Mr. Flaherty ... Tear Down This Wall!

Canadian Mortgage Trends

Waugh to Flaherty: Ease Off

It’s been a long search but finally one has emerged: A top banker who’s not afraid to hold Finance Minister Jim Flaherty publicly accountable for his anti-competitive rate actions.

Scotiabank CEO Rick Waugh said the following about Flaherty's persuasion of banks to raise their mortgage rates:

“As a minister of finance, he’s obviously concerned about the well-being of the country. However, to price products for businesses — whether it be banks or manufacturers — is not what I would have expected.”

“I understand why the finance minister is concerned about the Canadian economy, but I just philosophically don’t think government should be setting product pricing.”

“Despite the difficulties of central banks to use interest rates, the alternative of trying to manage specific products or prices, to me, is fraught with difficulty.”

“The government sets the framework, but you’ve got to let companies go out and use their business judgment rather than the government’s business judgment.”

Consumers will applaud Waugh for being one of the only banking executives to openly challenge Flaherty's efforts to deprive Canadians of lower competition-driven mortgage rates

The government has every right to set the general level of mortgage rates (via the Bank of Canada and securitization policy), but harassing individual banks and coercing them to reverse 10-20 basis point rate discounts is beyond its mandate.

How Big Brother is Meddling (in Mortgage Insurance) Effects You!

From Canadian Mortgage Trends

Big Brother Interferes in (Bulk) Mortgage Insurance

Last week’s federal budget included few mortgage changes. One exception was a new proposal to restrict the use of default insurance on low-ratio mortgages (i.e., those with 20% or more equity).

The Department of Finance says it will gradually prohibit lenders from bulk insuring low-ratio mortgages unless those mortgages are part of a CMHC-backed securitization program.

In addition, the government said it eventually intends to prohibit insured mortgages from being used in any non-CMHC sponsored securitization program.

Here’s what this may mean to borrowers and lenders…

Why is the government limiting “bulk insurance?”

The Department of Finance ostensibly wants to:

• Lower Ottawa’s exposure to “nonessential” mortgage insurance (which taxpayers guarantee)
• Encourage lenders to assume more risk themselves when extending credit, instead of relying on mortgage insurance
• Free up insurance availability (CMHC has a legislatively-capped $600 billion insurance limit and it’s running close to that limit now. Bulk insurance eats into that available capacity and is deemed less essential to the housing market than regular [a.k.a. flow] insurance.)
• Encourage banks to keep more capital on hand by restricting their ability to “portfolio insure” large numbers of mortgages. (Thus far, banks have been able to minimize the capital they must post against mortgages simply by purchasing low-cost portfolio [i.e., bulk] insurance. That’s because bulk insurance makes those mortgages essentially “risk-free” from a capital ratio and regulator’s standpoint.)

What effects might this have?

Here are some of the possibilities:

• First off, the cost of funding mortgages should rise as banks may need to:

(a)  raise additional capital to hold low-ratio mortgages on their balance sheet (given that they can no longer bulk insure as freely),

and/or

(b)  securitize a greater number of low-ratio mortgages. That would require banks to:

• pay additional government application and guarantee fees (two basis points plus ~0.2% of the mortgage amount on a 5-year fixed), and 
• sell those mortgages into a higher-cost mortgage-backed securities (MBS) market
  (Securitizing via MBS may get more expensive since other lenders would be doing the same thing, thus raising the cost of “liquidity”)
• Smaller non-bank lenders will have fewer securitization options (Insured mortgages won’t be allowed as collateral in non-CMHC sponsored securitization vehicles like asset-backed commercial paper [ABCP]. ABCP is a private funding option that’s made a small comeback since the credit crisis.)
• Higher funding costs could lead to slightly higher mortgage rates, to the extent that lenders pass along these costs to consumers.
• Government risk exposure will drop slightly (Although, the odds of mass defaults on mortgages with 20% or more down are already exceptionally low.)
• Bulk insurance restrictions could encourage more use of covered bonds (a securitization mechanism that Ottawa is trying to promote as a way to fund uninsured mortgages)

FAQs:

• Why would Ottawa allow insured mortgages as collateral for securitization sponsored by CMHC, but not allow them in private securitization vehicles? The Department of Finance told CMT on Friday: “The Government is making these changes to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector. Funding channels that use taxpayer-backed insured mortgages should be subject to minimum standards and Canadian oversight in order to promote financial stability.”

• Do these new rules apply to mortgage insurance from all three insurers? Yes.

Feedback from Industry:

These are quotes from various top-level industry leaders, who spoke to CMT on condition of anonymity:

• Capital markets expert: “Wider mortgage spreads would seem to be the most obvious impact. The ‘race to the bottom’ should stop now.”
• Industry executive: “The impact on mortgage insurers is not significant as most portfolio insured loans have (already) been used in CMHC securitization programs…There could be some impact to the smaller specialty mortgage lenders, but I feel this will be addressed during the commentary period.”
• Another industry executive: “I think this is the Department of Finance not trusting the banks. They already put the covered bond framework in place. Why else would they take this further step?”
• Another capital markets pro: “NHA MBS is now the only game in town (for bulk insured mortgages) and funding costs will reflect that…If you're a little guy (i.e., small lender)...it's going to cost you...You're going to potentially have to put up more equity or find a balance sheet lender (to sell more of your mortgages to)."

The changes contemplated here are expected to occur slowly, and not before the government gets comment from various stakeholders.

Brokers use Flaherty to Promote Low Mortgage Rate

From Mortgage Broker News

With tongue firmly planted in cheek, one brokerage is using a photo of Finance Minister Jim Flaherty to help promote its 2.79 per cent 5-year fixed mortgage with the caption “This rate is too low for the Canadian people.” “We were distributing the flyer at the Home Show to promote our special rate,” says Sean Binkley, a broker with Your Home Team. “We are having a pretty good chuckle about it at the office and it received lots of laughs from the Home Show, great conversations.” The flyer, distributed at the Kingston home show by Your Home Team @ Dominion Lending Centres, shows Flaherty cautioning Canadians about the “too low” rate, with words in larger type above: “He may not want you to save… BUT WE DO.” The finance minister has gone on the record several times admonishing the lending community about engaging in a rate war, following BMO’s decision to post its 5-year fixed mortgage at 2.99 per cent. Since BMO’s posted rate on March 4, several banks have countered with their own matching or lower rates – the most notorious being Manulife’s drop from 3.09 to 2.89 per cent, which it summarily reversed following a phone call from the finance minister’s office. The promotional rate offered by Your Home Team was specifically keyed to the finance minister’s comments. “Our special rate is through Lendwise 50 bps. I normally don’t sell rate, but I was piggybacking for a short period based on Flaherty’s comments,” he told MortggeBrokerNews.ca. As for the dangers of low rates for clients, Binkley does explain that there is a difference between qualifying to pay and being able to pay. “We counsel our clients to pay more right away – that is pay ‘as if’ you had taken a 10-year rate, we show them how much more they can save, advise them about the rate increasing in 5 years, etc. ,” says Binkley. “There’re lots of clients I will ask to reconsider buying if they are close to qualifying; to me, qualification does NOT mean affordability.”

Flaherty Hints ... Maybe a Bridge Too Far with "Rule Changes"

Flaherty: No more room for rule changes

Mortgage Broker News
Brokers have heard it before, but the Finance minister is saying it again – this time with more conviction – arguing the government simply has no more room to play with the mortgage rules in order to curb household debt.
“We’ve done enough,” Flaherty said during a weekend interview. “I do not intend to do anymore.”
If true, that's good news, say most mortgage brokers.
Many of them complained that the guidelines and rule changes introduced by the Conservative government this summer in order to slam the brakes on an overheated housing market were too harsh. Flaherty himself had earlier conceded that the economy could take a beating with the changes, but called the tighter mortgage rules around amortization and LTV for refinances necessary to prevent a housing bubble.
During Saturday’s interview, the minister said he was pleased by signs of a slowdown in vital segments such as condo markets in white-hot centres Toronto and Vancouver.