Regulators Deserve Praise…and Reproach



CMT has a long record of critiquing government rule changes in the mortgage business. It’s a check and balance on a bureaucratic system that sometimes “forgets” to consult stakeholders and discounts the consumer repercussions of its policies.

But it would be a mistake to misinterpret this as advocating for the status quo.

On the contrary, Canada’s mortgage regulators have kept our housing market from going completely off the rails. Specifically, they’ve been prescient and wise in reversing lax lending policies, including:

  • Zero-down insured loans
  • 100% rental financing
  • 95% insured refinances
  • 95% stated income financing
  • Insured interest-only financing
  • High-ratio HELOCs
  • Insufficient minimum credit scores
  • Inadequate documentation requirements
  • Qualifying high-ratio variable and short-term borrowers at inadequate rates
  • Allowing insured cash-back down payment mortgages
  • Unnecessarily high maximum debt ratios.

Policy-makers at the Department of Finance, OSFI, CMHC and the Bank of Canada should be applauded for their role in these measures. We don’t say that enough.

If needed, and I stress the phrase “if needed,” the government could take additional steps to cool overvaluation (in the few regions it exists) and improve borrower quality. It could do that by:

  • Raising minimum credit scores
  • Lowering maximum debt ratios for below-average credit scores
  • Lowering maximum debt ratios for low-equity borrowers
  • Incentivizing development and reducing developer red tape to alleviate the supply constraints (a central driver of overvaluation)
  • Publicly publishing individual lenders’ arrears rates
  • Adding new insurance surcharges for lenders with arrears rates in the worst X-percentile
  • Requiring more public data disclosure from default insurers (e.g., Why on earth does CMHC not disclose TDS buckets, like what percentage of its borrowers have TDS ratios over 40% and an LTV > 90%?)
  • Increasing insurance premiums on borrowed and gifted down payments.
  • Increasing insurance premiums and MBS guarantee fees where they are not actuarially sufficient (albeit they’re already more than actuarially sound in most cases).

There’s a lot that’s been done, and still a lot that could be done, to make Canada’s housing market safer.

But one thing that should never, ever occur is policy that penalizes low-risk Canadian families with higher borrowing costs. No one wins in that scenario. And that’s exactly what the regulators have done by:

  • steadily reducing the liquidity of, and access to, NHA-MBS
  • not maintaining CMB allocations adequate for lender needs
  • eliminating insurance on low-risk refinances
  • imposing capital requirements that are overkill in many cases
  • overcharging for MBS guarantees
  • eliminating long-amortization options for those who can qualify at a standard 25-year amortization
  • forcing insurers to charge surcharges in Canada’s most liquid real estate markets
  • restricting bulk insurance access
  • eliminating important securitization outlets for insured mortgages (e.g., ABCP)
  • limiting access to low-cost insured financing for low-risk borrowers with higher-value homes
  • not fostering covered bond access for smaller and mid-size lenders
  • hamstringing banks by keeping covered bond limits below internationally accepted levels
  • not fostering private RMBS markets sooner
  • promoting loss sharing, which (depending on how it’s implemented) could hammer the final nail in small lenders’ caskets.

…and this probably overlooks many more such myopic policies.

How lenders sell and fund mortgages has never been the problem in Canada. It’s bad mortgages that are the risk.

Without question, we owe it to taxpayers to keep government-backed mortgage exposure in check with judicious underwriting, and regulators have enforced just that (over-enforced in some cases).

But the government also owes it to taxpayers to use the AAA credit rating Canada has been blessed with to lessen families’ borrowing cost burden.

This doesn’t mean lenders should give fringe borrowers more options. Definitely not. Under-qualified borrowers should see their options further restricted, and soon. That’s how to create a safer mortgage market and slow overvaluation at the same time.

But never, ever, should policy-makers force a prudent 800-credit score borrower with 20% equity and a secure employment to pay more for her mortgage.

That’s exactly what’s happening today, because of a shotgun regulatory approach that shoots to kill consumers’ options, and asks questions later.

Canada’s mortgage regulators should be simultaneously: (a) applauded and (b) held accountable. Citizens constantly hear the former in carefully planned CMHC speeches, Department of Finance press conferences and Bank of Canada Financial Reviews, but there aren’t many people doing the latter.

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Comments

  1. Comment avatar

    Kyle Hansen    

    I agree with you 100%, Rob. I’ve been saying for a while that hopefully we’ll never know how close we got to a crash. Ideally the Canadian market is further than anticipated and they reduce or eliminate the measures introduced last year, and focus on more regional issues rather than a one-size-fits-all policy.

    An unfortunate side effect of further restrictions is that a crash in the housing market becomes a self-fulfilling prophecy as a result of pushing too many would-be good borrowers out of the market. I don’t believe we are at risk right now, but since the regulators are casually tossing around a myriad of further options (as you listed above) that may further eliminate buyers from the market, reduce competition, or a combination of both, we could see the negative effects of harsh policies fairly quickly depending on how severely they affect the market (see: Vancouver foreign buyers tax).

    I don’t think for a second that the regulators are out to ‘get us’, but a bit more forethought on how this will affect different segments of the housing market (new home buyers, for example) and some external consultation would do us all some good.

    Thanks for all of your contributions, Rob.

     
  2. Comment avatar

    whatdoiknow    

    Yes, they should be praised for doing”something”. However, by “something” about “something” that they didn’t know everything about….they end up penalizing everybody for the sins of the few.

    Tell me, when one is RENEWING their mortgage….why am I now penalized to accept a higher cost and limited options?. As someone with GREAT credit and income, why am I now faced with reduced options?

    Bottom line…the regulators and paper pushers did not have the solution…these are band aid approaches. The winners? Banks.

     
    1. whatdoiknow    

      Just curious….to those who voted with less than average for my comment (ahem)…tell me, what did I say that was NOT true?

      Again, it just points out how gullible some people are who lack critical thinking.

      Another perfect example of “smoke and mirrors” and the “band aid” approach of high priced paper pushers ….BC gov’ts planned downpayment “contribution” to “help” the housing drama!

      First…someone without any sense of operational and logistical capability thought this was a great idea! Then, they figured, we should spend millions in marketing dollars (paid by tax payers money) tell how great the govt is via TV and radio ads…

      Now, when you strip away the BS….is that plan really really really helping? Hint…Scotia wants to include that amount “borrowed” from the gov’t into the debt servicing!

      So….PM Trudeau or Clark…if you are reading this…there are solutions….too bad you guys are just surrounded by high priced no good think tanks.

       
      Comment avatar
  3. Comment avatar

    Ray McDonald    

    Outstanding article. Well-reasoned, articulate and concise.I hope someone up on Parliament Hill is listening.

     
  4. Comment avatar

    Reed Harris    

    I’m seeing the effects of this with almost every client right now. Most recently we can’t do an increase and blend at 25% LTV because the existing loan is bulk insured – so we have to break that loan because refinances are VERBOTEN. Client elected not to proceed. So no renovation, no debt payout. Client is clearly in a worse situation thanks to the feds latest nonsense.

    I’m not sure who is calling the shots in Ottawa right now, but they have properly broken our industry. Have you seen the latest rate sheets from non-balance sheet lenders? Complete insanity.

    My prediction is the non-balance sheet lenders are belly up within the year. You can’t survive on insured purchases alone. And you’re not going to fund anything with a 20bps rate premium at 80% ltv.

    The liberal touch. The opposite of Midas.

     
  5. Comment avatar

    Alec Smecher    

    This post seems like a belated response to my criticism back in June that CMT was not proposing constructive reform, but frequently condemning change, and thus appeared to be lobbying for the status quo:

    https://www.canadianmortgagetrends.com/canadian_mortgage_trends/2016/06/banks-call-for-higher-down-payments.html

    This is the first time I can recall reading acceptable possibilities for reform here — however reticent — and I’m happy to see them.

    Meanwhile, as an interested layperson I continue to broadly support the government’s reforms. And read the reaction here with interest, so to speak.

     
  6. Comment avatar

    Dawn    

    Great Article Rob, I am sure that most consumers are not aware of the massive changes that were made. But since the Government is Mandating more policy on Lending, perhaps they should now mandate Mortgage Penalty guidelines against the massive posted mortgage rate of interest the large banks are using to calculate penalties when owners must sell their home now that they cannot refinance. Who pays posted Mortgage Rates Anymore? This affects anyone that owns a property on Native Land, Mobile homes in parks, Age Restricted Condo Complexes and likely that Beautiful Log Home that is not widely accepted for Financing. NO Refinances are affecting a lot of normal folks that the Government has forgotten about. Think about a home renovation project in one of these situations- no you cannot refinance your home to get the funds you need to make your home more suitable for an aging owner. Thank you for being a sound voice for the Mortgage industry and our clients that do not understand why.

     
    1. Robert McLister    

      Many thanks Dawn (and everyone) for your posts.
      Rates aside, there are certainly special situations where insured refis were practically mandatory, and are now no longer available.

       
      Comment avatar

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