CMHC’s Siddall on the Hotseat: Commentary – Part II



Below is the second and last instalment of our commentary on the February 13th testimony to Parliament by CMHC’s CEO. (See part I here)

In that hearing, Evan Siddall argues that the new rounds of mortgage insurance rules were necessary and their side effects were fully intended.

His supporting data for his assertions comes under fire, however, with one opposition MP claiming regulator arrogance was behind the rules and their hasty implementation.

Here are Siddall’s positions in his words, with some “alternative” viewpoints.


Siddall on whether the feds targeted Toronto & Vancouver

“…The October 3 changes were not targeted at escalating house prices in the Toronto and Vancouver markets.” There is “strong evidence of problematic conditions in the Canadian housing markets as a whole” and high indebtedness is a problem “across the country.”

Counterpoint:  CMHC notes that strong overvaluation exists in just four census metropolitan areas (CMAs) that it tracks—Toronto, Vancouver, Hamilton and Quebec City. There are 35 CMAs nationwide. Folks with high mortgage-debt-to-income are found mainly in three metro areas (Toronto, Vancouver, Calgary), says the Bank of Canada. Interestingly—Toronto and Vancouver excluded—Canadian mortgage payments are about 24% of median family income (i.e., reasonable). And despite the popular misconception, “The majority of consumers are actually decreasing their debt,” says Equifax. So we have mainly regional extremes exacerbated by a minority of debt-addicted consumers. Yet, the personal finance police in Ottawa claim that spiraling debt is a plague so nationally ingrained as to demand immediate blanket mortgage policy—policy that depresses the majority of already-stable real estate markets and strips all homeowners coast-to-coast of low-cost financing options.

Siddall on who’s impacted by the new stress test:

The stress test on borrowers ensures people can withstand higher rates, Siddall stated. It “will impact only borrowers who are or who would be highly indebted following the purchase of their house, regardless of where they live.”

Counterpoint:  The numbers don’t bear that out. Consider a family earning the average income, with average consumer debt, buying the average priced Canadian home with 20% down. If that family is qualified on a 5-year fixed contract rate, their total debt service ratio is under the 40% traditional guideline. This is not highly indebted.

Impose a 4.64% qualification rate, however, and suddenly they’re above the 44% TDS maximum, they no longer qualify for that same mortgage and they are now “highly indebted.”

With respect to the stress test, Siddall was silent on another key point. The stress test now makes it impossible for many Canadians to switch lenders and get the lowest possible rates. Why? Because some non-bank lenders—which used to offer the lowest conventional rates in Canada—must now upcharge if a borrower is even 0.00001% above the 44% TDS limit, which now happens all too often.

Siddall on Canada’s “high” homeownership rate:

“…We have among the highest homeownership rate at 69%.”

Counterpoint:  Canada is actually well down the list. In 28 countries of the EU, for example, the average homeownership rate is 70% and one-half have rates of 75% or more. (My thanks to economist Will Dunning for noting this data.)

Siddall on killing insured refinances:

“There were a number of business models that were substantially based on…refinancing.” Refinances are “not a housing need…that is a housing want…and still is freely available in the public markets but to the extent there is government support for it, that didn’t strike us as something the government should be supporting…“[Mortgage finance companies’] business has dried up because the government was involved in a market providing stimulus and the Minister of Finance decided to remove some of that stimulus.”

Counterpoint:  Those “business models” Siddall refers to were keeping rates competitive for all responsible well-qualified Canadians. Those “business models” were effectively regulated by multiple sources: OSFI, CMHC and the lender’s aggregators. Those “business models” have consistently maintained arrears rates of half of those at regulated banks, with even higher-credit-score borrowers than the big banks.

(OSFI does not directly regulate mortgage finance companies. But it does require bank mortgage funders to strictly enforce OSFI underwriting rules on these lenders.) 

Siddall on the evidence that portfolio insurance needed to be eliminated for refinances:

“The evidence is in economic crises throughout history, for the 46 financial crises for which we have data, the overwhelming majority of those (70%) were preceded by housing boom and bust cycles,” said Siddall, quoting from this book, which he cited as “evidence” justifying the portfolio insurance changes. (Economist Will Dunning challenges Siddall’s conclusions from that book here.)

“We were jeopardizing the economic future of Canada by promoting an economic cycle in housing markets that could result in a crash and unemployment for people.”

Counterpoint:  Did anyone notice that Mr. Siddall did not answer the question? That question was: “What evidence of risk was present to eliminate portfolio insurance on refis and rentals where there was a delinquency of 0.24% in the current portfolio?”

Another question also needs answering, and that is:  Would it not have been possible to preserve financing options and keep refinance costs low for well-qualified borrowers, while raising qualification requirements to weed out risky borrowers?

The implication that most refinancers are debt-crazed maniacs is absurd. MP Dan Albas mentioned, “Part of refinancing allows for people to be able to invest in their small business, it allows them…to survive a lockout or a strike…it allows them to be able to purchase a home from a spouse because of a divorce.” Canada’s federal mortgage guarantee promotes refinance options and maximizes interest savings for well-qualified homeowners, folks who essentially present zero, zitch, zippo risk to taxpayers. And that risk is carefully monitored and controlled because our lending overlords, CMHC and the Department of Finance, strictly enforce their own guidelines on lenders and borrowers.

Siddall on the Financial Crisis:

“I wouldn’t suggest that the financial crisis as it applied in Canada was a true stress test…We published stress tests that are far more aggressive than that…I would suggest that a single-digit decline in house prices is not a crisis.”

Counterpoint: A 3-point unemployment surge and one of the worst global recessions of all time is nothing to scoff at. But more interesting were the severe employment shocks in the 80s and 90s. Canada’s mortgage market weathered those economic disasters admirably.

But that’s not all. CMHC’s own “far more aggressive” stress tests show that CMHC could withstand conditions more hideous than the U.S. housing apocalypse, and not even run out of capital, and that was before the Finance Minister’s latest draconian insurance and capital tightening.

Oh, and Alberta’s unemployment just hit a 22-year high. Arrears there are currently just half their post-recession peak (albeit they’ll climb a bit more).


Source: tradingeconomics.com

Siddall on what keeps him up at night:

“The problem we worry about most…is unemployment.”

Counterpoint: MP Ron Liepert responded on this point, telling Siddall, “We have a situation in Alberta where we’ve gone through two years of job losses unprecedented in this country and foreclosures have barely changed. So how do you justify what you recommended to the minister based on exactly what’s been happening in Alberta for the past two years?”

Siddall on why low arrears don’t matter (enough):

“People in Canada will determinedly pay their home so the fact that our arrears rates are low is worrisome in the sense that someone will save their home by not buying a car, by not buying a fridge, by economizing on their groceries…What that does is it reduces consumption, and when we reduce consumption we reduce economic activity, and when we reduce economic activity someone loses their job. And that is what we’re concerned about.”

Counterpoint:  CMHC’s own data suggests just 1 in 5 borrowers have a GDS ratio above the traditional 32% guideline. So if those people are the problem, why not target them, remove them from the market and leave options for the remaining majority of cautious financially stable Canadians? Siddall didn’t touch on this.

********

“Arrogant.” That’s how some critics are describing Siddall and his regulatory brigade. But arrogance can sometimes be confused with perspicacity, so we must be careful.

Nonetheless, it is statements like these from Siddall that make people wonder:

  • “…[Other witnesses] have people they represent and I would suggest that you may want to take that into account.”—Evan Siddall on the credibility of lender and broker testimony, Feb. 13 , 2017 (The implication: He’s got no angle. It’s the people who disagree with him who have an angle.)
  • “Never ask a barber if you need a haircut.”—Evan Siddall, commenting on whether lender concerns about the government’s portfolio insurance prohibitions were valid, November 18, 2016 (Sure, because it’s biologically impossible for folks in a profession to tell the truth about that profession, or offer practical insights about that profession. Is this right? P.S. Since we’re on the topic of logical fallacies, please, whatever you do, never ask a barber regulator if you need a haircut.)
  • “…The distortionary effects of portfolio insurance…in my view was stimulating excess credit and contributing to higher levels of household debt.”—Evan Siddall, November 18, 2016 (…his view…)
  • “We help Canadians meet their housing needs, not exceed them”—Evan Siddall (Rest assured: Policy-makers know what all Canadians need.)
  • “…Lenders have, as I’ve said in the past, no skin in the game and therefore the incentives are misaligned with good risk management.”—Evan Siddall, Oct. 4, 2016 (Implication: Lenders have little to lose and insufficient business sense to stay in business by underwriting prudently, despite overwhelming evidence to the contrary.)
  • “Some critics now accuse us of overlooking the ‘unintended consequences’ of our actions. In fact, the results of these policy changes were fully intended.”—Evan Siddall, Oct. 17, 2016 (Possible translation: We intended to damage the mortgage market and no apologies are required. If you don’t like the rules, deal with them.)

A sense of superiority often comes with power, and regulators have had virtually unfettered unaccountable power. 

“The policy somewhat smacks of a nanny state,” MP Albas told Siddall. “Some of the best advice I ever received was to think of people, not for them…It sounds like your agency is thinking for people.”

Is this what we want? Do we put our finances in the hands of bureaucrats who think for us all and make one-size-fits-all policy? If we do, it’s a given that Ottawa will emasculate one of the world’s most successful and most envied housing finance systems. And if they do, neither we, nor politicians who care, nor the mortgage industry of Canada, will ever let them forget it.

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Comments

  1. Comment avatar

    Appraiser    

    Wow! Let me read this statement from Mr. Siddall again:

    “People in Canada will determinedly pay their home so the fact that our arrears rates are low is worrisome…”

    George Orwell would be so proud.

    “Doublethink is the act of simultaneously accepting two mutually contradictory beliefs as correct. Doublethink is notable due to a lack of cognitive dissonance — thus the person is completely unaware of any conflict or contradiction.”

     
    1. John    

      Mr. Siddall said that consumers will pay mortgage first above all other things if things gets tough and money dry up. That will lead to unemployment in other sectors, which will lead to recession.

       
      Comment avatar
      1. Comment avatar

        MTeam6    

        How could Siddall possibly know that enough homeowners would not spend enough, and hence lead the country into recession?

        Oh yeah. He read it in a book.

         
  2. Comment avatar

    Will Dunning    

    “In fact, the results of these policy changes were fully intended”. CMHC and the government have not adequately spelled-out what are the intended consequences. By how much do they want housing activity to fall? How much do they expect (or indeed want) house prices to fall? What are the expected economic consequences of reduced housing activity for employment and unemployment? If house prices prices fall as a result of the policy, what is the economic impact (hint, it’s not good, in fact, according to the book that ES loves – House of Debt – economic crises often start with falling house prices – it’s not clear that ES understands this)?

     
  3. Comment avatar

    Will Dunning    

    Another point. Mr Siddall points to its housing market assessment framework as its analysis and the research base for its fears. But, and this is important, that analysis is backward-looking and does not consider how changing conditions will affect future risk. Its reporting on Calgary illustrates that beyond any doubt. Even after the price of oil collapsed (starting about mid-2014) and it was clear that there would be substantial consequences for the local economy and housing market, CMHC did not introduce its conclusion about “overbuilding” until its first quarter report for 2016, when it had the actual data from the fall 2015 rental market survey. As late as the fourth quarter of 2015 (more than a year after the plunge for oil began), the overall conclusion was “weak evidence of problematic conditions”. Risk is about the future, not the past.

     
  4. Comment avatar

    Gordon McCallum    

    Another fantastic post Rob.

    Just a comment on the point about “Low Arrears Not Being Enough”: What Siddall appears to be saying is that he’d prefer it if a few people stopped preserving their home, or better yet, didn’t own one, so that they would purchase more consumer goods.

    I suppose they’d be paying for those fridges and stereos and cars with cash? Or does he prefer increased consumer credit usage to stimulate the economy?

    These bozos, who ironically have no aversion to debt or spending of taxpayer money, have no clue.

     
  5. Comment avatar

    Jennie shandley    

    Rob, were you asked to appear and speak at the hearings? If not I feel it was an oversight on our industry’s part. You are knowledgeable and eloquent and would have represented us well.

     
    1. Robert McLister    

      Thanks Jennie, I was on the proposed witness list and the Conservatives pushed the committee to allow all witnesses to testify. Unfortunately, the Liberal members disagreed and they hold a majority.

       
      Comment avatar
  6. Comment avatar

    Darren D    

    Why don’t we remove all government support for the lending market, as it is in many other countries, and put 100% of the risk to the lender, and then see how this plays out. You are so lucky that you have any support at all as this is interfering in the true open market and has promoted home ownership over a long period. These minor roll-backs are just a small fraction of what we need to bring back the full risk to lenders. I found his comments very well supported and reasonable and the re-shuffling of risk is a needed back-track on what the market has enjoyed for many years.

     
    1. Robert McLister    

      Darren,

      When you say “you are so lucky,” do you mean consumers are so lucky? Because it is ultimately for consumers’ benefit that we have federal support of mortgage competition. It’s a rare consumer that likes to pay thousands more for their mortgage.

      As for these “roll-backs” being minor, perhaps you’re rich enough to shake off $2,000 to $3,000 more interest over five years. But there’s no good reason that well-qualified borrowers should be forced to pay it. And that’s the result we now have. Nor is it “minor,” by the way, that non-bank lender and insurer volumes have plunged 15% to 40%+ when the majority of their underwriting metrics were stronger than the major banks.

      For something to be fixed it must be broken. You’ve made no case to establish that the previous heavily regulated system was broken, or that the dictated fix was most optimal…and neither did federal policymakers.

       
      Comment avatar
  7. Comment avatar

    John B    

    More of a question than a comment since I’m not all that familiar with the refinancing market which is alluded to in this article:

    A borrower can refinance and take out additional mortgage amounts based on the equity in their house, up to a limit (say 80% of the house value). So someone in Toronto that bought a year ago and has seen prices rise by 20% can effectively one year later take out 100% of their purchase price as a loan and have 0 invested.

    If this is in fact a reality then I can’t see why taking the government/public taxpayer out of the equation is a bad thing. Volatility and zero down leverage are usually a dangerous recipe and I don’t think many taxpayers would want their government to be exposing them to this type of risk.

     

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