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regulatory witch hunt

Commentary: Another Regulatory Witch Hunt?

CMHC head Evan Siddall made a comment last fall that has credit unions worried.

“CMHC will be seeking data from securitization program participants on their uninsured conventional mortgage lending,” he said. That information could result in “changes” (read, new rules) to the rulebook that approved non-federally regulated lenders—like credit unions—must abide by.

Recently, I asked a top CMHC official if the agency would use its leverage as NHA securitization gatekeeper to essentially sway credit unions into using OSFI’s stress test. He replied, “All options are on the table.”

A CMHC spokesperson says the concern is over “growing risks in this segment of the market, including higher loan-to-income ratios and a high number of 30-year amortizations.”

That’s interesting, because CMHC has a long history of working with such lenders. It should already know the fundamentals of their mortgage books given that its job is to limit the agency’s (and taxpayers’) risk.

It’s hard to imagine CMHC’s “information request” turning up anything significant that it doesn’t already know, or should know.

That’s got many a credit union wondering if this is just a ploy for CMHC to force B-20 and other rules down the throat of non-federally regulated lenders—by threatening to limit their access to government-sponsored funding (funding that has been safely lent out for decades under credit unions’ existing prudent underwriting policies).

CMHC CEO Evan Siddall Siddall would seemingly love (directly or indirectly) to exert more control over provincially regulated lenders. He says that while “…we would hope provincial regulators would act accordingly, we cannot compel them to in respecting their jurisdiction.”

A source at CMHC says, “This information request will allow us to determine if changes are needed to our Approved Issuer Framework to manage contagion and CMHC’s guarantee risk.”

Contagion from credit unions’ lilliputian non-conforming mortgage volumes? What risk is CMHC referring to exactly? Is it the risk on:

  • Insured mortgages that CMHC has already underwritten itself?
  • Insured mortgages that CMHC has already collected steep default insurance premiums on?
  • Securitized mortgages that CMHC has already collected ample guarantee fees from credit unions on?
  • Uninsured mortgages that credit unions already charge risk premiums (rate surcharges) on?
  • Uninsured mortgages that credit unions are already underwriting with greater rigour, thanks to closer provincial regulator oversight? (We all know too well that provincial regulators who don’t impose OSFI’s policies are not about to let credit unions’ underwriting deteriorate and put their jobs and the public’s trust on the line.)

There is no boogeyman in credit unions’ uninsured mortgage lending closets, definitely not system-wide. Regulators know as well as anyone that credit unions are sound underwriters (compare their arrears versus the banks) who have always lent more carefully because they don’t have billions and billions in capital to fall back on like the Big 6.

Credit unions are not too big to fail. And meaningful credit unions almost never fail (the Canadian Credit Union Association says it’s unaware of any credit union failures going back to 1980.). Moreover, their balance sheets are tiny in comparison to mainstream lenders.

In the one in a 100+ chance that a CU does goes under, CMHC would feel barely a spec of pain. CMHC’s sky-high premiums and $17.5 billion in equity are more than sufficient to weather multiple CU failures—all at the same time.

The overwhelming majority of provincially regulated credit unions represent no more threat than former CMHC-approved MBS-issuer Maple Bank represented when it failed in 2016. So for the sake of borrowers—who desperately need the common sense prime lending that only credit unions now provide—here’s to hoping this witch hunt (if it is one) conjures up no witches, imagined or otherwise.


Views and opinions expressed in our Commentary section are those of the author and do not necessarily reflect the official policy or position of this website.