Sledgehammer FBThe Feds clearly wanted to crack the housing market, and they may have finally done it, with a sledgehammer.

New Department of Finance (DoF) rules will hit the mortgage market hard, but consumers will take the brunt of the blow. The two big changes:

1) Effective Oct. 17, the qualification rate will now apply to all high-ratio insured mortgages, even 5-year fixed terms. On Nov. 30 it applies to insured low-LTV mortgages as well.

2) Regulators are banning a wide array of mortgages from being insured, effective Nov. 30.

One big non-bank lender didn’t mince words when describing today’s DoF’s announcement. “This is a crisis,” the executive told CMT. The lender estimates that up to 40% of its insured volume could vaporize near-term because of these rules. Even if it’s half that among non-banks industry-wide, this appears to be a devastating blow to mortgage competition in Canada.

Background: Non-bank lenders rely on default insurance because it (in the DoF’s words) “supports lender access to mortgage funding through government-sponsored securitization programs.” Banks don’t depend on insurance to the same extent (at least not on conventional mortgages) because they don’t have to sell their loans to investors.

You’d think that with such a drastic policy change that stakeholders would be thoroughly consulted. Nope. Lenders I spoke with had not even a hint this was coming.

So what happens now? Here are our top 10 predictions:

    1. Housing prices will tumble as a sizable minority of first-time buyers and those with higher GDS/TDS ratios no longer qualify for the mortgage amount they want.
      • Forcing all insured borrowers to prove they can afford a payment at the posted rate (4.64%) will remove up to 15-20% of buyers from the market, say lenders.  
      • “This will impact more than 50% of borrowers’ [mortgage] limits, among those who select 5-year fixed rates,” said Mortgage Planner Calum Ross. “As unpopular as this may be to say, however, I fundamentally believe this is the right move by regulators. The fact they allowed such a large disparity on the qualifying rate for such a long time was, in my opinion, not a prudent lending decision.”
      • Others argue that 5-year fixed borrowers with 10%+ down payments could have refinanced and re-amortized after five years anyhow (to reduce their payments and mitigate a 200+ bps rate increase). Mind you, a 200+ bps hike in the next five years would probably cause a recession, so it’s unlikely at best.)
    2. Non-deposit-taking lenders could be forced to sell a wide array of loans to balance sheet lenders at a premium. They’ll be forced to pass those funding cost hikes directly through to consumers. These include refinances, amortizations over 25 years, non-owner-occupied properties and mortgages over $1 million—all the stuff that can no longer be insured and securitized.
    3. Broker market share will fall.
      • It’s Christmas in October for the banks. Among other things, they’ll gain refinance, jumbo mortgage and rental business from the monolines.
      • That business boost will reduce their reliance on the broker market. In fact, don’t be surprised if a Big 6 bank exits the broker channel by this time next year.
    4. Mortgage availability will drop in high-valued regions like Vancouver and Toronto and rates will rise nationally.
      • This liquidity drop is partly because of the insurance prohibitions, and partly because of higher capital requirements for insurers. This latter measure was announced previously and is expected to take effect in Q1. Word on the street is that bulk insurance premiums (which average roughly 40+ bps now) could at least double.
      • As competitors raise rates, banks will likely take that opportunity to hike their own rates. And they’ll probably do it nationally because regional pricing presents internal challenges.
    5. Banks will also have to qualify conventional borrowers at the posted rate on all terms.
      • OSFI tells us, “…Our update to [Guideline] B-20 is going to reflect the announcement made by the Department of Finance today about [the] “Mortgage rate stress test…” But it adds, “We are still reviewing the guideline, and have not yet made decisions in this regard.”
      • That suggests monolines could potentially be at a disadvantage for a while, unless OSFI encourages banks to adopt a standard 5-year posted qualifying rate sooner.
    6. Market share for near-prime lenders will rise yet again, especially for refinances.
      • Consumers, of course, will pay significantly higher interest for these lenders’ flexibilities.
    7. There will be a mad dash to refinance under the old rules prior to October 17th, when the new qualification rate comes into force.
      • Expect most lenders to stop taking such deals by mid-next week.
    8. We’ll start hearing more economists forecast a Bank of Canada rate cut due to the GDP hit from these rules.
      • Two big pillars of Canada’s growth, oil and housing are now on the ropes.
      • As we’ve written before, this is probably the worst time to send a message to foreign investors that they’re not welcome in Canada’s housing market. Canada needs their investment and most politicians and policy-makers appear shockingly blind to this.)
    9. Non-balance sheet lenders could apply rate premiums to amortizations over 25 years since they can no longer be insured. That’s no small point. Mortgages with amortizations longer than 25 years accounted for over half of all portfolio insurance underwritten by CMHC through June.
    10. Morneau

      Finance Minister Bill Morneau

      MBS yields will fall as supply drops and pool risk improves (more on that from Bloomberg). Yay, some good news in all this.

In the long run, the DoF’s move adds housing stability (at what cost is the question). But most of the 70% of existing homeowners who value their equity may well curse regulators in the short run.

The sad part is that borrowers in the majority of the country are clearly paying a price for Vancouver and Toronto’s excesses. “What I find most frustrating is that this change penalizes the wrong segments of the market,” said Tyler Hildebrand, a mortgage planner at One St. Mortgage. “Housing policy continues to be set on a national basis without any consideration for regional implications. Real estate is a local business; it should be regulated on a regional basis.”

Of course, the government also announced it’ll prevent non-residents from claiming the capital gains exemption—which is primarily targeted at Vancouver and Toronto. (This is a reasonable move. Here are more details on it). But this measure was a distraction from the other rule changes, and trivial by comparison. Non-resident buyers who buy to flip tax-free are simply not a major price driver nationwide. 

All of this adds to the layers of mortgage regulations imposed since 2008. And, to make matters worse for the lending industry, the Department of Finance has reaffirmed its decision to evaluate lender risk sharing. Charging lenders deductibles on default insurance claims could be an utter disaster for less capitalized non-bank lenders (and hence mortgage competition and consumers), depending on how it’s implemented.

With mortgage tightening finally starting to impact high-valued markets, this new round of rules has come too late, with too little forethought and too many consumer repercussions. It’s effects are so wide-reaching, so sudden, that something has me thinking it’s a conspiracy against non-bank lenders.

But no. I trust Canada’s regulatory system much more than that…I think.


Canada’s banking regulator wants mortgage default insurers to put more money between themselves and taxpayers, especially for mortgages they insure in riskier cities.

The new rules, detailed today by OSFI, will force government-backed insurers to bolster their capital on mortgages in certain areas. Effective January 1, 2017, this could make mortgages more expensive for insurers and consumers alike.

“When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside,” said Superintendent Jeremy Rudin. 

In a report today, BMO Capital Markets referred to these changes as “modestly tougher capital requirements.” It said that “through a phase-in mechanism” the new rules “essentially apply to new business only.”

You can bet your last basis point that insurers are already looking at ways to offset these new costs. Borrowers could be stuck with steeper premiums, higher interest rates and/or more rigid underwriting. That’s especially true if they have:

  • Lower credit scores
  • Higher loan-to-values
  • Longer amortizations.

I’m hearing insiders speculate that this could even lead to regional premium variations. So I asked OSFI if it’s possible that a borrower in Toronto might be asked to pay a higher insurance premium than a borrower in, say, London, Ontario. OSFI replied: “It is up to the institutions to determine how they will manage the new requirements.”

As of Q2, Toronto, Vancouver, Edmonton and Calgary would have exceeded OSFI’s valuation thresholds and forced insurers to cough up more capital on mortgages in those cities. OSFI is using census metropolitan areas (CMAs) to define the regional boundaries.

The following map shows Toronto’s CMA, for example. If regional variations came to reality, someone in Guelph, Barrie and Oshawa could pay smaller insurance premiums than borrowers in Toronto, Mississauga and Markham.

Toronto CMA. StatsCan

Genworth Canada, the country’s largest private insurer, is already setting expectations for higher premiums. In a statement today it said:

The Company expects that the capital required for certain loan-to-value categories may increase and this could lead to a corresponding increase in premium rates. In addition, for those regions that are impacted by the supplementary capital, premium rates could also increase.

CMHC reviews premiums annually. We wouldn’t be surprised if it announces higher premiums by the first few months in 2017 or before.

Even premiums on low-ratio mortgages may rise. That could be a problem for certain monoline lenders who depend on buying transactional insurance to fund (securitize) their mortgages. More expensive low-ratio premiums could put them at a further competitive disadvantage to big banks that don’t rely on low-ratio transactional insurance.

OSFI confirmed for us that, “The same calculation formulas will be used for all mortgages whether insured individually or as part of a portfolio.”

Rising premiums aren’t the only fallout here. It could also get incrementally tougher for some borrowers to get an insured mortgage. Insurers may now try even harder not to incur losses on mortgages that entail higher capital costs. That could mean marginally more declines and fewer guideline exceptions.

In some cases, however, insured mortgages might actually require less capital than today. OSFI says, “All else being equal, the capital requirement for mortgages associated with borrowers with better credit, and that pay their mortgages off quickly, will be lower. Also, under the new framework, mortgage insurers will no longer have to hold capital for mortgages that have been fully paid off.”

OSFI’s proposed changes are up for public comment until October 21. 


Canada’s banking regulator has released revised capital guidelines for mortgage lenders. Just what every lender loves to hear, right?

Once implemented, federally regulated lenders will have to set aside more capital in certain cases to shield them from a potential market blowup. The new rules kick in November 1 for the big banks.

“Under the proposed revised guideline, the amount of capital required to be held by the institutions is not expected to change significantly,” assured a spokesperson. “These changes aim to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry.”

One interesting change is OSFI’s new “countercyclical buffer” policy. That’s where banks must put aside more capital if the market gets abnormally risky. OSFI says the Bank of Canada’s Financial System Review (FSR) will, in part, help determine if such buffers are necessary. Banks will get 6-12 months’ notice before these countercyclical buffer increases take effect.

“…in Canada, under the current requirements we do not require financial institutions to have a countercyclical buffer,” the spokesperson said. “OSFI does not feel it is necessary to activate a countercyclical buffer based on the principles outlined in the Capital Adequacy Requirements Guideline (CAR).”

In terms of securitization, an issue near and dear to broker lenders, OSFI says, “The revisions to…CAR should not have an impact on mortgage lenders’ securitization abilities.”

As for underwriting, OSFI told CMT, “Through the revised CAR guideline, OSFI is clarifying the conditions under which risk mitigation benefits of mortgage insurance are recognized for regulatory capital purposes.” In other words, if lenders don’t carefully heed insurers’ underwriting and loan requirements, that could “require OSFI to ask financial institutions to implement remedial measures,” which could include coughing up even more capital, suggests the regulator.

OSFIOSFI has been keeping busy in the past year. On July 7, it announced it was tightening its “supervisory expectations for mortgage underwriting in light of the evolving housing market.”

It also made clear that it “will be placing a greater emphasis on confirming that controls and risk management practices of mortgage lenders and mortgage insurers are sound and consistent with the principles underpinned by OSFI Guideline B-20: Residential Mortgage Underwriting Practices and Procedures (and, where applicable, OSFI Guideline B-21 – Residential Mortgage Insurance Underwriting Practices and Procedures).”

In April, OSFI introduced a higher floor on capital requirements to “take into account periods where the value of properties pledged as collateral becomes less certain.” Those changes are meant to be “risk sensitive and therefore reflective of regional variation in risk,” it said in December.

What’s the goal of all this? To strengthen the measurement of capital held by the major banks, and better position them to withstand potential losses.

The net effect to mortgage shoppers remains to be seen. Our money is on banks incrementally tightening lending qualifications and slightly increasing mortgage rates to offset their cost of compliance.



As we like to say around here, it’s good to be a bank. Reason #188 (or whatever number we’re up to now) is covered bonds. Only seven lenders in Canada can issue covered bonds, and six of them are major banks.

Who should care about covered bonds?

Any mortgagor with at least 20% down who prefers a lower rate.

Covered bonds (CBs) are a low-cost way to raise mortgage capital, which the lender (issuer) can then lend out to borrowers. Essentially, CBs are just packaged up pools of uninsured mortgages that mega-lenders sell off to investors.

Investors like CBs because:

  • the bonds are “covered” (backed) not only by the mortgages, but with the full faith and credit of the lender itself
  • the mortgage collateral is segregated in case the bank ever goes belly up
  • the bonds are over-collateralized by about 5-10% (i.e., issuers back them with more mortgages than necessary)
  • all mortgages have at least 20% equity, resulting in small default rates
  • mortgages are generally removed from the cover pool if they’re over two months delinquent (and almost certainly if 90-days+ delinquent, due to the asset coverage test issuers must meet)
  • investors can rely on Canada’s solid CB legal framework
  • CBs are rated AAA, the highest rating possible (in fact, Fitch’s triple-A rating even factors in the risk of a 25% plunge in home prices)

All of this makes covered bonds a tasty treat to yield hungry high-quality bond investors.


Demand is off the charts in Europe, where (get this) our banks are issuing CBs at just a fraction above 0%! That’s possible because CBs are relative bargains versus European bonds, which yield near/below 0%. Bloomberg calls it a “covered bond boom,” citing a 37% ($7.2 billion) increase in Canadian issuance versus last year—a record pace.

CB sales would be even higher were it not for regulators preventing banks from issuing more than 4% of their assets in covereds. Banking regulator OSFI’s covered bond issuance limit is “extremely low compared to other developed nations,” says C.D. Howe housing watchdog Finn Poschmann. In most advanced countries there is either no limit at all, or it’s much higher (e.g., 8-10%).

Raising Canada’s 4% cap needs to be an OSFI priority. With all the regulation Ottawa has thrown at banks since the credit crisis, hiking the issuance limit is a safe way for policy-makers to loosen the noose. Doing so would pose no appreciable risk to taxpayers (the government doesn’t guarantee CBs like it does Canada Mortgage Bonds and mortgage-backed-securities). Moreover, while risk to bank depositors would theoretically increase (since CBs can’t be liquidated for depositors in a bank insolvency), a slight deposit insurance hike could offset that risk.

The benefits to borrowers would be measurable. Banks would have more international liquidity for their mortgages, which could directly result in lower interest costs and less pressure on banks to boost fees.

Granted, this idea may be a political hot potato at the moment. Daily headlines on housing overvaluation won’t make raising CB limits OSFI’s top priority. But regulators do a lot of taking, and sometimes they have to give a little too. A CB issuance policy that’s closer to international standards would be a net win for families slaving to pay their mortgage. To the extent the limit can be safely increased, policy-makers should help Canadians keep more money in their pockets.


B.C.’s mortgage regulator confirmed today that it is moving forward with its proposal to require brokers there to publicly disclose compensation details, possibly as early as this summer.

“My office is proceeding with plans to implement improved disclosure measures for mortgage brokers in British Columbia,” Carolyn Rogers, Registrar of Mortgage Brokers and CEO at FICOM, said in an email sent to media.

“We have reviewed feedback received from industry in response to the open letter sent in January and appreciate all the comments. I have asked the staff to begin work on the implementation details, and that work is underway.”

Since FICOM proposed the changes last fall, brokers from B.C. and across Canada have been vocal in their opposition to the plan. They contend that the amount of money a broker earns on a deal is of little value to consumers without consumer education or context, and actually confuses some consumers into choosing higher-cost financing.

Broker trade groups Mortgage Professionals Canada and MBABC have taken the position that the changes will harm the industry and consumers, and both submitted written comments to FICOM.

“In our continued discussions with FICOM, we always understood that their intention was to proceed with some form of enhanced disclosure requirement,” said Paul Taylor, CEO of Mortgage Professionals Canada. “The consultation was, to our minds, a means for FICOM to gauge our industry’s appetite for, and solicit suggestions and feedback on, various methods to achieve their stated goal of making consumers aware of any potential conflicts of interest that may arise. As such, the comments made by Caroline Rogers do not surprise us.”

Taylor added that they will continue discussions with FICOM and “wait to see what the final requirements are once released. At this point it would be premature to make any statement regarding the requirements because they have not yet been prescribed.”

FICOM says it will release more details in the next 30 to 60 days, and that it expects a transition period of “at least several months” once its disclosure plan is released.

“My office continues to welcome feedback from industry on implementation and I have received a number of offers in this regard that we will be following up on,” Rogers added.

Related Posts

Brokers Showing Their Hands. The Repercussions.

Explicit Compensation Disclosure – Part II

FICOM Proposes More Compensation Transparency



Showing cards FBThe public is increasingly aware of what mortgage brokers make per deal. And now, courtesy of pending regulatory change, they’re about to become even more aware.

Should that concern you as a broker?

If you like making full commissions, you bet.

Everyone from the CBC and Globe and Mail to trade magazines and consumer forums have published how FICOM (B.C.’s broker regulator) wants to force brokers to reveal their compensation (more on that). In time, other provinces may follow.

What Happens Next

If/when these rules pass, it could take just a few years for a critical mass of borrowers to realize: a) how, and how much, brokers are paid; and b) how they can use that knowledge to negotiate lower mortgage rates.

As this information comes to light, savvy price-shopping consumers will have a field day (savvy being the key word; more on that below). It’s kind of like knowing your car dealer’s invoice cost. It provides a basis for negotiation.

For many brokers, that is unequivocally a problem, a big problem. Tamsin McMahon at the Globe writes, “traditional brokers…argue that revealing their commissions will push clients toward discount brokers offering the lowest fees and rates.” You better believe it will.

Countless borrowers will gravitate to the obvious savings and increasingly opt for brokers who cough up more of their commissions. Who wouldn’t want to save an extra $1,000 or $2,000 in interest?

Where Things Take a Wrong Turn

Choosing the right mortgage isn’t just about the obvious savings. Anyone can compare a three-digit number.

Minimizing one’s borrowing cost relies on finding the unobvious savings, for that has the biggest potential impact on borrowing cost.

Unobvious savings come from:

  • more flexibility (e.g., not having refinance restrictions when you need to refinance, blend and increase restrictions when you need to borrow more, insufficient porting timeframes when you need to port, etc.)
  • lower fees (e.g., avoiding or minimizing prepayment charges, legal fees, appraisal fees, discharge fees, reinvestment fees, title insurance fees, credit line fees, etc.)
  • better strategies (e.g., optimal term selection based on one’s family, employment and financial circumstances, refinancing tactics to lower overall interest expense, early renewal to lock in or average down on one’s interest rate, timing one’s application to get better rates, prudently utilizing debt to invest, structuring rental portfolios to maximize future financing options, etc.)

Unobvious savings come from detailed product comparisons and careful client analysis. Will deep discount brokers, who typically can’t afford to spend 3 to 4+ hours advising clients, offer this same degree of counsel? Likely not, at least not one-on-one.

And if you’re a well-qualified, experienced, financially savvy mortgagor, you may not even care. You might save just as much with that no-frills online rate you found yourself. But that’s not the majority. There’s a reason why the majority of investors prefer advice, despite 30 years of online discount stockbrokering. Likewise, most mortgage consumers want and need guidance. They don’t have the time, skill or inclination to learn the lingo and make detailed comparisons of mortgage features and restrictions.

FICOM’s plan puts online discounters in the catbird’s seat. “It’s really simple,” Ron Butler told the Globe. “I operate on one-third the income of the average mortgage broker, so I don’t mind it being showed to people.”

For the most part, this author (who also has an online mortgage business) doesn’t mind either. For one, brokers should have nothing to hide when it comes to compensation. And second, FICOM’s rule will boost volume for Internet mortgage models materially, for at least a few years.

Ultimately, however, compensation disclosure will lead to bigger buydowns and it will drive down commissions industry-wide—faster than the Internet alone would have done.

This worries more than a few broker network bosses. Any business that takes a percentage of agent commissions—as opposed to a flat fee—is destined to take a haircut.

What’s Wrong With FICOM’s Plan

There is nothing inherently wrong with more disclosure. Various professions disclose their pay in black and white. But with most other businesses, there is less chance of people drawing conclusions about the product/service based on the compensation of the salesperson.

For example, all traditional realtors in a given province make about the same commission percentage. Knowing a buyer’s agent makes 2.5%, for example, shouldn’t cause you to doubt that realtor’s recommendations. The market, not the realtor, sets prices and their commission percentage doesn’t increase if they sell a higher-priced home.

With mortgages, however, compensation varies and is directly linked to price (the rate), term, short-term lender promotions, etc. Knowing the originator’s compensation alone tells you nothing about that mortgage. At any given time the best mortgage can pay the highest commissions and the worst mortgage can pay the lowest commissions, or vice versa. Not surprisingly, research shows that choosing a mortgage based on originator compensation can lead to costly mistakes.

It’s a Start

FICOM’s plan is on the right track. There is no question that a minority of brokers sell worse products for greater personal gain, and we’ve argued for years that something should be done about it.

But implementing this rule, as is, would be detrimental to hundreds of thousands of Canadians. Its flaws first need to be addressed.

For example:

  • It proposes disclosure of all economic benefits to the dollar. How do brokers know what they’ll be paid when lender bonuses are often contingent on future volumes?
  • It mandates this disclosure, but arms consumers with no information to interpret the data.
    • How do average consumers know if a 110 bps finder’s fee plus 7.5 basis points efficiency bonus plus $175 marketing dollars is reasonable for a 5-year fixed?
    • How do consumers know if their broker could have sold a lower rate for a similar product, and still made a normal commission?
    • How would consumers know if a mortgage that generated a lower commission actually entailed the lowest cost of borrowing?

If FICOM could provide benchmarks for these comparisons, that would be useful. That would put this disclosure in context. If FICOM had clear suitability guidelines, that would reduce self-interested mortgage recommendations.

Without this information, FICOM is delivering but one thing to consumers: more ammunition to negotiate rates. FICOM’s actions will expedite commission reductions in the mortgage broker business. In turn, brokers will need to close more deals to earn the same living. That means less incentive to spend 3-4 hours counselling clients and poorer choices for consumers who rely on that advice. That shouldn’t be a regulator’s decision to make, not unless their solution is bulletproof.

Only a minority of knowledgeable consumers with negotiation skills will benefit from this policy change, to the detriment of less educated consumers who arguably need the most protection. The proposed rule, as is, is not the answer. It is like a shovel with no handle, an incomplete tool.

Sidebar: Today, February 20, is the last day to send FICOM comments on these rules. You can do so at



FT buyers FBThe days of buying near-million-dollar homes with 5% down are officially over.

The new minimum equity rules for purchases between $500,000 and $1 million began Monday. The regs now require 5% down on the first $500,000 and 10% down for the remaining portion. As before, purchases of $1 million+ still require at least 20% down (if you want the best rates).

This news was all over the press today, as expected. One of the prominent questions was, how will young buyers fare?

Some, like this broker, suggested that first-timers are the losers, and that the market “didn’t need” this rule. At the very least, that’s debatable.

For one thing, we know that less than 1 in 10 rookie buyers purchase homes over $500,000. Of the minority who do, we’d guesstimate that somewhere around half have down payments of at least 7.5% (the most a qualified borrower would need under the new rules). That’s based on the fact that almost 4 in 10 first-time buyers already put down 20% or more, says Mortgage Professionals Canada.

Of those who are shy the extra 0.1% to 2.5% of equity, many will tap their parents for more cash, some will use other debt sources and some will just defer their purchase 6-18 months or so, which may not be the worst decision as we watch how housing markets react to Canada’s economic challenges.

On the question of whether the change was needed, this rule wasn’t so much about slowing the housing market. No, policy-makers were more focused on limiting the federal government’s insured mortgage exposure. And, of all the ways they could have done that (increasing down payments to a flat 10%, shortening amortizations further, lowering debt ratio limits, etc), this was one of the most buyer- and industry-friendly moves they could have made. In a country where people earning $100,000 can’t buy a house in our biggest cities, and debt ratios keep on climbing, the Department of Finance did the right thing.


CD Howe surveyThe “sustained low interest-rate environment” has caused a “significant minority” of Canadians to take on more mortgage debt than they can comfortably manage. That was the conclusion from a recent study by C.D. Howe.

Out of all the study’s findings, the one garnering the most headlines was the percentage of homeowners with a mortgage debt-to-disposable income ratio in excess of 500%. That number has rocketed from 3% in 1999 to 11% in 2012 (the latest data available). That’s upwards of half a million households.

That led the study authors, Craig Alexander and Paul Jacobson, to suggest that the federal government “may want to consider further policy actions to lean against the shift towards significantly higher mortgage burdens.” This is despite their conclusion that “the majority of Canadians have been responsible in their borrowing.”

Coincidentally, this study came out right before the Finance Department raised minimum down payments. That measure addressed some of Alexander and Jacobson’s concerns, but not all. They note that highly mortgage-indebted households are more likely to be

  • in the lower-income quintiles
    • i.e., not buying the $500,000+ homes targeted by the new down payment rules
  • younger Canadians who have recently entered the housing market
    • the average first-time buyer’s purchase price is $293,000, says the DoF, again, less than $500,000
  • from provinces with the biggest housing booms.

Also concerning is the fact that roughly 1 in 5 mortgage-indebted households have less than $5,000 in financial assets to draw upon if they lose their job or face surging interest rates. Worse yet, 1 in 10 have less than $1,500 in financial assets and are considered “extremely vulnerable to a negative economic or financial shock.”

“This represents an inadequate financial buffer,”  say the study’s authors, “as the Statistics Canada Survey of Household Spending indicates that average mortgage payments are more than $1,000 a month, before taxes and operating costs.”

All of this speaks to two risks. The first is obviously the financial risk to the borrowers themselves. Even if arrears rates stay contained as expected, no one wants families backed into a debt corner, doing things like racking up unsecured debt to finance secured debt.

The second risk is systemic (i.e., what happens to our financial system if default rates are higher than anticipated?). Default insurers claim they can withstand a U.S.-style housing sell-off without dipping into taxpayer pockets. (By the way, we are assuming/hoping that insurer’s stress tests rest on adequate assumptions.) But the mortgage market would nonetheless endure painful market volatility, huge risk premiums and illiquidity. These effects would be (will be) exacerbated if debt ratios continue moving in the wrong direction.

Hence, if home prices in T.V. (Toronto/Vancouver) continue climbing in 2016, the DoF may not be finished it’s policy tightening. Lowering maximum debt ratio guidelines and increasing minimum credit scores (especially for borrowers making small down payments) could get more attention in Ottawa.

But Alexander and Jacobson wisely recommend that any new mortgage rules be targeted. The last thing anyone wants are weak markets getting weaker with a national policy intended to rein in T.V. lending.

Moreover, given enough time, natural economic forces would address some of the imbalances we’re seeing, specifically

  • higher prices would curtail demand
  • higher rates would crimp affordability, and hence prices (best not hold your breath on this one)
  • higher incomes would improve affordability and debt ratios (for many)
  • housing supply would catch up with demand (maybe not in the major single-family urban markets, but definitely with multi-family units and suburban housing)

But policy-makers are likely not content to let the “invisible hand” correct household debt risks on its own. So keep an eye on this chart through the first half of 2016. It may have magically predictive properties for new mortgage rules.

National Average Home Price

Other notable findings from the survey:

  • B.C. has gone from a primary mortgage-to-disposable income ratio of 250% in 1999 to 375% in 2012 (Remember that’s an average, so many are above this ratio)
  • Ontario’s average mortgage-to-disposable income ratio rose from nearly 200% to around 350%
  • The share of young households (age 25 to 34) with ratios above 300% has increased by almost 27 percentage points
  • 14% of those aged 25 to 44 have ratios above 500%, along with 16% of those 65 to 75 years old vs. just 5% of those aged 45 to 54

Ultimately, debt service ratios (a.k.a., affordability ratios) are far more predictive of losses than debt-to-income ratios, and Canada’s average debt service ratio isn’t far from its long-run average. But we may never realize how close some people are to the edge until interest rates or unemployment spike.


Tamsin McMahon penned a rather alarming story about mortgage fraud on Friday. The number of crooked practices she compiled, regardless of their anecdotal nature, was both impressive and unsettling.

You couldn’t blame readers of that story for concluding that Canada’s mortgage market is on shaky ground thanks to widespread fraud. But a pile of anecdotes don’t paint the whole picture.

The story cites Canada Guaranty data that “one in 10 mortgage applications…have some element of fraud.” (That quote apparently originated from a First Canadian Title finding a while back.) Ten per cent is a sizable number in a country with 5.64 million mortgage households. You’d think all that fraud would translate into an avalanche of mortgage defaults.

Thankfully, it doesn’t. Arrears have trended lower for six years and now sit near the lowest on record. Moreover, the number-one factor driving them is unemployment, not fraud.

Of all the accounts in McMahon’s story, one that stands out was from Genworth’s Stuart Levings, who noted that early defaults (those occurring within the first year a sign of fraud and/or underqualified borrowers) has dropped by half since 2008. That’s tremendous progress in a short period, especially since home valuations continue to mount.

Mortgage fraud will never drop near zero, but it may very well drop further. High-profile cases and accompanying media attention have helped light a fire under policy-makers and regulators, more of whom are now requiring lenders and brokers to report all fraud instead of sweeping it under the rug. Stricter rules will help, like Ontario’s Regulation 188/08, section 14.2, which prohibits brokers from ignoring suspicions of fraud.

If we as an industry feel this is a bigger problem than arrears numbers suggest (a debatable point), then regulators must take charge. They need to:

  • reinforce that mortgage misrepresentation is a criminal offence
  • aggressively investigate and publicly censure mortgage originators who submit bad paper
  • force lenders to report all suspected fraud
  • notify borrowers when their applications have been flagged as fraudulent
  • improve information sharing among lenders
  • be prepared to adjudicate a truckload of cases

Will all of this happen? Probably not any time soon.

It’s a good thing then that just a small slice of fraud ultimately leads to defaults and losses.


Financial transparencyHow would you like to know what your mortgage broker is earning on your mortgage?

In B.C., you may soon find out. The mortgage broker regulator there plans on doing what no other major province has done: force mortgage brokers to disclose how much they’re earning from lenders on your mortgage. We’re talking exact dollars and cents.

As a borrower, many will love this concept, if for no other reason than satisfying their curiosity. Many others will use compensation information against brokers to negotiate, by asking their broker to give up some commission to “buy down” their interest rate.

It’s a proposal that has brokers in B.C. white-hot angry with their regulator. But FICOM feels an obligation to forge forward with this plan anyway. To find out why (and how), we spoke to Chris Carter, Deputy Registrar of Mortgage Brokers at FICOM to get the regulator’s position.


CMT: Chris. Thanks for sharing your thoughts with our readers. First off, can you tell us how many consumer complaints FICOM has received in relation to the matter of undisclosed compensation?

Chris Carter: The issue here is clear disclosure of conflicts of interest to consumers and a growing public expectation of transparency in their dealings with the financial services sector. Consumers of financial products are more vulnerable than consumers of other products. Products are complex, intangible and future oriented. Consumers place a high degree of reliance on advisers to help them make an informed decision. A clear and easy-to-understand description of a mortgage broker’s interest in the transaction reduces the risk that advice to the consumer is compromised by the broker’s own interest in the transaction.

CMT: FICOM believes that hidden compensation increases the risk that brokers steer consumers into mortgages that are not in the consumer’s best interest, and I agree totally. But how exactly should consumers use the disclosed dollar amount of compensation and perks to decide if a broker is not acting in their best interests?

Chris Carter: It is up to consumers how they use the information. We have confidence that given the facts consumers will make wise decisions that are in their own best interests.

CMT: Brokers seem to view this as a major rule change with repercussions for their business. You noted that, until recently, FICOM was not seeking comment from industry stakeholders; albeit you mentioned FICOM would receive those comments. Typically, the industry is formally invited to comment on key changes affecting their business well in advance. Any particular reason why that custom was not observed in this case?

Chris Carter: We are observing that custom, and are actively consulting with MBABC, CAAMP and directly with leaders in the B.C. mortgage broker community on how best to implement the changes. The Registrar has received legal advice that the changes are necessary, and has accepted and is acting on that advice.

CMT: Invariably some consumers will focus on finding the broker who accepts the lowest compensation. Are you worried that this might cause some consumers to place less weight on advice — advice that reduces their cost of borrowing in other meaningful ways?

Chris Carter: Those consumers have made a decision to work with a mortgage broker, and in doing so clearly place a high value on the advice a mortgage broker provides. If a consumer subsequently decides that the compensation a broker receives from a lender is the most important criteria in making their decision, that is the consumer’s choice. Consistent with a mortgage broker’s value proposition, that consumer should and would still receive the best advice.

CMT: Since lenders generally pay the same base compensation, base compensation differences are typically not enough to sway a broker’s recommendation (or create a conflict of interest). As such, wouldn’t it be enough to instead disclose:


  • Extra compensation? For example, why not simply force brokers to disclose all consideration, perks and compensation over the standard 100 basis points on a 5-year fixed?
  • The percentage of a broker’s volume that he/she has sent to the chosen lender in the last 12 months?
  • The types of compensation and perks received, and how they are calculated?

Why would all of the above not be enough to solve the “hidden compensation” issue and bring conflicts of interest to light?

ficom_logo-300x89Chris Carter: The law in British Columbia requires that brokers describe to the borrower any direct or indirect interests the broker, or a related party, has or may acquire in the transaction. All of the above would be captured by that requirement.

Describing conflicts in terms that consumers can easily understand reduces the risk that brokers provide advice that is not in the consumer’s best interest. Disclosure that frames the interest as a hypothetical (for example, contingent commissions), uses industry terminology (for example, bps), or is vague and imprecise (for example, non-monetary benefits) and is not easy for consumers to understand.

CMT: How would a broker disclose a volume bonus that is contingent on her hitting a certain volume target within 12 months, if the future volume to that lender is unknown?

Chris Carter: We are consulting industry on precisely that type of question. A draft bulletin and improved Form 10 and Form 11 have been shared with CAAMP and MBABC, and we expect that the associations will identify both potential implementation challenges and solutions for our consideration.

CMT: Do you believe this rule could drive down broker compensation if consumers use this information as negotiating leverage?

Chris Carter: As mentioned earlier, it is up to consumers how they use the information. FICOM does not regulate the compensation that mortgage brokers receive for their work.

CMT: You mentioned that disclosing a dollar figure helps consumers judge the value of their broker’s services. Do you believe consumers have the expertise to put a value on advice that could save them thousands of dollars in prepayment penalties? If they cannot value something like that, how can they truly assess a broker’s value?

Chris Carter: We would expect an average consumer would use information from a variety of sources to judge the value they receive from a broker, including how well the broker communicates that value and the merits of the mortgage options under consideration. Under an improved Form 10, consumers would have additional information at their disposal to judge the value of a broker’s services.

CMT: You noted that judging value entails assessing “cost versus performance.” If the lender pays the broker, how does the consumer compute the true cost they’re paying for the broker’s services?

Chris Carter: As mentioned above, consumers are likely to use a range of factors to judge the value they receive from a broker. Clearer disclosure of conflicts of interest provides industry with an opportunity to better inform consumers of the value of their services.

CMT: How can a consumer value the broker’s performance if that performance is contingent on certain events? For example, if a broker recommends a mortgage with a favourable blend and increase policy, the full value of that broker’s performance will only be realized if the consumer increases their mortgage before maturity and saves money because of my advice. So even if a consumer judges the cost, they can’t accurately judge a broker’s value, can they?

Chris Carter: Consumers will likely continue to judge a broker’s performance in much the same way they do now by the quality of their service and advice. In the scenario you outline, you will have provided your best advice to the consumer and clearly described your conflicts. Your ongoing relationship with the consumer and communication of your value proposition is yours to manage.

CMT: Has FICOM considered any adverse side effects of disclosing the exact value of compensation? If so, what potential side effects were contemplated?

Chris Carter: We have heard many viewpoints about the potential impact of the change. The change is necessary to align industry practices with the law in British Columbia, as mentioned earlier, and we are in ongoing consultation with industry about how best to implement the change. Consumers place great value in the services of mortgage brokers. Your success is testament to that. [A good broker’s] advantage is that [he or she] works in the best interests of the consumer and is not beholden to any one lender. Clearer conflict-of-interest disclosure strengthens that advantage and provides consumers with even greater confidence in [the broker’s] service offerings. By embracing change in British Columbia, industry has an opportunity to send a strong signal that it believes in its value proposition and understands the importance of transparency in its interactions with consumers.

Editor’s Note: Our thanks to Mr. Carter and FICOM for providing this open dialogue. CMT’s take on this issue will appear in an article to follow.