It’s so hard to have a calm, intelligent debate about mortgage policy in Canada. And there’s a reason for it.
Despite over a decade of relentless mortgage policy tightening, regulators still freely throw around the “R” word (“risk”) to fire up public support for their policy beliefs.
As if Canada’s hasn’t done anything to stamp out excessive lending since 2008.
As if balance between risk mitigation and consumer impact doesn’t matter.
As if the law of diminishing returns doesn’t apply to these incessant “little” mortgage policy tweaks.
Worst of all, policy leaders rarely quantify the purported “risk.”
That feels intentional. Clearly, it’s much easier to rally support from the uninformed if you let them visualize some dark lurking “risk” that might be massive for all people know.
If there’s genuine material risk to the system, there’s a lot of industry types out there (this author included) who would rush to support CMHC, OSFI, the Bank of Canada and the Department of Finance in stamping it out. CMHC’s ban on unsecured borrowed down payments was long overdue, for example. It’s something I and others had advocated for and written about for years, literally. And it’s something I hope the DoF legislates out of the insured mortgage market altogether.
The CMHC CEO’s latest proposal to stop serving default-insured borrowers with debt ratios over 35% GDS and 42% TDS is different.
We’re talking somewhere around 65,000 to 70,000 insured borrowers a year who might fit this higher-debt-ratio label, out of 6+ million mortgagor households. These borrowers are just as low a default risk as borrowers who have average debt ratios. And I suspect Genworth and Canada Guaranty would both confirm that for anyone who wanted to know.
The reason is simple. Debt ratios are just one of dozens of underwriting criteria. Insurers always look for offsetting credit positives when approving above-average debt ratios. For example, is the borrower a new lawyer, engineer, doctor or dentist who’ll soon be earning six figures? Does he/she have other resources to fall back on if times get tough?
When underwriting such borrowers, it’s nonsensically short-sighted to ignore the extraordinary safety buffer already built into debt ratio calculations by way of Canada’s stress test, with its already conservative 280+ basis point higher qualifying rate. And it’s just as short signed to assume such borrowers will be financially stretched for the entire duration of their mortgage term.
But here’s the most interesting part. CMHC’s argument in abandoning deserving higher-GDS/TDS borrowers, as announced on June 4, was to:
- “protect future homebuyers”
- “reduce risk” to “taxpayers”
- “further manage the risk to our insurance business”
- “curtailing excessive demand and unsustainable house price growth”
- “support the stability of housing markets” in “anticipation of potential house price adjustment”
Those last two sound somewhat contradictory and CMHC’s 9% to 18% MLS price decline call isn’t exactly panning out (at least not yet), but that’s beside the point.
You’ll notice that never once in that June 4 PR announcement did CMHC highlight “future consumption” or consumer spending as a reason for its decision.
But now, conveniently, it becomes the crux of its policy change justification, as mentioned numerous times in Mr. Siddall’s August 10 moral browbeating of lenders and insurers.
The first rule of public persuasion: pick a story and stick to it.
Now, one might stretch and argue that it was implied, but if borrowers’ “future consumption” was truly a key reason (as Siddall’s latest messaging now suggests), you’d think it would have at least been a footnote in CMHC’s initial positioning.
Siddall’s now-infamous letter cites “misconceptions” about CMHC’s “rationale” for abandoning higher-debt-ratio borrowers. Well, yes. People tend to have misconceptions when they’re fed one “rationale” only to hear it’s changed two months later.
Mr. Siddall goes on to unabashedly solicit more business from lenders “for the good of our economy,” after it was his very decisions that drove them away.
Where was the “good of the economy” consideration when CMHC devised this policy change? Are you telling me CMHC’s leadership wasn’t anticipatory enough to realize lenders would still need to find a home for 30+% of their insured business after CMHC left the space?
Is this the foresight Canadians should expect from housing agency leaders relied upon to mitigate the housing crisis? Let’s hope CMHC’s CEO job posting includes a required understanding of game theory. That might come in handy in helping CMHC avoid such policy blunders and embarrassment in the future.
With all due respect to Mr. Siddall, whose intellect and passion I admire, the timing couldn’t be better for new blood come December. This industry badly needs a reset on the dialogue between regulators and industry—to something far more respectful, far more collaborative, far more consultative and far more productive.
I don’t write this kind of stuff often because I hate calling out individuals in our space who are usually good people behind their public veneer with well-intentioned underlying motives. But this is what Canada’s industry-regulator dynamic has been driven to. Adversarial relations.
CMHC’s public narrative in justifying high debt-ratio borrowers clearly changed from June 4 to August 10. No longer can it credibly make the argument that forsaking higher-GDS/TDS borrowers significantly lowers default risk, taxpayer risk, risk to its insurance business, etc. because that’s been disproven by loan performance data.
Now, Mr. Siddall must hang his hat on an appeal to economic stability in the hopes of guilting lenders and insurers to follow his lead and validate his decision-making. And don’t even get me started on his latest crusade against 5% down mortgages, which Siddall’s company still happily sells, by the way.
The spin, sanctimoniousness and abrasive, arrogant approach to building consensus in the housing industry is unlike anything I’ve ever seen in my 13 years in the business. It pains me to no end to write this, because CMHC is largely a world-class organization of smart people who care deeply about building a better Canadian housing market. I and countless others look forward with great hope to a new start for CMHC in January 2021.