Evan Siddall, CEO of the Canada Mortgage and Housing Corporation, is calling on lenders and mortgage default insurers to tighten underwriting and qualification standards for the sake of the economy.

Siddall made the plea in a letter to CMHC-approved lenders and the country’s other two mortgage insurers. Contents of the letter were first leaked to Bloomberg on Wednesday, following which Siddall released the letter in its entirety.

The issue stems from CMHC’s decision earlier this year to tighten its underwriting policies on July 1 for high-ratio borrowers, including increasing credit score requirements and lowering debt servicing limits. CMHC implemented these changes alone, with no requirement for its competitors—Canada Guaranty and Genworth Canada—to do the same.

As a result, CMHC has experienced a loss in market share as mortgage deals that no longer qualify for CMHC insurance are now being sent to the other two insurers. Industry insiders say lenders are now sending more deals overall their way as well.

“There is no doubt that we have willingly chosen to forego some profitable business that our competitors would find appealing,” Siddall wrote, adding the CMHC is “approaching a level of minimum market share” required to be able to protect the market in times of crisis.

“While we would prefer that our competitors followed our lead for the good of our economy, they nevertheless remain free to offer insurance to those for whom we would not.”

He continued, “Please put our country’s long-term outlook ahead of short-term profitability.”

Siddall Accused of Fearmongering

Some industry experts responded by criticizing Siddall’s choice of wording, particularly when he referred to a “dark economic underbelly to this business that I do not want to expose.”

“I think the type of language that is used in this letter is really only serving to drive fear in some instances,” Paul Taylor, President and CEO of Mortgage Professionals Canada, said during an interview on BNN Bloomberg. “We should be thinking about the long-term economic prospects of Canadians here.”

Taylor challenged Siddall’s assertion that lenders are taking on undue risk in their lending practices.

“Quite a lot of lenders feel that they are already prudently managed. We have not been issuing loans indiscriminately in Canada,” he said. “We definitely do have some macroeconomic challenges ahead, for sure, but I think they’re quite overstated, frankly, in Mr. Siddall’s letter.”

Rob McLister, founder of RateSpy.com, agreed, telling BNN that insurers and lenders are already being “extremely conservative” in their underwriting practices.

“Nobody wants to take a house back,” he said. “No lender or insurer wants to lend such that their arrears rate is noticeably above average, because then they stick out and bad things happen. The cost of capital goes up (and) regulators clamp down. There are so many incentives that people don’t understand in this business to keep lenders doing the right thing.”

The Mortgage Stress Test is Part of the Problem

Another of Siddall’s key arguments, and one he’s made consistently during his term as head of the CMHC, is that Canadians are taking on too much debt, which could ultimately put the entire economy at risk.

In his letter, he said the Bank of International Settlements shows national household borrowing above 80% of gross income intensifies the drag on GDP growth, and that Canada is now approaching a ratio of 115%.

“It is CMHC’s responsibility to reverse this trend,” he wrote.

But others argue there are other factors at play other than “risky” lending, as Siddall asserts.

“…debt ratios are high because of two main things. Number one, CMHC and policy-makers dropping the ball with respect to generating housing supply,” McLister told BNN. “There’s not enough housing supply for middle-class Canadians who need houses. Number two, the debt ratios are high because they’re being stress tested.”

He noted homebuyers with an average market rate of 1.99% today for an insured 5-year fixed mortgage now have to prove they can afford a rate 280 basis points above their actual rate, or 4.79%.

“That is unrealistic, it’s unnecessary, and it’s why debt ratios are so high.”

Taylor echoed concerns about the mortgage stress test being materially higher than today’s contract mortgage rates.

With CMHC’s tighter underwriting rules, he said they’re “effectively telling consumers they can only use 28% of their income to service a mortgage and own a home. I’ll bet you there are a lot of renters across the country that are paying significantly more than that.”

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Last modified: August 13, 2020