The state of the mortgage industry

By Mark Kerzner, President, TMG The Mortgage Group

Perhaps it's just that I am feeling a little nostalgic today or perhaps it's the Toronto heat and humidity starting to get to me, but I was curious to see just how far we, as a mortgage industry, have come over the past number of years.

There are many of you who were not working in this industry at the end of the last decade, a time when institutional 'A' lending included beacon scores of 620 or higher. In fact, there was a 'sandbox' that allowed lenders to extend as much as 3% of their loans to clients who had beacon scores as low as 580.

At the same time 'A' lenders were able to provide loans on stated income; 65% equity deals were commonplace; rentals and refinances could be had up to 95% loan-to-value; mortgagors could amortize to 40 years and purchasers could borrow with $0 down.

Perhaps we went too far.

On the policy side

When the Global Financial Crisis (GFC) hit, we witnessed a market collapse in the United States. Canadian regulators, policy makers and government did not want to expose us to the same fate. They enacted a series of regulation and policy changes, which did a good job to ensure prudent lending practices.

• Amortization terms were reduced 
• Loan-to-value limits were changed for refinances and rental properties. 
• Restrictions on lines of credit limits were introduced
• There were more stringent underwriting guidelines, including higher beacon scores.
• And so on… 

And while recoveries were muted in other countries, our economy, fueled by a buoyant resource sector and low interest rates, allowed our housing market to remain robust. With low interest rates and a healthy housing market, prices continued to rise.

The increase in home values has been most noticeable in Toronto and Vancouver. Policy makers and regulators who were once viewing decisions based on ensuring strong credit standards are now also viewing decisions under the microscope of appreciating prices and increasing debt levels.

In the early winter of 2015/6, we saw the introduction of larger down payment requirements for higher-valued homes. We are now hearing about increased capital requirements for homes in certain geographic areas and most recently, there have been suggestions that we deal with supply side constraints with demand side policy restrictions. These latest recommendations are all in an effort to help slow down a housing market to prevent a potential crash.

On the mortgage supply side

Around the same time as the GFC started to impact liquidity, lending guidelines, etc., the composition of the Canadian lending environment also started to change.

First, a number of alternative lenders left the market; for example: Accredited and GE Money. Then, a number of 'A' lenders either shut down or stopped originating loans through mortgage brokers such as FirstLine, HSBC, ING, VanCity.

While we have lost a number of lenders, which has the potential to impact competition and ultimately the rates offered to clients, a number of new entrants have entered the market as well. RMG emerged stronger than before as well as Marathon Mortgages and Manulife Financial, to name a few.

And while guideline changes have made it much harder for many borrowers to qualify for 'A' lending products, there has been a resurgence in the alternative and private lending markets to fill that void.

Putting the two sides together

When I look back on our industry I feel a huge sense of pride. We have navigated through constant change with leadership and professionalism. In fact, broker share has grown from approximately 23% to 30% during these tumultuous times.

The strength of the mortgage broker channel is leading to consumers saving significantly on their mortgage costs as well. A 2011 study by the Bank of Canada said the average discount of borrowers who use a broker was 19 bps.

Even if that number of 19 basis points is overstating today’s savings and we reduce it by nearly half, say to 10 basis points, that means that of the approximate $75B in total mortgages originated by brokers, Canadians save nearly $75,000,000 (per year) in their mortgage payments.

Furthermore if the entire mortgage market is $225B in annual mortgage production and the remaining $150B not originated by brokers saved only 5 bps on their mortgage transactions due to the competition enabled by the broker channel, Canadians saved a further $75M in payments annually. Those funds could be used for spending or to pay down more expensive forms of debt.

The mortgage industry was once thought to be a low risk, moderate return business for the banks. It certainly was not front page news. Today, discussion about interest rates, home values, qualifications, and economic drivers from housing seems to be part of our regular conversation. As Canadians access more and more information, they continue to select mortgage brokers to present them with options to help them secure home financing solutions best suited for their unique needs.

The impact of BC’s foreign tax

There are a lot of unknowns regarding BC’s decision to tax foreign home buyers, a requirement that took effect this week.  The impact on the market was immediate. Real estate agencies, mortgage brokers, lawyers and notaries scrambled, during the week leading up to and including the holiday weekend, to close the sale of hundreds of homes leaving many home buyers frazzled before the August 2 deadline. In fact, it was so busy, the land registry system crash, forcing registration to be done manually.

Provincial Finance Minister Mike de Jong unveiled the 15% tax levy on Monday, July 25, leaving less than a week for the housing market to react. The tax is part of legislation aimed at foreign ownership, which has been blamed, at least in part for low vacancy rates and high real estate prices in southern B.C.

Dan Pultr, Vice-President of TMG The Mortgage Group Vancouver said that the government may have rushed its decision to implement the tax so quickly. “Following significant public outcry, the government clearly felt it needed to do something about the housing market, however they may not have thought through the unintended consequences and strain on the systems and of a retro-active tax.”

The biggest issue for Pultr and others in the mortgage and real estate industry is that the new tax is based on the closing date and not the contract date.

Pultr agreed that something had to be done but it may not be the solution for the long-term. “Vancouver has always been an expensive area and has attracted healthy investment activity and frankly, if you have substantial income or assets, as many foreign investors have, it’s hard to say if the tax will deter them from investing.”

Moody’s, the bond credit rating agency believes the tax will likely slow down the steep house price appreciation in Vancouver that has grown over the past decade.  For example, a foreign buyer will pay $168,000 in land transfer taxes on a $1 million home in Vancouver after Aug. 2, compared to the $18,000 cost for a Canadian citizen or permanent resident.

Other countries, including Hong Kong and Australia have imposed similar taxes designed to stem foreign investment in real estate.

The new tax also applies to foreign-controlled corporations that are not incorporated in Canada or in which at least one beneficiary is a foreign entity. Interestingly, the tax does not apply to commercial real estate, an area that has seen increased interest from foreign individuals and entities. The leading commercial indicator has been at an all-time high, and because a lot of commercial buildings are done as share sales, property transfer tax is avoided all together. So the tax would only be levied on a foreign-controlled company that purchases residential real estate.

However, the tax does negatively impact some home buyers.  Chris Adkins, a 12-year veteran mortgage broker for TMG The Mortgage Group in Vancouver believes the short term effect will be a psychological one.  In the long term, he doesn’t think much will change.

 “The wealthy don’t really care about the costs -- if they want to buy, they will. The real issue is supply and demand.”

Others will be unfairly penalized, he said.  “For example, those who have work permits in Canada and who pay taxes will be affected.”

He also mentions the New to Canada program available will have to change their status requirements for immigrants. “It’s a big grey area and there are a lot of unknowns. It’s almost akin to taxation without representation.”

Adkins suggested that BC might have looked at the Australia model more closely, which levies a foreign tax on homes in the higher price range.

He also does not believe this tax will have the long term effect that was intended.  “In Vancouver, demand is outweighing supply and government red tape is holding back a large number of units from the market, which increases the prices in an already high-priced market.”

Can this happen in Toronto?

Ontario Finance Minister Charles Sousa has said he is “looking very closely” at BC’s new tax, but is Toronto in the same situation as Vancouver?

According to Murtaza Haider, associate professor of real estate management at Ryerson University, the two cities are vastly different, despite both having high prices. Again, the supply and demand argument comes into play.

 “What you see in Toronto is a supply constraint. New homes are not coming in at the same pace and at the same time the demand is slightly higher… and that is also contributing to higher prices here,” he said in an interview with Macleans Magazine.

 A new Angus Reid online poll conducted last week in BC  found that most respondents support a tax on foreign buyers of Metro Vancouver homes but  doubt it will be effective  to cool  the region’s red-hot real estate market.  And despite the new tax seven out of 10 respondents believe affected buyers will manage to find loopholes allowing them to get around the new tax.

A lot of unknowns.