In what must have felt like walking into the lion’s den, CMHC head Evan Siddall addressed concerns about recent regulatory changes in front of a crowd of over 1,000 mortgage professionals on Monday.
Siddall attended Mortgage Professionals Canada’s annual conference in Montreal, answering questions posed by President and CEO Paul Taylor.
The discussion revolved around federal mortgage rule changes, primarily the new stress test introduced as part of the revised B-20 guidelines.
“One thing I think we do well, and some of you may think we over-rotated on this, is maintain a healthy housing market and help avoid financial crises,” he said. “My view is that we have a much healthier housing system and a richer market for [brokers] to operate and compete in than we would have had had those changes not occurred.”
Though he assured the audience that “we’re not in a big rush to make more changes.”
Siddall addressed a range of topics during the Q&A-style talk. Here is a selection of some of his most pertinent comments:
On a Rising Stress Test
With the stress test based on the Bank of Canada’s qualifying rate (currently 5.34%), which increases as interest rates rise, Siddall was asked whether changes may be required given the current rate hike expectations for the year ahead.
“I’m actually sympathetic to this view that as the rate structure changes, the premium may need to change. I get that argument economically,” he said. “(But) the frustrating thing about government is changes take a long time. In the private sector if you make a mistake or change your mind, you just change it. Well, it’s not that easy in government.”
On Credit Unions
Siddall touched on the inequality in the market with private lenders and credit unions falling outside the purview of B-20.
“Mortgage Finance Companies like MCAP and First National and federally regulated financial institutions are B-20 compliant, 42%-ish of credit unions are not,” he said. “That means the playing field is tilted. We just don’t know if that matters or not, and if it does what we’re going to do about it. But I’ll say that tilted playing fields are not good. The cost of levelling that playing field may not be worth the effort, but we’ll share that information (publicly).”
Taylor noted that credit unions argue they are regulated provincially, and that if their underwriting is more lax than B-20, “ultimately their own funding is going to make them change their mind as time progresses or they pick up more market share that they might not necessarily want.”
“If we let the market decide then we shouldn’t have made B-20,” Siddall replied.
On the $1 Million Insurance Cap
Given that CMHC no longer provides mortgage insurance for homes valued at more than $1 million, and the fact the average price of a single-family home in Toronto and Vancouver is now more than $1 million, Siddall was asked whether an inflationary adjustment might be considered.
“I don’t think it’s a crazy discussion to have, whether that million-dollar cap makes sense over time with economic growth and all that. But again, changes in Ottawa are hard to come by,” he said. “If we’ve got inflated prices in Toronto and Vancouver, on the one hand we don’t want to encourage it, but on the other hand we can’t ignore it. So that would mean looking at that threshold has logic.”
On Refi Restrictions
On the current refinancing restriction, which prohibits refis on insured mortgages, Siddall said this: “The simple philosophy is does the government want to provide an incentive for people not to equitize their homes, which is kind of what refi is in general. In general, we do not want to use the government balance sheet to support that. And that was the decision that was made by the minster of finance.”
“On the other hand if we get in the way of capital formation—entrepreneurs using their home to help grow businesses, then maybe there are edges on the margin we should look at. But I would say to you writ large, I don’t think that we would want to move that threshold.”
On the #1 Market Risk
Asked what he sees as the largest risk facing the mortgage and housing markets, Siddall replied: “The true answer is I think we’ve got a really stable system,” in part because mortgage brokers “advise [homebuyers] really effectively on making wise house-purchase decisions.”
He noted that unemployment is by far the largest driver of defaults and foreclosures, and that of all market segments, highly indebted first-time buyers pose the largest risk.
In a recent CMHC consumer poll, 40% responded that they don’t feel they have the liquidity to withstand a housing price downturn. “They get over that in two to three years, but those are the people we are really worried about,” Siddall said. “That’s really what the stress test is all about, it’s about that particular group.”
Edit: This story has been updated to correct a previous inaccuracy regarding refinance restrictions.