Hi, it’s Mark Alltree, franchise owner of Dominion Lending Centres Innovation Group here in Vancouver.
After reading this, please consider reaching out to your Member of Parliament and ask them why they are risking your mortgage affordability and mortgage choice and the opportunity for your children to ever have the pride and the joy of home ownership.
Our Dominion Lending Centres President, Gary Mauris, will make a presentation before the Standing Committee on Finance in Ottawa on Thursday. We are thrilled Gary has this opportunity. I have prepared a few additional perspectives and recommendations to share with Gary in the hopes they will complement his testimony to the committee. This I do on behalf of my current and future clients, fellow mortgage brokers, our lender and insurer partners and to all Canadian home owners and aspiring home owners. If you could please share these comments and show your support by liking and forwarding them to all your contacts, that would be most appreciated.
Here are my topics:
a) Intervention vs. Stakeholders – a history lesson;
b) 10-Years ago vs. today – another history lesson;
c) Out of touch benchmark stress testing – Posted vs. Discounted Rates;
d) a reminder to the Government of Canada the main “purpose” of the National Housing Act;
e) Foreign National Lending Policy? Does B20 (residential mortgage underwriting practices and procedures) apply to Foreign Nationals? Today, Foreign Nationals are the silent killer of affordable housing in Canada.
f) Prejudicial policies for non-deposit taking or “monoline” lenders – A history lesson in full motion.
This is intended to be a historical reminder of how policy changed the course of the Canadian real estate market. Government intervention, if appropriate and well thought out in advance, especially combined with stakeholder input prior to the introduction of any policy change, can have a remarkable outcome and is a great process to experience. I’ve personally worked with government as a stakeholder and enjoyed the resulting outcome. I appreciate our stakeholder opportunity being heard but I, too, would appreciate our government taking appropriate action with stakeholders’ participation before considering changing policies of any kind in the future. Given that mortgage brokers have a significant mortgage audience in Canada, perhaps the mortgage broker industry could now have seats at a formal table with the Standing Committee on Finance going forward which may help prevent an unnecessary reactive process. Serious consideration would be most appreciated.
Government intervention, at one point in our recent history, permitted 0% down financing and 40-year amortizations and was heading down the pathway of U.S. lending practices. In my opinion, this is clearly what commenced the creation of an unaffordable housing market in Canada. Despite the intended goal to help Canadians achieve home ownership at the time, the unrestricted insured lending policies which included investment property and homes valued over $1 million, did more harm than good and has had lasting negative effects on market value today. Moving from a 25-year amortization to 40 years increased borrowing capacity by nearly 18%. Combine this with zero down, the increased capacity then becomes nearly 23%. Again, this increase in capacity simply pushed market values upward, over-extended consumers’ affordability, created the potential for great risk to our financial system and put greater stress on our mortgage insurers and lenders. Today, would-be Canadian home owners are still suffering the consequences of the failed yesteryear policies.
Reducing amortizations back to 25 and 30-years respectively, together with changes to down payment policy was proactive to protecting our banking system, but too late for Canadian home buyers. Again, zero percent down and 40-year amortizations had already taken their toll and should never have been introduced in the first place. Had government policy not changed from the traditional lending policy of our parents’ time, we may likely have been in a lower market value territory today without this government intervention. Some may argue this is simplistic thinking compared to the complex analysis of market analysists and economists, but I believe it’s a simple fact. If the government can back off on the policies of October 2016, perhaps history won’t be repeated. But, more has to be done…please read on.
10-years ago vs. Today – Another History Lesson
This conversation is about first-time-buyers under $1 million and how it’s important to compare where we were with borrowing capacity in 2007 compared to today. Prior to the October 2016 policy change, we had approximately 15% increased borrowing capacity compared to 2007. The insured lending policy introduced last October (which required borrowers to qualify on the 5-year benchmark rate or stress rate), significantly reduced Canadians’ borrowing capacity by 20% below that of 2007. This reduction is based on the loss of the 15% change from 2007 plus the 5% loss post the policy introduction (see chart). Putting insured first-time-buyers on this backward treadmill will not serve Canadians’ ability to achieve home ownership like all those before them. Prior to this policy introduction, the National Housing Act (the “NHA”) carried on the privilege and purpose of the NHA. Now a majority of first-time-buyers may have to put their aspirations aside for perhaps as long as a decade or more. The benchmark stress rate puts even more pressure on a household to achieve and see a rising income that can reach and sustain buying capacity while trying to keep pace with market appreciation, neither which are likely achievable. Return the “purpose” of the NHA back to Canadians.
Out of touch benchmark stress testing – Posted vs. Discounted Rates
I stress-test my clients against their personal budget in nearly every transaction and have done so almost my entire career. By taking the position to stress test the market with a qualifying rate (currently 4.64%) in my opinion, is simply statistically out of touch. If a stress test is deemed essential, this should be revisited and I have a recommendation.
Using Bank of Canada rate statistics together with our discounted mortgage rate data, I estimate the benchmark stress rate to be 81 to 100 basis points too high. This will vary depending on lender discounted rates available. Discounted 5-year rates, in my opinion, have averaged 3.829% over the last ten years. This is achieved by reducing the benchmark rates from 2007 until today by an average spread of 170 basis points across the board. Generally, this spread would represent arriving at conventional discounted mortgage rates. Insured rates on the other hand are usually up to 200 basis points below the benchmark rate in many cases. Stress testing today at 4.64% or 81 basis points above this average of 3.829% makes no sense given our rate history. If a stress test is absolutely essential, the government should give merit to the fact that lending in this country is discounted. Reasonable stress testing should be considered if government policy sees no way to avoid a policy of this kind. Presently, my recommendation would be to test against the 10-year average of the discounted 5-year rate of 3.829%. This would likely bring a greater share of first-time-buyers back into the market. The current benchmark stress rate is counter intuitive to the NHA “Purpose” to “promote housing affordability and choice” and this recommendation would hopefully bring the purpose back.
A reminder of the “Purpose” of the NHA.
So my emphasis is again to remind the Government of Canada the original purpose of the Act as described in sec. 3 of the NATIONAL HOUSING ACT (see extract below). Bring back the purpose of the NHA and return the hope and encouragement of home ownership to the insured first-time-buyer market. Let the Bank of Canada continue its good work with inflation control and in doing so, let market interest rates dictate Canadians’ future financial borrowing capacity and their ability to attain home ownership, but not by using unrealistic stress testing together with shocking the Canadian real estate market and Canadians with surprise counterproductive policy.
Foreign National Lending Policy? Does B20 (residential mortgage underwriting practices and procedures) apply to Foreign Nationals? Today, Foreign Nationals are the silent killer of affordable housing in Canada.
Foreign Nationals, in most cases, have lending alternatives that are far reaching; they don’t require proof of income, and by themselves, are understood to have contributed immensely to unrealistic market activity and market value appreciation. This makes it extremely difficult for existing or aspiring home owners to get to the next level in their financial and ownership potential. It would appear B20 has no application to foreign nationals and they need to be brought in line and into the 21st century. It’s as though a foreign national has escaped the B20 Guidelines or is exempt altogether. Similar lending alternatives are not available to Canadians, nor are they available to non-resident Canadians unless these non-resident Canadians pay income taxes in Canada on their work abroad. This seems to be a very discriminating set of rules, in my opinion, that needs immediate attention. Shooting the first-time-buyer in the foot is not the answer when they are far from the root cause of current market values. I would recommend that stakeholders take immediate action to suggest imposing B20 underwriting policies on foreign nationals and expand B20 to include these borrowers (perhaps naming it B20FN), at the very least, and put measures in place that will mitigate the possibility for abuse, potential fraud and market manipulation. This has been a national topic but has not been addressed in any significant way to date. Today, this is the silent killer of affordable housing in Canada.
My comments may not be scientific, but I make these comments on behalf of nearly 60% of my 2016 first-time-buyers who, post the October 2016 policy introduction, would not be enjoying the pride of home ownership today or at any time in the near future. Take foreign national real estate participation seriously into consideration and make lots of noise about it. Foreign nationals should be treated to an even higher test than those imposed on Canadians. Establish B20FN immediately.
Prejudicial policies for non-deposit taking or “monoline” lenders.
This, too, is not a new topic of discussion. Our non-balance sheet or “monoline” lenders have been gradually constrained by NHA policies. These changes give rise to ask the question; could these gradual policy changes be the equivalent of a constructive dismissal of an employee in a company? Is it the government’s intention to eliminate these alternative sources of mortgage financing to consumers? Monoline lenders have been an integral part of the mortgage broker industry for decades and have provided a competitive source of funds to consumers, as well as outstanding customer service, and include mortgages for purchases, refinances and for properties valued over $1 million. Depending on the investor relationship of these monoline lenders, consumer “choice” and “affordability”, as described in the NHA, is slowly being stripped from these lenders and many can no longer consider refinance business and are constrained to mortgages on real estate transactions valued under $1 million.
Canadians need these additional sources of financing to keep the market competitive and again, to continue to give consumers “choice” and “affordability.” Affordability, too, comes with a cost-effective source of funds, the latter of which has changed so dramatically, these lenders are challenged in some cases to compete in the mortgage market place. There is no level playing field between the banks and monoline lenders. The increased insurance premium for bulk insured low ratio securitized mortgages sends a clear message to these lenders and ultimately, higher rates for lower loan-to-value borrowers.
Canadians deserve better! These lenders are essential to Canadians and essential to the housing market in Canada. Don’t do a constructive dismissal of monoline lenders. They, too, represent a huge mortgage audience in Canada, and one of respect and trust they worked hard to establish with investors and consumers alike. Look at their historical contribution to the housing market and don’t let policy changes of today become another unfortunate history lesson for the government. This history lesson is already in full motion.
Extract from the National Housing Act
3 The purpose of this Act, in relation to financing for housing, is to promote housing affordability and choice, to facilitate access to, and competition and efficiency in the provision of, housing finance, to protect the availability of adequate funding for housing at low cost, and generally to contribute to the well-being of the housing sector in the national economy.
R.S., 1985, c. N-11, s. 3;
1992, c. 32, s. 6;
1999, c. 27, s. 2.