this support has to do primarily with removing labour mobility impediments __________rather than creating more competition amongst brokers and therefore better pricing to consumers. ___________”

    In another article Rogers indicated that she feels that consumers bear no responsibility for their choices, by saying “I don’t think we should put it on consumers to protect themselves…”

    Your points about Ms. Rogers’ apparent lack of awareness or industry consultation is not new. In an article in the Vancouver Sun, right before stripping the Real Estate industry of their right to self-regulation, she admitted that she had only visited a real estate association meeting twice over a span of six years, and that she “didn’t spend a lot of time focused on your sector”.

    Perhaps her time at RBC and the provincial credit union systems in Alberta and Saskatchewan before becoming a regulator gave her omniscience, or at very least, a bias towards the large incumbent institutions.

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