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Thumbs down for Canadian Mortgage Charter

Brokers react to the government’s “nonsense” mortgage charter

The Liberal government last week unveiled a “new” Canadian Mortgage Charter aimed at ensuring lenders offer relief to mortgage borrowers who are struggling to make their payments.

But it may not be getting the reaction they had hoped for.

Some in the industry have been forthright in their assessment of the charter’s principles, calling it “nonsense,” “political theatre,” and “much ado about nothing.”

As we reported last week, the charter has largely re-packaged the same guidelines that were issued in July by the Financial Consumer Agency of Canada (FCAC):

In a social media post, Ron Butler of Butler Mortgage called the charter “mainly nonsense” and “just old news repackaged for added political theatre.”

“This is much ado about nothing,” added Tyler Hildebrand, a mortgage broker with Saskatchewan-based oneSt. Mortgage. “Most of these things—the reasonable ones anyways—are already in practice at most lenders.”

The country’s national mortgage broker association, Mortgage Professionals Canada, echoed comments that there was little in the way of new initiatives included in the mortgage charter.

“When it comes to the Canadian Mortgage Charter broadly, it codifies mostly pre-existing measures to better protect mortgage holders who are facing significant financial pressure due to higher rates, particularly with a wave of renewals coming,” said MPC President and CEO Lauren van den Berg.

“Coupled with the federal government’s investments to increase housing supply and rental stock, the Fall Economic Statement is a step in the right direction,” she added. “However, more needs to be done to improve mortgage and housing affordability.”

Separating fact from fiction: what you need to know about the Mortgage Charter

Below we’ve taken a closer look at some of the misconceptions about the mortgage charter and why some in the industry see some of the guidelines as being problematic.

Did the government make changes to the mortgage stress test?

No, there were no new changes made to either the mortgage stress test on insured mortgages (those with a down payment of less than 20%), which is the responsibility of the Department of Finance, nor to the stress test on uninsured mortgages (those with a down payment of 20% or more), which is under the purview of OSFI.

However, anyone who has been scrolling through TikTok or read some of the headlines in the national media over the past week may have been under a very different impression, since many reported “changes” to the mortgage stress test:

The confusion stems from the government’s inclusion of the following as part of its charter: “Not requiring insured mortgage holders to re-qualify under the insured minimum qualifying rate when switching lenders at mortgage renewal.”

As we reported last month, those with default-insured mortgages have never been required to re-qualify under the mortgage stress test when switching lenders. This has been the case ever since the stress test for insured mortgages was introduced in 2016. It had largely been unknown to most in the mortgage industry, except for several lenders, until an OSFI report drew widespread attention to it in October.

Commenting on the mischaracterization of the guidelines on both social media and in the media, mortgage broker Dave Larock told CMT it illustrates the value mortgage brokers can provide in helping consumers properly understand today’s mortgage rules and regulations.

“There’s a lot of false information and it’s incumbent upon us to dispel those misunderstandings and to explain to people how things really work,” he said.

Asked if he believes there is more misinformation about the nuances of the mortgage industry today compared to the past, Larock said this “lack of understanding is an ongoing problem.”

“It rears its head at times like this, because when the profile of our industry increases, and when there’s something topical that’s in the mainstream media, it becomes more apparent,” he said.

Hildebrand agrees that it’s at times like these that brokers can prove their value by cutting through the noise.

“The process of applying for and obtaining the right mortgage is dramatically more complicated and confusing for the average borrower than it was in 2008 when I entered the industry,” he said. “For the vast majority of borrowers, it is more important than ever to work with a team of experienced and trusted advisors.”

Does the Mortgage Charter have any legal backing?

No, the Canadian Mortgage Charter guidelines have no legal backing and should instead be viewed as recommendations from the government to lenders in how they deal with borrowers who experience financial difficulty.

“Charter is a powerful word in Canada, but everything in this charter has no legal standing,” Larock told CMT. “They didn’t enact any laws…It’s entirely performative. It’s basically an open public letter to lenders.”

In a note to clients, broker Ryan Sims added that while some of the policies “might at the margin help some people,” the key drawback is that the charter is entirely voluntary.

The big banks “are not required to participate, nor even enrol in it,” he wrote. “This means that the entire program really has no teeth to it.”

Can lenders waive prepayment penalties?

There’s also been criticism of principle #5: “Giving homeowners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties.”

“The idea that a prepayment penalty could or would get waived is almost comical,” Hildebrand told CMT. “Banks do not waive consequences for breaking contracts. The investors that fund the vast majority of mortgages in Canada are certainly not going to waive penalties on bond contracts.”

Contacting borrowers 4-6 months before their renewal deadline

Some also say that guideline #4 does little for the borrower. Butler noted that most lenders do this already.

“But here’s the stupid part: if a bank offers a rate six months in advance, you would need to accept renewal THEN—6 months early or the bank would have to put a 6-month hedge on the rate, very expensive,” he wrote. “There is ZERO financial advantage to the borrower.”

What constitutes a “vulnerable borrower?”

While the Mortgage Charter guidelines are meant to set standards for how lenders respond to “vulnerable” or “at-risk” borrowers, the government does not provide a specific definition as to when a borrower would fit those descriptions.

In its own guidelines, the Financial Consumer Agency of Canada (FCAC) defines “consumers at risk” as “natural persons with an existing residential mortgage loan on their principal residence who are experiencing severe financial stress, as a result of exceptional circumstances, and are at risk of mortgage default.”