Note: This editorial piece was previously published on RateSpy.com. It is being reprinted with permission due to the important and timely issues raised.
Rarely have the heads of Canada’s housing agency and largest mortgage broker association been at such odds publicly.
It feels like CMHC boss Evan Siddall and Mortgage Professionals Canada (MPC) chief Paul Taylor want to get in the ring and beat the stuffing out of each other.
The former published his latest in a series of missives denouncing opponents of the mortgage policies he endorses. Among other condemnations, Siddall accuses Taylor of “bold” self-interested rhetoric and “reckless myopia.”
Taylor responded, telling the Globe and Mail, “Trying to suggest that folks that I represent, who are customer service professionals, are doing anything untoward, or outside of the wishes of the consumers they serve, is frankly misguided.” He told BNN today, “[MPC has] never been opposed to a stress test…” They just want it reduced.
But the truth is, neither party has faultless intentions in this fight. And neither are promoting optimal mortgage policy that’s in the best interest of Canadians.
Here’s an overview of their slugfest…
Round 1: Stress Testing & the Economy
The Issue: Whether easing the stress test on homebuyers is worth the risk.
Why: Research he cites (from one of his favourite books) documents how “the combination of high house prices and elevated debt [leads] inexorably to reduced future economic growth.” Studies suggest that two-thirds of banking crises are preceded by real estate boom/bust cycles. Canada has record-high debt. Canada has booming housing valuations. Draw your own conclusions.
Affordability is also at stake. Siddall is dead right that drastic overvaluation creates financial stability risk. Weakening the stress test now would support home prices at a time where supply can’t adjust fast enough. The risk isn’t worth the reward given national home prices aren’t plunging.
But even if you discount all these factors and simply point to the lost benefits of homeownership, the fact is Canadians will adapt to the stress test. In time, today’s shut-out buyers will enter the housing market after saving bigger down payments, getting a raise or getting a co-borrower. Prices will then go right back up.
Hence, the stress test, as applied to those taking on new debt, appears to be a necessary tradeoff from a risk mitigation standpoint. We fully support policy-makers on that point.
Round 2: Stress Testing Renewals
The Issue: Whether borrowers switching lenders to get a better rate/terms should be stress tested—given the stress test doesn’t apply if they renew with their existing lender.
Why: The new qualification rules are having a profound impact on some borrowers. Just yesterday, the country’s biggest mortgage lender (RBC) reported record highs in customer retention at renewal. That’s no accident.
The reasons Siddall provides are:
(1) “OSFI doesn’t want to stimulate competition among banks for weaker credits,” and
(2) “…Underwriting standards must apply.”
Reality paints a truer picture:
- For one, it’s pure bullhunkey to characterize renewers as “weak credits.” The best proof of creditworthiness is a track record of paying a mortgage as agreed for years. That, provable income, excellent credit, an up-to-date property appraisal and proof one can afford their actual payments (based on a 5-year fixed contract rate) all mitigates significant risk of default.
- People who renew with their existing lender undergo virtually no underwriting to ascertain risk other than basically a credit report review, an automated property valuation (in some cases) and payment history review. By contrast, those who switch lenders undergo rigorous underwriting before they can ever qualify for a new mortgage.
- Siddall assumes lenders will not adequately price risk when the borrower’s case warrants it. He suggests that lenders may give away the farm to people who don’t pass the 2018 stress test. Both are utterly baseless assumptions that assume the government is better equipped to set rates than the lenders taking the risk.
- Siddall acknowledges what industry folks all know, that lenders will re-price non-stress-test-compliant renewers (read: increase their rates, especially since they’re held captive by the rules). What he overlooks is that forcing higher rates on more indebted, but still creditworthy borrowers, increases default probability. Any micro-economist will tell you, raising the interest burden on high debt-to-income borrowers is a problem waiting to happen.
Round 3: Consumption Risk
The Issue: Whether future consumer spending would suffer if the stress test rate was reduced.
Winner: Not Siddall
Why: Evan Siddall states, “The consumption on which our future economic prosperity rests (58% of our GDP) is already spent. Our future spending is sustained only if we borrow more.”
That’s what economists call economic fallacy. And frankly we’re worried to hear it coming from a CEO hired to assess the nationwide impacts of housing policies.
Siddall does rightly point out the vast surge in consumer debt, which worries us like everyone else. What he fails to acknowledge are long-term increases in home values, which largely offset debt and built wealth.
Of course, the air will eventually come out of the housing and debt balloons, which is why we support a stress test on those increasing their debt load. But home prices will still rise over time regardless. If 150 years of data is worth anything, it’s highly likely that real estate values will grow faster than inflation over the long run.
Will there be deleveraging and consumption slow-downs? Absolutely. But to ignore income growth and future equity growth and argue that consumer resources are already “spent” simply doesn’t add up. And lest we forget, homeowners overall have 74% equity on homes averaging $494,978.
Round 4: Slowing Home Prices
The Issue: Whether government should create policy to restrict home price appreciation.
Why: Siddall states, “We need to be deliberate to avoid further inflating house prices.” Meanwhile, two in three Canadian families own a home and rely on their home equity. Indeed, the economy itself relies on rising home equity.
He adds, “High house prices are the overwhelming reason why home ownership is out of reach.” We have a hard time with that. It’s like saying high milk prices are the overwhelming reason why more people don’t drink milk. The fact is, prices are high because of:
A) long-term trends (urban migration, international migration, foreign investment, falling mortgage rates, etc.), and
B) government intervention
As with milk prices, home prices have been higher than necessary because of government action (or inaction). Besides things we can’t control (e.g., interest rates), we’re talking mainly about:
- the absence of significant CMHC-led initiatives to create housing supply for the middle class
- Particularly in high-demand regions
- over-restrictive land use policies
- policies supporting relentless immigration
- Which fuels inorganic demand
- mortgage policies that were too generous to too many borrowers
- Research shows that greater mortgage flexibility is economically positive, but mainly for above-average quality borrowers. It was CMHC, for example, that offered zero-down 40-year amortizations to borrowers with below-average credit scores. That unnecessarily stoked demand in an increasingly supply constrained market.
So yes, policies that fuel more price appreciation aren’t helpful at the moment. But once the government does its job to foster more supply, price inhibitors could be economically detrimental.
Round 5: First-Time Home Buyer Incentive
The Issue: Whether the FTHBI is sound policy.
Why: The FTHBI, as presented thus far, won’t help anyone afford a home (i.e., qualify for a mortgage). CMHC keeps advocating for more affordability but, based on what CMHC has disclosed, buyers would have more purchasing power if they don’t use the program.
The main FTHBI benefits appear to be: (A) saving borrowers interest in exchange for giving up price appreciation, and (B) sheltering borrowers from a fraction of their losses if home prices dive.
But it could be very complex and costly to administer. Barring the revelation of new benefits (CMHC is still adjusting the program), it looks like a case of more government spending and bureaucracy for minimal reward. For full details, here’s the Spy’s prior story on the First Time Home Buyer Incentive.
We’re All Biased
Everyone’s got their angle in this fight, so we’re calling it a split decision. But Siddall’s censure of the housing industry would have the uninitiated believe he’s the moral one and home builders, real estate agents, mortgage brokers and economists are all too biased to be trusted.
Some of MPC’s policies, like rolling back the stress test on homebuyers and adding 30-year amortizations, make critics wonder if all of their motives are really in the nation’s best interests.
But while we disagree with those two proposals, MPC has other valid points that are no less valid simply because they’re in the business. One example is de-linking the stress test from bank posted rates (which has now become clearly necessary given the travesty we’re witnessing with banks keeping posted rates artificially high). Another example is exempting lender switches from the stress test when borrower risk is not increasing.
CMHC and the Department of Finance have stabilized the Canadian housing market, which is to be applauded. But regulatory side effects create unnecessary pain every day for hundreds of thousands of families.
Moreover, brokers argue the government’s repeated failure to consult industry on key policy changes (which could have avoided multiple policy mistakes) is evidence of how these civil servants think they have all the answers. That hubris has failed Canadians, they charge.
Any way you slice it, this new war of words from Siddall is unhealthy. By alienating the mortgage industry and attacking its credibility, CMHC is implying it won’t seriously weigh conflicting viewpoints. Policy-makers who don’t assess all evidence are destined to make sub-optimal policy, and destined to ultimately lose their jobs — especially if there’s a new government.
Holier Than Thou?
Siddall proclaims, “…Heed the consistent views of those of us who are unconflicted.”
But people who are unconflicted and worth heeding generally don’t have to tell people they’re unconflicted and worth heeding. It’s kind of like when President Trump says, “Belieeeve me…You can trust me on this.”
More to the point, how many unconflicted officials:
- repeatedly launch ad hominem attacks against opponents in press releases (sorry, speeches and op-eds)?
- One of the weakest ways to argue is by asserting your opponent must be wrong because of who they are. That fails to establish truth because it fails to evaluate the actual arguments on their merits.
- defend policies despite a sheer absence of logic?
- e.g., Despite the regulator’s smoke and mirrors justifications, there is simply no justifiable grounds for stress testing people who switch lenders but not stress testing people who stay with their lender. The cost of this policy to consumers is demonstrably greater than the purported benefit to the system.
- publicly accuse banks of taking no risk?
- “I doubt they’d be as cavalier if it were their risk,” Siddall rebuked. Meanwhile, Canadian banks are some of the most onerously regulated, overcapitalized and relentlessly scrutinized in the world — by regulators, default insurers, media and investors. Any lender that has outsized arrears (e.g., a mere 15-20 bps above average) attracts the wrath of those parties. Every lender assumes significant risk of loss with each mortgage it writes (even insured mortgages). No one gets ahead in this industry by taking underwriting shortcuts.
This latest attack by CMHC’s CEO suggests he may not be as objective as he’d like the public to believe. One has to wonder if he’s cracking under all the criticism, or being asked by his friend and Finance Minister Bill Morneau to take heat off Liberal housing policies.
We don’t want to slag Siddall too badly (okay, too late). After all, he’s done some good for the housing market and we respect that. But here’s the truth. Siddall has very publicly hitched his wagon to the stress test and First-Time Home Buyer program. Anyone who successfully challenges B-20 and the FTHBI puts his credibility at risk. That’s why this new level of defensiveness is unexpected, but not shocking. Whatever is prompting it, publicly rebuking the mortgage industry for “self-interest” is unprofessional, unproductive…and hypocritical.
Sidebar: One last quick point of fact. It was stated that “the mortgage interest rate stress test…was first introduced in 2010.” Laypeople might take that to mean there was no stress test before that. That’s false. Stress tests have been around for decades. Long before it was regulation, lenders routinely stress tested variable-rate and 1- to 2-year fixed borrowers at higher 3- or 5-year fixed rates.