From The Toronto Star: Ottawa may further dampen mortgage market
Federal budget proposals could curb competition and raise interest rates in the mortgage market.
By: Dana Flavelle Economy, Published on Tue Apr 02 2013
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Canadian borrowers could find themselves paying higher mortgage rates if Ottawa goes ahead with budget proposals that would further reduce taxpayers’ exposure to the housing market, industry observers say.
The proposals – which would restrict the use of default insurance available for conventional, low-risk mortgages – could raise costs, especially for smaller non-bank lenders, and reduce competition, industry observers said.
The result could be higher mortgage rates for consumers, experts predicted.
In budget documents released March 21, Ottawa proposed two important changes in the way lenders can insure low-risk conventional mortgages.
The government plans to gradually limit the insurance of low-ratio mortgages and also prohibit the use of any taxpayer-backed insured mortgages, whether high or low ratio, outside of a CMHC sponsored program.
High ratio loans refer to those that require the borrower to pay a premium because they have less than a 20 per cent down payment. Low ratio loans, also called conventional loans, don’t require the borrower to pay a premium because they have more than 20 per cent as a down payment.
Ottawa has already moved four times to tighten rules surrounding high-risk mortgages. Now it’s tackling the low-risk market.
The proposed measures will mainly affect smaller non-bank lenders, such as First National Financial LP, MCAP Financial Corp. and Investors Group, because of the way they fund their mortgages, experts said.
However, the impact could be felt across the mortgage market as smaller lenders set the floor for other lenders, observers said.
“All you have to do is go on the Internet and see a lender is offering 2.79 per cent and you can go into a big bank and say, ‘Match it.’ Even small guys can have a big impact on the market,” noted Rob McLister, editor of CanadianMortgageTrends.com.
The move is seen by some real-estate experts as the latest attempt by the federal government to cool an overheated Canadian housing market and address record household debt levels, most of it tied up in mortgages.
“It seems to me this is another attempt by the (federal) minister of finance to try to tighten up the mortgage market,” said John Andrew, a real estate expert at Queen’s University. “They’re kind of running out of ways to do this. Like the other four rounds of changes, this would also essentially increase the cost of a mortgage.”
But while the housing market in Vancouver and the condo market in Toronto are both slowing, Andrew said it’s been tough to gauge whether the changes are having the desired impact on the overall real estate market.
“We’re not in the spring market yet. We’re waiting for the weather to warm up,” Andrew noted.
The proposed change will hit small lenders hardest, industry observers said, because of the way they fund their loans, such as Asset Backed Commercial Paper.
ABCP may not qualify for insurance under the proposed new rules.
Here’s how low-ratio mortgage insurance works under the current rules:
A consumer goes into a bank or other lender for a mortgage. The lender provides the funds, then packages that mortgage with others, gets bulk insurance from Canada Mortgage and Housing Corporation, and then sells the entire group of insured mortgages as a package to investors, such as pension funds.
The process makes it easier for banks and other lenders to raise capital.
During the financial crisis of 2007, when credit was hard to get, banks and other lenders substantially increased their use of portfolio insurance, the government noted in budget documents two weeks ago.
In fact, three-quarters of CMHC’s outstanding mortgage insurance is now on low-risk loans, an official with the agency confirmed Tuesday.
But CMHC is fast approaching the $600 billion ceiling imposed by the federal government on the amount of insurance policies it can write.
What form any change in federal policy will take remains unclear. At the moment, Ottawa says it’s consulting with industry participants.
