I read an interesting article this morning By Kathryn Boothby, For Postmedia News March 26, 2014.

Before you hoof it to your financial institution, bank, credit union or just a simple mortgage renewal… you might want to give your local Mortgage Broker a call! www.kcscherpenberg.ca

Do you ever wonder where these huge record breaking Canadian bank profits come from…? Hint… PROBABLY NOT from giving you a good deal on your banking products… read on…

Len Collins is well-versed in mortgage financing – he owns four houses, so he’s had considerable experience in these matters. But even so, he says he never goes it alone.

Collins signed his first mortgage deal with a local bank when he was 24. “It was 1988. I was young and had a down payment. Going to the bank for a home mortgage was the standard thing to do. I didn’t shop around because mortgage brokers weren’t too prevalent back then.”

Collins bought and sold three homes over the next decade and a half. It was at that point he adopted the philosophy that real estate should only be bought, not sold. Around the same time, he met the mortgage broker who would help him assemble the stable of properties he and his wife own today.

He hadn’t had much exposure to brokers to that point. But he needed someone to help build his property portfolio in a cost-effective way with mortgages that matched his personal and economic situation.

“A mortgage is often the largest financial commitment of a lifetime,” says Jim Murphy, president and chief executive officer of the Canadian Association of Accredited Mortgage Professionals (CAAMP). “It’s important that consumers have choice, one of which is a mortgage broker who shops the market to find the best product at the best rate for the borrower, whether it’s a first mortgage or a renewal.”

According to CAAMP research, brokers account for 25 per cent of mortgage deals in this country, says Murphy. “For first-time buyers and new Canadians the percentages are even higher.”

Mortgage brokers are specialists who have relationships with a wide range of lenders, including banks, credit unions and non-banking institutions such as First National or MCAP, says Murphy.

In eight provinces, brokers must be licensed and registered, secure ‘errors and omissions’ insurance and disclose the lenders they deal with, he says.

A national brokerage firm works with a multitude of different lenders on behalf of his clients. They range between ‘A’ lenders that offer the best rates; ‘B’ lenders for those with bruised credit; and ‘C’ lenders that have the highest rates and are for unique situations, he says.

A 2010-2011 Bank of Canada study found that those who use a mortgage broker pay less, on average, than those who negotiate directly with lenders. The same study found that higher-income borrowers pay more to borrow because they are less inclined to shop around or negotiate a mortgage.

“Brokers do the leg work and make recommendations with the end goal that clients pay the least amount of money to own their own home,” says Garganis. But it’s not simply about order-taking and shopping for the best rate, he says.

“While interest rate is the biggest factor affecting the cost of a mortgage, it’s also about getting the right product, terms and conditions.” For example, someone looking to stay in a home for only three years might not be best served by a five-year fixed-rate mortgage with penalties for breaking the term, he says.

Typically, the service of a mortgage broker is free to borrowers. Commissions are paid by the lending institution once a mortgage transaction is completed.

“While there are slight differences in the commissions paid by lenders,” says Garganis, “we’re a service-oriented business based on referrals and repeat customers – a small gain is not worth the risk of losing a client.”

The ongoing assistance of a broker also comes at no cost to the borrower. This is something Collins values highly. “Our broker has gained a great deal of expertise over the years. He has a blog and is active on social media where I can read his insights into current market conditions,” he says. “He warns us about what not to do, and even recommends affordable lawyers and other professionals.

“With changing CHMC rules, reduced amortization, and the fear that interest rates might rise, we’re at a time where home buyers are facing some daunting decisions. It’s comforting to know I have a guy that I can trust in my corner.”

© Copyright (c) For Postmedia News

The Bank of Canada is maintaining its target for the overnight rate at one per cent once again, pointing to inflation that is expected to hover below its target for the time being.

“With inflation expected to be well below target for some time, the downside risks to inflation remain important,” an official release for the BoC states. “At the same time, the risks associated with elevated household imbalances have not materially changed.”

Still, economic growth was stronger than expected at the end of 2013, shedding some positive light on an issue Bank of Canada Governor Stephen Poloz was quite bearish about at the end of last year.

“In Canada, economic growth in the fourth quarter of 2013 was slightly stronger than the Bank anticipated, and upward revisions earlier in the year further raised the level of GDP,” the release states. “The Bank still expects underlying growth of around 2 1/2 per cent in 2014, with the current quarter likely to be softer.”

On a positive note, the BoC continues to believe the housing market will experience a soft landing as opposed to an all-out crash.

“Meanwhile, recent data support the Bank’s expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households,” the report states.

The Bank of Canada’s benchmark rate has been held at its one per cent target since 2010. And it looks like brokers will continue to see interest in their variable rate offerings, with the BoC showing no signs it will be hiking its rate anytime soon.

The cat is out of the bag…..!

Ever wonder why your neighbour seems to be doing financially better than you? They got the mortgage done by an industry expert…. With access to all Canadian mortgage products… from your bank, your credit union, your mortgage company and a host of others. The best mortgage for you is only a phone call away. 705 333 2222 or 705 646 2777 can save you thousands!

“The Canadian Association of Accredited Mortgage Professionals (CAAMP) released its annual fall survey report on Tuesday which indicated that brokers are quickly gaining valuable market share on their banking counterparts.

“Among borrowers who took out a new mortgage during 2013 up to the time of the survey in October, 42 per cent obtained the mortgage from a Canadian bank and 40 per cent from a mortgage broker,” the report stated. “Other categories accounted for 18 per cent of new mortgages.”

From CMT.

September 15, 2013

Q3 2013 Bank Reports – Mortgage Morsels

Despite expectations for a more subdued quarter, Canada’s Big 6 Banks pulled off another impressive earnings season. And while many were expecting a slowdown in the housing market, most banks’ mortgage portfolios showed resilience.

The tidbits that follow come from the Big 6 Banks’ quarterly earnings reports, presentations and conference calls. There’s some good stuff in there (CIBC’s discussion of how it deals with price-sensitive mortgage customers is particularly interesting.)

If you’re time-pressed, the focal points are highlighted. 

*********

Bank of Montreal
Q3 net income: $1.14 billion (+17% Y/Y)
Earnings per share: $1.53

• BMO’s total Canadian residential mortgage portfolio stood at $85.5 billion, up from $81 billion in Q2. (Source)
• 59% of the bank’s residential mortgage portfolio is insured, down from 62% in Q2 and 65% in Q3’12. (Source)
• Average loan-to-value (LTV) on the uninsured portfolio is 59%, unchanged from Q2. (Source)
• Loss Rates for the trailing 4-quarter period were less than 1 basis point. (Source)
• “As expected, there were decreases in certain loan portfolios and in our personal loan balances, due in part to the effects of our continued practice of selling most mortgage originations in the secondary market and active loan portfolio management.” (Source)
• “We’re doing the right things to generate sustainable revenue growth, with a focus on adding high quality earning assets, including secured mortgages and auto loans,” said Bill Downe, president and CEO of BMO. (Source)
• Asked about the 4.5% quarterly increase in residential mortgage balance and whether that may be due to customers acting ahead of a perceived move in mortgage rates, Frank Techar, President and CEO, Personal and Commercial Banking Canada, BMO, said this:  

“…I think a couple of things. One is seasonality definitely plays a role. So, I know our growth over the last few quarters has been strong. Part of that’s because of the time of the year. I do think there’s been a little bit of bring-forward with respect to the perception that rates are going up. So, there might have been a little bit of a flush of activity as a result of that. It’s very hard to put your finger on, though. It’s more anecdotal than anything. My expectation is that, overall market growth moving forward is likely to slow a bit. I think in particular if rates do move up a bit more, we’re going to see a little bit more slowing. From my perspective, we’ve been able to grow faster than the market as it is now and our objective is to grow faster under that scenario as well. But I would say there is a bit of a bias for a slowdown, no doubt in particular staring at the possibility of rates going up.” (Source)

• 66% of BMO’s portfolio has an effective remaining amortization of 25 years or less, up from 64% in Q2. (Source)
• BMO’s condo mortgage portfolio is $11.8B (up from $11B in Q2) with 53% insured (down from 56% in Q2). (Source)
• “Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages,” said the bank’s quarterly report. (Source)
• BMO notes: “BMO regularly performs stress testing on its mortgage and HELOC portfolios to evaluate the potential impact of tail events. These stress tests incorporate moderate to severe adverse scenarios. The resulting credit losses vary depending on the severity of the scenario and are considered to be manageable.” (Source)

CIBC
Q3 net income: $890 million (+8% Y/Y)
Earnings per share: $2.16 a share

• CIBC’s residential mortgage portfolio stood at $144 billion in Q3, up from $143.7 billion in the previous quarter. (Source) Of that, approximately 46% is in Ontario, 20% is in British Columbia, and 16% is in Alberta. (Source)
• “The credit quality of this portfolio continues to be high, with a net credit loss rate of about 1 basis point per annum,” said Laura Dottori-Attanasio, Chief Risk Officer and Senior Executive Vice-President. (Source)
• The bank’s residential mortgage portfolio was 72% insured, of that 90% was provided by CMHC. Of the uninsured portfolio, the average LTV was 54%. (Source)
• Condos account for approximately 12% (or $16.6 billion) worth of the bank’s total mortgage portfolio, and 74% of that is insured. Another 2% (or $2.9 billion) is related to condo developers, with 32% drawn and 68% undrawn. (Source)
• The bank noted, “Residential mortgages were down $693 million, primarily due to attrition in our FirstLine mortgage broker business, largely offset by new mortgage originations through CIBC channels.” (Source)
• CIBC noted, “Other revenue was down $50 million mainly due to lower Treasury allocations and lower revenue in our exited FirstLine mortgage broker business.” (Source)
• “Our exit from the FirstLine mortgage broker business continued to progress well, with both conversion volumes and spreads well exceeding our targets,” said Kevin Glass, Chief Financial Officer and Senior Executive Vice President. (Source)
• Glass added: “The CIBC brand mortgage portfolio grew 13% year-over-year, which represented the 15th consecutive quarter of outperformance versus the industry.” (Source)
• “Our core net interest margin, or NIM, was 263 basis points for the quarter,” Glass continued. “This was down 1 basis point from the prior quarter, but up 6 basis points from the prior year. NIMs have been helped by the improvement in our business mix, driven by growth in higher-margin CIBC-branded products, and this was offset by lower margins in our deposit portfolio. We expect the level of NIM to remain relatively stable, with improvements in business mix helping to offset the ongoing negative impact of lower interest rates that have been felt throughout industry.” (Source)
• Regarding CIBC’s mortgage business, David Williamson, Group Head of Retail & Business Banking and Senior Executive Vice President, said this: “Our mortgage business is running quite well. We don’t lead on price. You’ll see that in the markets. We haven’t been doing that, and we don’t intend to. But our mortgage growth is up 13% year-over-year. So we haven’t broken out how much of that is a tailwind from FirstLine. But even if you adjust out FirstLine, I’d say we are still running at market-leading growth in our brand, and we’re doing it through our brand. We’re not buying broker-originated mortgages, which maybe supports the growth in certain industry players. This is through our own channels. So probably worth talking about how that’s occurring if it’s not price. There are 3 things that we’re doing. One is investing in our branch network… We’re also investing in our mobile adviser channel. We were underrepresented in that space and we’re adjusting that, and that’s giving us some lift in the year-over-year stats… One of our priorities is (to) improve our sales and service capabilities. And I think we’ve spoken about our breakaway initiative, which has been rolled out across our branches, at least most of the branches at this point, and some nationwide intake programs and so forth. And we’re seeing a very significant lift in sales activities through both those intake programs and breakaway. And then thirdly, we introduced Home Power Plan, the integrated HELOC and mortgage product. Now it came out the same time as regulatory constraints on HELOC at 65%, but it’s still been a very well-received program.”
• Williamson:  “If I speak a bit just about FirstLine, that’s gone particularly well, and that has supported the growth, so campaign-to-date retentions at about 45%. This quarter, we’re retaining about 50% of what’s coming off, and that’s relative to the target retention that we’ve set at the beginning of this initiative, 25%. So our retention levels are well exceeding, like, doubling the initial target, and we’re still maintaining margins. So again, probably good to speak about how that’s happening. We’ve set up a retention team that’s focused on just that, retention. We introduced … somewhat advanced analytics that look at the price sensitivity of clients based on the data we have available to us, and that’s informed things such as when we call clients. So if you’re identified as a price-sensitive client, our retention team calls you earlier, prior to your renewal date. And if you’re less price-sensitive, our thinking is you’re probably not thinking about it, so we’ll call you later. And then on top of that, we’re focused on getting these clients embedded into a deeper relationship with CIBC. So those retention teams have offers and lead programs that are facilitating that. So in aggregate, this quarter, the FirstLine runoff has been, for the first time, eclipsed by growth in the CIBC-branded mortgage space. So recently, the NIM expansion has been offsetting reduced volume. And this quarter, we now have NIM expansion plus volume growth in mortgages… The mortgage space has been one that we’ve made a pretty fundamental shift in, in the last little while.” (Source)

(Ed. Note:  If the above is any indication, and you’re a CIBC mortgage customer, you probably don’t want to be getting your renewal reminder call right before maturity. If you do, take a hard look at the rate you’re being offered.)

National Bank of Canada
Q3 net income: $419 million (+11% Y/Y)
Earnings per share: $2.39 a share

• Residential mortgages rose 7% Q/Q and 10% Y/Y to $35.9 billion in Q3. (Source)
• Personal Banking’s total revenues rose $12 million, “mainly due to higher loan volumes, especially consumer and mortgage loans, partly offset by a narrowing of net interest margins.” (Source)
• “…Loan-to-value for HELOCs and uninsured mortgages was approximately 58% and 55%, respectively.” (Source)
• “What we’ve experienced in the last quarter is, the volume that we’ve experienced in mortgages have actually not been to what we had last year,” said Helene Baril – Senior Director, IR. (Source)
• “During the nine months ended July 31, 2013, the Bank acquired a portfolio of residential mortgage loans with a higher credit risk profile for a total amount of $328 million.” (Source)
• In discussing credit risk, the bank noted: “…the risk of economic slowdown is real and could adversely affect the profitability of the mortgage portfolio. In stress test analyses, the Bank considers a variety of scenarios to measure the impact of adverse market conditions. In such circumstances, our analyses show higher loan losses, which would decrease profitability and reduce the Bank’s regulatory capital ratios. To counteract the negative impact of an economic slowdown, the Bank has acted preventively by defining a contingency plan to guide its response in such an event.” (Source)

Royal Bank of Canada
Q3 net income: $2.3 billion (+3% Y/Y)
Earnings per share: $1.52

• Residential mortgage volume rose to $179 billion in Q3, up 2% from $177 billion in Q2, and up 5% from $172 billion in Q3 2012. Average LTV was unchanged at 47%. (Source)
• 42% of RBC’s residential mortgage portfolio was insured in the quarter, down from 43% in Q2. (Source)
• “Net interest margin continues to be impacted by a low rate environment and competitive pressures.” (Source)
• RBC repeated its wording from previous quarters, saying it has a “well-diversified mortgage portfolio across Canada” and that it continues to conduct “Ongoing stress testing for numerous scenarios including unemployment, interest rates, housing prices.” (Source)
• “(Loss) provisions for our residential mortgage portfolio were consistent with our historical performance at 1 basis point,” said Morten N. Friis, Chief Risk Officer. (Source)
• From David McKay, Group Head, Personal and Commercial Banking: “We’ve been very disciplined about the volumes that we’re generating. As you know we don’t participate in the broker mortgage business nor do we, as many banks do buy wholesale mortgages from third-party originators at very low margins and spread. So our growth has been through proprietary channels that generate very strong margins for us and has been consistent margins. So I think those are some of the generic drivers of where we are.” (Source)
• Gordon M. Nixon – President and CEO: “…Certainly there is some volatility in the (mortgage) commitment pipeline and…we make forward rate commitments for up to 120 days as a market practice. We hedged a number of those commitments protecting margins, so we hedge forward at a known cost and we price accordingly. So we’ve got experience in managing in a volatile interest rate environment where swaps are moving around… (Source)

Scotiabank
Q3 net income: $1.77 billion (-14% Y/Y)
Earnings per share: $1.39

• The bank’s residential mortgage portfolio totalled $186 billion in Q3, flat on the quarter and up 24% Y/Y (or 6% excluding ING). (Source)
• “We have…become the leader in…mortgage product,” said CEO Rick Waugh.
• “…Market share in residential mortgages for Scotiabank has increased nearly 5% to
  22.6% from 17.9%.” (Source)
• 90% ($170 billion) of Scotia’s portfolio is related to freehold properties and 10% ($19 billion) is in condominiums. (Source)
• Of Scotia’s residential mortgage portfolio, 56% is insured, down from 58% in Q2. (Source)
• The average loan-to-value (LTV) ratio of the uninsured portfolio is 56%, down from 57% in Q3 2012. (Source)
• Net interest income was up 14% from the previous year, aided in part by asset growth, “particularly in Canadian mortgages”. (Source)
• “While we continue to believe that the Canadian Housing market generally remains stable, there may be some softness in Canadian Housing market prices in the short-term. Credit quality and performance of the residential portfolio remains strong,” noted Robert Pitfield, Group Head and CRO. (Source)
• “Our disciplined and consistent underwriting standards through all of our origination channels have resulted in extremely low loan losses, and again have been stressed under many severe assumptions, which confirm the appropriateness of our risk appetite,” Pitfield added. (Source)
• “Asset growth in automotive finance and residential mortgages was strong in Q3 and we see that continuing in Q4,” said Brian Porter, Group Head, International Banking. (Source)
• “Earnings were driven by the successful acquisition of ING DIRECT and by growth in auto loans and mortgages,” said Rick Waugh, CEO of Scotiabank. (Source)
• “Net interest income was driven by asset growth in Canadian mortgages, diversified loan growth internationally, and a stable margin,” noted Sean McGuckin, EVP and CFO. (Source)
• “The credit risk in the Canadian residential mortgage portfolio remains benign and customers continue to manage their finances as expected. The loss estimated of the real portfolio impacted by the Alberta flooding is not significant,” said Pitfield. (Source)
• Jeffery C. Heath – EVP and Group Treasurer: “…On dealing with NHA MBS…We all know what was announced as a short-term measure by CMHC, but without knowing the size of the cap and how it will be allocated in the future, long-term impact is really hard to gauge at this point. My view in the near term is that the impact is not material. NHA MBS is pure funding – it’s relatively modest in our case, I mean, overall scheme of things, and roughly comparable to the cost of covered bonds as another alternative. (Source)
• Christopher J. Hodgson – Group Head, Global Wealth: “On the creditor’s (life insurance) side, a number of years ago, we were significantly below the industry average in terms of (cross-)selling against our mortgage book. Over the last few years, we’ve increased our penetration through the retail branch channel to industry average. So, we’re now at a rate of about 77%, which is in and around industry. We expect to continue to see that grow over the course of the next few years, even though the mortgage volumes are slowing down…The other thing I’d say on that front is when we bought the Maple book of business a number of years ago, we had very low cross penetration in that in terms of creditor insurance, and we’ve grown that now from 12% about four or five years ago to about 45%. So, we see significant continued growth through that broker channel. (Source)

TD Bank
Q3 net income: $1.53 billion (-11% Y/Y)
Earnings per share: $1.58

• TD’s residential mortgage portfolio was up slightly to $159 billion in Q3, up from $155 billion in the previous quarter and $149 billion in Q3 2012. (Source)
• TD says its real estate secured lending (RESL) volume increased 4% Y/Y. (Source)
• “…We are bottoming out here in terms of rate compression in the United States and I think we are getting closer and closer to bottoming out in Canada as well,” said Ed Clark, President and CEO. (Source)
• Canadian P&C Gross Impaired Loans decreased $43 million (2 bps) to $437 million due to “resolutions in the residential mortgage portfolio”. (Source)
• HELOC volume fell to $62 billion in Q3, down from $63 billion in both Q2 and Q3 2012. (Source)

Note: Transcripts are provided by third parties like Morningstar and Seeking Alpha. Their accuracy cannot be 100% assured.

Steve Huebl & Rob McLister, CMT

Posted in Quarterly Bank Reports

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Canadian said…

RBC : “So our growth has been through proprietary channels that generate very strong margins for us and has been consistent margins. “

It means : Our clients pay us well over what it costs to us to lend them the money.

The RBC clients are either proud to pay more, or too negligent to negotiate better rates and conditions for themselves.

If you are still “thinking” about buying a house or refinancing…. Get on the program, the train is leaving! Call K.C. 705 333 2222 and get a rate locked down!

TORONTO, ONTARIO–(Marketwired – June 11, 2013) – It’s been warned of for months: after reaching record low levels over the past year, mortgage rates are in for an increase. Canadian bond yields have risen as of late, causing lenders to respond with a hike to fixed mortgage rates. However, variable mortgage rates will maintain the status quo, as instability among Canada’s largest trade partners and sluggish domestic economic growth lead to no change for the Bank of Canada’s Overnight Lending Rate.

Fixed Mortgage Rates: Up

Government of Canada bond yields, which set the bar for fixed mortgage rates, experienced an increase early in the month. This may prompt lenders to respond by raising their fixed mortgage offerings, however, a dramatic rate hike is unlikely given current competitive market factors.

Variable Mortgage Rates: Unchanged

Canada’s economy remains on track to reach capacity, but conditions have not recovered sufficiently to cause change to the current cost of borrowing. It is not anticipated that incoming Bank of Canada governor Stephen Poloz will change the Overnight Lending Rate in the next announcement on July 17, and economists expect such stimulus to remain in effect until 2014.

Yields Spike. Fixed Rates May Follow

Give K.C. a call at 705 646 2777 or 705 333 2222 or email kscherpenberg@dominionlending.ca

From Canadian Mortgage Trends May 29, 2013.

If you’re house hunting or thinking of refinancing, and you don’t have a mortgage rate hold, consider getting one.

Canada’s 5-year bond yield just pierced a 3-month high. That means—barring a big reversal—there’s a good likelihood that fixed rates will ratchet higher. (Bond yields steer fixed mortgage pricing, most of the time.)

A few lenders have already announced higher rates earlier today—with increases of 5-10 basis points on longer fixed terms.

In less than a month the mortgage industry’s pricing benchmark (the 5-year GoC) has surged 33 basis points from its recent lows. That’s thanks in part to:

• a brightening picture south of the border, including:
• A 10.9% y/y jump in home prices—the most in 7 years
• Consumer confidence at a 5-year high
• U.S. stocks at record highs
• lower perceived global risk (which reduces demand for “safe” government bonds)
• technical-related bond selling.

Everyone’s got their own theory on how many legs this yield rally may have. Some are proclaiming the end of the great bond bull market. But that has been said countless times before. And bull markets don’t have to all-of-a-sudden reverse direction. Yields can just as easily move sideways…for years. (Note: Bond yields move inversely to bond prices.)

Either way, inflation ultimately drives yields and mortgage rates. Notwithstanding the bond-unfriendly U.S. news, Canada has core inflation of just 1.1% (2.0% is the BoC’s target), tepid GDP growth and questionable employment gains. There is little domestic news (yet) which suggests that Canadian yields will keep soaring. But at some point, that may no longer be true.

Sidebar: For the little that it’s worth, major economists have again moved back their forecasts for the next Bank of Canada rate change. Now they’re calling for a hike in late 2014 (Source: Reuters). But that says nothing about fixed rates today. And it’s always worth repeating: Fixed rates routinely increase well before the Bank of Canada tightens monetary policy.

From Canadian Mortgage Trends.

Mortgage Rules Help Fuel Rent Hikes

Nowhere has this been more evident than in Canada’s biggest rental market, Toronto. Condo vacancies there have now dropped to a skimpy 1%, according to CIBC.

Demand from shut-out buyers has, in part, rocketed Toronto condo rents 10% higher in just 24 months. That’s according to data from Urbanation, which pegs Toronto’s average rent at a record $1,856, or $170 per month higher than at this time in 2011.

“Demand for renting condos has heated up with less first-time buyers,” said Urbanation SVP Shaun Hildebrand in a news release. “Rental transactions have exceeded resale volumes in the condo market since mid-2012, when the latest round of mortgage rule changes came into effect.”

“For the first time in a while, rents are rising faster than prices,” he added.

Regardless of one’s position on the Finance Department’s policy-induced housing slowdown, the rental market side effects are clear. Until the market rebalances (i.e., rental supply increases, home prices drop, and/or incomes rise, etc.), renters in big markets will feel some pain. That pain will come from rules intended for home buyers.

February 12, 2013

Bank Mortgages: Disclosure and Suitability

Sidebar:

The article linked to above examines concerns in the banks’ retail mortgage channels. On February 25, we’ll take an honest look at conflicts in the broker market.

Such articles will undoubtedly annoy certain stakeholders, but the conflicts they expose rarely apply to bank reps and brokers who take their fiduciary obligations seriously. Those are individuals who never fear an informed consumer.

No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.

The effects of these guidelines are visible already. A host of lenders have announced stricter rules on things like conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages. Albeit, some implemented these changes well ahead of today.

In essence, it is now tougher for many borrowers to get mortgage financing.

The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.

One prime example is First National, Canada’s biggest non-bank lender. It has adopted OSFI’s low-ratio qualification policy on variable and 1- to 4-year fixed mortgages with 20% or more equity. That requires it to analyze a borrower’s debt ratios using the Bank of Canada’s 5-year posted rate (which is usually a much higher rate than the actual contract rate).

(This is generally a sound guideline. It helps protect unsuspecting borrowers from the risk of higher rates. In the past, many lenders used rates like their 3-year discounted rate to qualify conventional mortgages with variable, 1, 2, 3 or 4-year terms.)

Like most non-bank lenders, First National relies in part on OSFI-regulated institutions to fund its mortgages. Those institutions now require compliance with B-20 and First National has little practical choice but to go with the flow.

And it’s not alone. Most monoline lenders are in the same boat.

We spoke with a treasury executive at one lender earlier today. He told us:

“My view is that all non-bank lenders other than credit unions will be subject to B-20, it’s just a matter of time.”

“All other lenders are selling loans to federally regulated financial institutions (FFRIs), either on the FI’s balance sheet or through the Canada Mortgage Bond (CMB) program. Those lenders would all be subject to B-20.”

(He added that “every one of them” will eventually use the 5-year Bank of Canada benchmark rate to qualify variable and one- to-four-year conventional mortgages.)

In short, OSFI guidelines will rule the day for any bank, trust or lender that gets funding from a bank or trust.

As you read above, however, credit unions are not federally regulated (see OSFI Rules Spell Opportunity for Some Credit Unions). That means CUs have more flexibility when approving a mortgage. That flexibility will continue as long as:

(a)  provincial regulators don’t impose new OSFI-style guidelines

(b)  a CU doesn’t accept funding from an OSFI-regulated source, and

(C)  a CU doesn’t apply for a federal charter.

Due to B-20, CUs have now become the last bastion of common sense lending in the prime mortgage market. Take Meridian Credit Union for example, one of Canada’s biggest credit unions. Meridian still uses the actual mortgage rate to qualify 1-4 year conventional mortgages. And there are various other CUs that do the same.

In most cases, we would never advise a borrower to not assume higher rates in the future. But in limited circumstances, that extra borrowing power is appropriate for a well-qualified borrower with good equity, good employment, good credit and either a short holding period or higher near-term income expectations.

Instead of conforming to a rigid box, Meridian and many other credit unions use old fashion good judgment. This allows for flexibility where needed, without taking unnecessary risks. Meridian says there are no plans to change its qualification rate on conventional mortgages.

By contrast, most lenders under OSFI rules will be more black or white: You’re either in their credit box, or you’re not. Exceptions to these rules will be more limited than ever before.

Sidebar: Here’s a partial list of other OSFI-inspired changes occurring across the mortgage market:

• Tighter debt ratios on uninsured non-prime mortgages (some “B” Lenders have never even published debt ratio guidelines before today)
• Stricter proof of income for self-employed borrowers with more than 20% down (i.e., more evidence that an applicant’s business can afford to pay the salary being stated by that borrower—business and personal bank statements, for example.)
• Stricter guidelines for calculating a borrower’s minimum monthly payment on unsecured debt (This payment affects a borrower’s debt ratios. Three per cent of the outstanding balance has long been a standard, but several lenders used more flexible guidelines.)
• Stricter policies for estimating heating cost, which is also used in debt ratio calculations
• The end of cash-back down payment mortgages (at all lenders except credit unions)
• The end of borrowed down payments (at some lenders).

Many of these changes are sound, but all of them (combined) will curtail housing demand and/or affordability for some period of time. That means medium-term housing pain for the hope of long-term economic gain.

Mortgage Markets — U.S. vs. Canada

Tal begins by challenging some commonly-cited reasons why Canada is different, including:

• The U.S. mortgage interest deduction — Tal suggests this U.S. tax benefit played only a limited role in stoking the U.S. housing bubble. The absence of this rule in Canada is not a major saviour.
• Lender recourse— Canada’s recourse system (which keeps people on the hook after foreclosure) does “not provide a full shield from a substantial fall in prices,” he says. In the U.S., only 12 states have no-recourse laws and “there appears to be no significant difference in housing market performance between recourse and non-recourse states.”
  • That said, there is conflicting research suggesting the probability of default is actually up to 20% higher in non-recourse states. Moreover, U.S. borrowers in recourse states regularly default anyway, for reasons like this. Lenders often don’t pursue deficiency judgments on these people due to the legal process, costs, uncertain recovery, etc. When you default in Canada, lenders send the hunting dogs after you, and their teeth are long…and sharp.
• Canada’s low arrears rate— We can’t take too much solace in Canada’s minuscule default rate says Tal, who writes, “In a short eighteen-month period in 2007-08, the serious mortgage arrears rate in the US surged by more than 300%.”
  • Albeit, the U.S. arrears spike was largely caused by underwriting that was near-criminal (and often criminal). As well, Canada’s arrears rate has long been less than half that of the Americans’ (even pre-2006) thanks to conservative lending practices.
• Rate Sensitivity — Canadians are more vulnerable to rate hikes than the average American because our terms are far shorter (5 years versus 15-30 years).

Tal then goes on to list the reasons Canada is different:

• Less subprime — The U.S. crash was a subprime story, he concludes. Remove subprime and it would have been a “soft landing.” Subprime and Alt-A mortgages were 1/3 of originations in the year before the crash, and 20% of outstanding mortgages. Eighty per cent of those had risky floating rates. In Canada, CIBC pegs non-prime at just 7% of the market.
• Skin in the Game — One-third of U.S. mortgages in 2005-2006 were already in negative equity. More than half had less than 5% equity, thus “making [Americans] highly exposed to even a modest decline in prices,” he says. In Canada, only 15-20% of new originations have less than 15% equity. Moreover, negative equity is virtually non-existent (although, that could change quickly!).
• No teasers — Millions of Americans got teaser mortgages with rates that reset a few hundred basis points after 2-3 years. Two trillion dollars worth of mortgages reset in 2006-2007 alone. Canadian lenders don’t qualify borrowers at teaser rates. Borrowers must prove they can afford higher rates in advance.
• Tighter housing supply — Canadian housing starts have exceeded household formation by only 10% in the past decade. That number was 80% in the U.S. before its crash.
• Inconclusive Debt-to-income — “…As any economist knows, [the debt-to-income] ratio is more a headline grabber than a serious analytical tool,” Tal states. Various countries have had higher debt-to-income ratios than Canada and have experienced nothing “remotely resembling” the U.S. crash.
• Better credit — Canadian credit scores have improved in the past four years. By contrast, in the four years heading into the great recession, the ratio of “risky” U.S. borrowers rose by 10+ percentage points and comprised 22% of the market.

“To be sure, house prices in Canada will probably fall in the coming year or two,” writes Tal. But it won’t be to the same extent as—or for the same fundamental reasons as—our neighbours to the south.

Here is CIBC’s full report.