Golden Handshake and a Kiss Goodbye

Top Banking regulator stepping.. OSFI’s Julie Dickson leaving in 2014

May 31, 2013 — Steve Garganis

Julie Dickson, the head of OSFI (Office of the Superintendent of Financial Institutions) will not be back when her term expires in July 2014.  She’s decided to not to stick around after making more lending rule changes in 2012, than I have ever seen, during my entire 23 year career working in financial services.   OSFI is a regulatory bodythat provides regulation and supervision to 152 Banks, Trust companies and other Lenders.   In short, they are auditors.  Here’s a link to the major changes made just last year including putting CMHC under OSFI control.. more on that later..

Some say her claim to fame is that she was in charge during the worst banking and mortgage crises in history.  And that Canada came out of this global financial collapse way better than any other country.   It’s true, we did come out of this very well compared with the rest of the world…   But what does Ms. Dickson and OSFI have to do with it?  For me, this had more to do with luck, govt intervention and Canadians being our normal conservative selves.   We were a little slower to adapt to U.S. style lending policies… Ask any financial expert and they will tell you we were just a few years behind the U.S. with regards to their wild mortgage lending guidelines…

Did you know that our Federal govt approved and promoted $0 money down mortgages, with interest only payments?? and not just for owner occupied properties but for rental properties, too?  Think about that… $0 money down with interest only payments on a rental property!!!  Wow!  Or how about the 35 and 40 year mortgage amortizations?  95% loan to value refinances?   We also had 107% mortgage financing in Canada… (not supported by govt of Cda but it was here)…   Remember, all these programs started to get introduced in 2006.. just 2 years before the October 2008 U.S. sub-prime mortgage crisis.

And now Ms. Dickson and Mr. Flaherty (federal minister of finance) have turned back the clock to 1993 with a knee jerk like reaction with their Bill B-20… This Bill affects anyone that borrows money.. yes.. ALL of US… Many of the newer lending rules are just like they were 20 years ago… Only it isn’t 1993 anymore… and times have changed..  Our needs have changed… We don’t have 8.00% and 9.00% mortgage rates… We need a govt for 2013, not 1993. more here

Death Sentence for Extended Amortizations?

Canadian Mortgage Trends

Housing commentator Garth Turner cites insider info that long-termamortizations are about to go extinct, at least where the federal government has jurisdiction.

In a blog post today, he writes:

“Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada.”

This applies to mortgages that: (a) are from lenders subject to federal regulation, and (b) have 20% or more equity. Amortizations on prime mortgages with less than 20% equity are already capped at 25 years.

If true (with emphasis on the word "if"), this news could:

1. Increase monthly payments on newconventional mortgages by about $53 per $100,000 of mortgage, other things being equal.*
2. Potentially impact even smaller non-bank lenders (e.g., First National, Street Capital,MCAP,…). That’s because, as Turner adds:
   
   “Regulated financial institutions will also be prevented from buying any securities which are made up [of mortgages] with 30-year ams.”
   
   Virtually all non-deposit-taking lenders rely onsecuritization and/or selling mortgages directly to banks.
3. Make provincially-regulated credit unions the only game in town for amortizations over 25 years. That would provide credit unions who keep long-amortization mortgages on their balance sheets with another advantage versus the banks. CUs already sidestep federal mortgage rules by offering HELOCsabove the federal 65% loan-to-value (LTV) maximum, higher LTV stated incomemortgages and mortgages with lowerqualification rates.

As noted, none of the above has been confirmed. So the above should be considered speculation until it is. We’ll do more digging and report back.

BMO Rate Fixing: "Smoke and Mirrors"

BMO’s move to withdraw its 2.99 posted rate is no more than “smoke and mirrors,” says one Ottawa mortgage broker, suggesting the bank will continue to offer even lower rates at the branch level.

“I can still walk into a bank and get 2.89,” says Jeff Cody, with MCCMortgage Brokers City. “The move back to 3.09 is just a lot of smoke and mirrors.”

BMO has apparently bent to Jim Flaherty’s will and announced it is backing off its 2.99 per cent posted rate for that five-year no-friller mortgage, returning it to 3.09 per cent at the end of the week.

“Our advice to Canadians is simple: Protect yourself from rising rates by locking in for five years and become mortgage-free faster by choosing a maximum amortization of 25 years,” said Ernie Johannson, senior VP of Personal Banking Canada with BMO, in a statement issued to the press. “This mortgage is the responsible choice for the times.”

Although Cody doesn’t deal with BMO, he does do a lot of business with Manulife.

“Is BMO raising the rate to please Flaherty? Absolutely,” says Cody, who cited Manulife’s decision to go back on their own rate after a phone call from the finance minister’s office.

Last week Manulife Bank announced it was cutting its five-year fixed rate to 2.89 per cent, but changed course one day later – bringing it back up to 3.09 per cent – after receiving a call from an official in Mr. Flaherty’s office.

But for Cody, the best rate for the customer starts and finishes with the mortgage broker.

“Let us do the shopping for you; we’ll get you the best deal out there,” he told MortgageBrokerNews.ca.

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.

Crappy Market: Is It "Housing Bubble" or "The Rules"?

 Amid all of the  doom and gloom scenarios posed by every expert and commentator concerning our current market situation, I thought it might be a good idea to ask "what conditions caused our market to falter in the first place"?
Is it the effect of a change in mortgage rates? ... Hmmm, rates have actually gone down! ... I don't think so.
Is it because Vancouver's market has been over heated and was about to collapse? ... Well, sales volumes are slower than last year and there is certainly a small correction in prices but I don't see anyone leaping from bridges yet.
Is it investor confidence in Vancouver's market? ... Well, maybe. ... Everyone is looking for a good deal and it doesn't make sense to pay too much, but people still need a home to live in, don't they?
If it's a question of "Confidence", is the issue "Confidence" in our market? ... Perhaps it's just me but, the more people that I speak to, the more people I find who are losing "Confidence" about their prospects of ever becoming home owners.
But why is this? ... Aren't mortgage rates at record low levels?
If it's not the rates, and people still need homes for their families, wherein is the problem? ...
Well, perhaps it's the Rules!
Here is an interesting article that comments on Mortgage Insurance and sheds some light on the Effects that the Mortgage Rule Changes are having on Canada's Real Estate Market. (Canadian Mortgage Trends)

Insured Buyers are the Majority

Mortgage insurance is typically mandatory for homebuyers without 20% equity.

Putting down 10% on the average $350,152 home, for example, means you’ll cough up a $6,302 insurance premium (given fully documented income and decent credit). Since insurance premiums are tacked on to your mortgage, that adds up to $9,000+ if you amortize it over 25 years.

Of course, you can avoid insurance altogether by plopping down 20% or more. The challenge is, only a minority of buyers have that sort of equity.


According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.

For those purchasing from 2010 through spring 2012:

41% had less than a 10% down-payment
21% had a 10-19.99% down-payment
Only 39% put down 20% or more.
(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add to 100% due to rounding.)

Given the widespread use of mortgage insurance, it’s easy to see how regulator’s insurance rule changes can rapidly alter home buying trends. In another few months, we’ll get a good sense for how the most recent rule tightening has impacted nationwide mortgage volumes.