Anatomy of mortgage changes

There is little doubt that housing sales have slowed down in the past year, due in large part to stricter mortgage regulations. Part of those regulations is a mortgage stress test that requires borrowers to qualify for an interest rate that’s at least 200 basis points higher than the contracted rate. 

 Those in favour of the stress test saw it as a way to improve housing affordability by thinking it would result in falling home prices, as well as protecting homeowners from potentially higher interest rates at renewal.

While there were some house price reductions, there was also a major slowdown in house sales, which, one could argue, has helped fuel a slowing economy. 

History

The most recent round of mortgage rule changes came into effect in 2016, then in January 2018, more changes were introduced, including using the stress test to qualify for uninsured loans.  This had the greatest impact.   The next month, in February, sales declined in greater Toronto by 35% from those recorded in February 2017.  This past month (February, 2019) housing sales in greater Toronto were even 2.4% lower than a year ago. 

Housing sales in greater Vancouver were even weaker, with February 2019 sales 33% lower than the same month in 2018. In fact, February 2019 sales are 43% lower than the 10-year average for sales in February.

Evan Siddall, who heads Canada Mortgage and Housing Corporation (CMHC), believes the stress test is bitter medicine that is working fine. Siddall credits the stress test for lowering housing prices. His comments were based on the stress test being introduced to lower housing prices; however, Carolyn Rogers, the Assistant Superintendent at OSFI, said something different in her speech to the Economic Club of Canada.

She explained, the stress test “was designed to target mortgage underwriting standards.” In her words, the test was intended to provide a safety buffer so that borrowers do not “stretch their borrowing capacity to its maximum.”

Is it plausible that OSFI and the CMHC had two different goals? Maybe.  OSFI’s goal did indeed lower high-risk lending somewhat as reported by the Bank of Canada. House prices did drop slightly.

It appears the government may have overshot its mark with the stress test, and the slowdown in the housing sales may have been an unintended consequence. 

Pushback

Many housing and mortgage industry voices started to lobby the government -- some believed the stress test was working fine, other’s say the impact has been devastating to home buyers, especially first-time homebuyers.

CIBC economists, Bejamin Tal and Royce Mendes predicted in November, 2018 that the housing market would be a drag on Canada's economic growth in the coming year. Residential investment accounts for 7.5% of Canada's economy.

"It was a good run while it lasted, but the sun has officially set on the days of heady housing market growth fuelling Canada's national economy," Tal and Mendes wrote. “And that could be bad news because housing investment is more important to Canada's economy "than at any other time on record," they added.

Proposed solutions

Two ideas emerged from various stakeholders and associations -- lower the stress test threshold that requires borrowers to qualify at least 200 basis points above the contracted rate; and/or reintroduce the 30-year amortization for CMHC insured mortgages.

Government response

The Liberal government introduced the following two measures in their recent budget announcement to address the issue of housing affordability and first-time home buyers.

Home Buyer’s Plan Withdrawal Increase. Effective immediately, first time home buyers can now withdraw up to $35,000 from their RRSP, tax free, up from $25,000, for a down payment. If you have a co-borrower, that total could be up to $70,000. 

A first-time homebuyer, as defined by the Canada Revenue Agency, allows repeat homebuyers to also be classified as “first-time” if they or their spouse haven’t occupied a home, they owned in the prior four years. 

Funds must be repaid over a 15-year period or the money gets added to your income for tax purposes. Starting in 2020, those who separate from a spouse or common-law partner will get to use the Plan, even if they’re not a first-time buyer.

First Time Home Buyer Incentive

Billed as a “shared equity mortgage”, the government will lend first-time home buyers’ money to buy a home. According to the budget document, this new incentive “enables homebuyers to reduce the amount of money required from an insured mortgage without increasing the amount they must save for a down payment.”

The government has earmarked $1.25 billion over three years, administered by Canada Mortgage and Housing Corp. (CMHC), to provide up to  5 % of the cost of an existing home and 10% of a new home through what amounts to an interest-free loan to be repaid when the property is sold. 

Key points: 

•  Borrowers must have a down payment of at least 5% -- but less than 20% -- and a household income under $120,000.
•  The insured mortgage plus incentive, combined, cannot be greater than four times the participants’ combined annual household incomes.
• Condo purchases are allowed.
• The program is expected to start in September 2019 with further details to come this year. 
•  If you use it, the government will share in price gains or losses when you sell. (The government hasn’t released many details on this yet) 
• While the Department of Finance has not commented on this, the program is called a “shared equity mortgage”, so it may be safe to assume it will be a registered second.
•  You must be a first-time homebuyer. (We don’t know whether the government’s definition of “first-time buyer” will be the same as with its RRSP Home Buyers’ Plan (see definition above)
• Your mortgage must be default insured. Buyers may use any of the three insurers.
• There are no monthly payments required on this incentive money
• You have to pay the money back when you sell your home. There was no mention of what happens during a refinance but if similar programs abroad are any guide, a cash-out refi would trigger the repayment provision. 

Aftermath

Paul Taylor, CEO of Mortgage Professionals Canada, which represents the mortgage-brokerage channel, said in an interview with the Globe and Mail, he is disappointed that the government did not heed his organization’s calls to reduce the stress-test burden, which is keeping many home buyers from qualifying for mortgages.

But he said the new interest-free loan program will help the earners most affected by the stress test, so it may be a good alternative. The program requires more analysis to assess how successful it will be, he said.

His organization estimated that the stress test would compel about 200,000 potential home buyers to change their plans in the first two years of operation. If 100,000 are helped by the loan program over three years, “a good chunk” of people most impacted may be getting help, he said.

Many other key details, including precise repayment terms and maximum available loans, have yet to be addressed.  The government says CMHC will release full details later this year. That’s a long time, politically speaking and things could change again, given it’s an election year.

We will continue to monitor these announcements and update our readers as new information comes top light.

What if thoughts were things?

By Bud Jorgenson, Vice-President, Prairie Region
TMG The Mortgage Group

I was speaking with a mortgage broker recently who was struggling as their volume was down from previous years. 

They explained they weren't doing anything differently and just found themselves in a funk, and were asking for my perspective on what they should do. 

 Of course, we discussed all the reasons why things had changed for them. 

We talked about the changes in the market, the increased competition, the rate discounters, the underwriting rule changes etc.

My response was and is today that these changes have zero effect on your business and the only thing that matters is your response to these changes. 

I heard the concept of "thoughts are things" about 25 years ago and after testing it and seeing it in action with so many successful people throughout my professional life, I believe it to be the determining factor in our success or failure, in both our professional and personal life.  I also love that this is the one thing that I have complete control over.  How we can apply this in our everyday life as mortgage brokers is so simple. 

When walking into a first meeting with a client, take a moment to visualize how you would like the meeting to go, see it unfolding in a positive way and resulting in you completing a mortgage for them. 

When a cold call comes in asking for your best rate, it's so easy to consider this a waste of time. Instead, see it as an opportunity, and challenge yourself to turn that client from a discount shopper to a value client. 

When dealing with underwriters or speaking to realtors about partnering, or in every action, spend a few minutes setting the stage by visualizing the outcome in a positive way.  We all know people in our lives who seem to have that humble confidence that attracts people and opportunities that has helped them be successful. Let's be those people. 

I can't ever speak or write about success without throwing in a golf analogy.  I will finish with a quote from golfing great Jack Nicholas who is arguably the greatest golfer in history with 18 major wins.  When asked what he believed to be the most important factor in his success he said the following...

“I never hit a shot, not even in practice, without having a very sharp, in-focus picture of it in my head,” Nicklaus said. “First, I see the ball, where I want it to finish, nice and white, and sitting up high on the bright green grass. Then, the scene quickly changes, and I see the ball going there: its path, trajectory, and shape, even its behaviour on landing. Then there is a sort of fade-out, and the next scene shows me making the kind of swing that will turn the previous images into reality.”

The Canadian economy and the housing market

We are living in strange times, economically speaking. Mortgage stress tests have slowed the housing market and may be one of the reasons the Bank of Canada has signaled it may pause on increasing interest rates. 

Home sales fell sharply in Canada last year -- the largest annual decline since 2008, spurring predictions the country could face stagnant sales in 2019.  The decline was due in large part to slowing activity in British Columbia and in the Greater Toronto Area, both hit hard by new government measures and higher interest rates.

The Canadian Real Estate Association has forecast little improvement in 2019, predicting 0.5% growth in national sales this year, over 2018.

Christopher Alexander, regional director for Re/Max in Ontario and Atlantic Canada, said the mortgage stress test has been the biggest factor keeping buyers out of the market, especially in Vancouver and Toronto.

 “It’s a lot harder to get a mortgage now than it has been for the last 10 years,” he said. “Not only do you have the stress test, but the big banks are very particular in their criteria. It just seems that everybody is being very cautious.”

However, there are variations across the country. The average price of all homes sold in the Greater Toronto Area fell 3.4% in 2018, for example, while the average price climbed 3.7% in Ottawa and 5.8% in Montreal.

Bank of Montreal economist Robert Kavcic predicts little change in national sales totals or prices in 2019. He suggested the the housing market is going into a period of stagnation.

A Bigger Picture

Recently Statistics Canada released its third-quarter report on national wealth, which is the “value of non-financial assets in the Canadian economy.” Total national wealth hit $11.415 trillion in the third quarter, and at $8.752 trillion, real estate made up a 76% share of that figure. That was the highest that both figures had been, going back to the second quarter of 2007.

Data from both Canada and the US shows that real estate as a share of U.S. national wealth in 2007 was 75.3%, compared to 67.6% in Canada. That started to change with the 2008 recession when US real estate as a share of national wealth started to decline while in Canada real estate wealth started to grow.

BMO has estimated that Canadian benchmark home prices will grow by less than one per cent next year and two per cent in 2020, dragged by “tougher mortgage rules and higher interest rates so the share should continue to trend modestly lower.”

Economists have mixed feeling about this trend. Some say a flat housing market is not anything to worry about. Others, like CIBC’s Benjamin Tal said the Canadian housing market is more important to the overall economy than at any other time on record. Aalthough the Bank of Canada (BoC) argues that the worst is now behind us, and that housing markets are stabilizing, some economists find it difficult to agree.

The BoC’s workhorse model says that six quarters can pass before a rate hike can be felt in the economy but according to Tal and others, only five quarters have passed since the first move of this cycle and “we’re already seeing a slowdown in housing-related indicators.” 

The Global Economy

There are growing fears about a worldwide economic slowdown.  Uncertainty with tariffs, ongoing trade wars, and even the US government shutdown (over for now) is all having a negative impact on the global economy as a whole. 

The International Monetary Fund (IMF) downgraded its expectations for the global economy, highlighting sharp declines in Europe and warning that the risks of a major slowdown have increased.

Already, at the annual World Economic Forum being held in Davos, Switzerland, there is worry about the global economy. Absent from the Forum is representation from the US. French President Emanuel Macron stayed home to deal with ongoing domestic issues. British Prime Minister Theresa May is home, desperately trying to eke out a bipartisan deal for Brexit.

In the United States, the shutdown has cut into growth. Early this month, consumer confidence slumped to the lowest level of Trump’s presidency, according to the University of Michigan’s consumer sentiment survey.

While few see a recession as imminent, the number of risks is growing. As an economy slows, it’s easier for it to be knocked off track, many economists say.

 “After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising,” said Christine Lagarde, managing director of the International Monetary Fund in an interview in the Globe & Mail. “Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased.”

Chief executives ranked a global recession as their No. 1 concern for 2019, according to a survey of nearly 800 top business leaders around the world. 

A survey of 1,300 chief executives released by PwC found that 30%  of business leaders believe that global growth will decline in the next 12 months, a record jump in pessimism to about six times the number who said that last year.

What happens now?

The “R” word has been bandied about lately. In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slowdown, we are not seeing high job losses or increases in bankruptcies.

There is also some optimism. In a blog by TMG’s David Larock, he writes that core inflation has not increased and five-year fixed rates continue to settle in at slightly lower levels. Variable rates are holding steady. 

It’s a matter of waiting this through, as Canadians did in 2008. There may be an upside-- this projected slow period means buyers can take their time searching for a house and not worry about missing out on a sale. 

As always, Canadians are a resilient bunch – this is just one more challenge they will overcome.

L’EXPERT IMMOBILIER PM a choisi Le Groupe Hypothécaire TMG afin de supporter leur plan de croissance stratégique.

Le Groupe Hypothécaire TMG est fier d’annoncer qu’il a signé une alliance stratégique avec L’EXPERT IMMOBILIER PM, ayant des bureaux et des courtiers à travers la province.

Avec l’introduction prochaine de la loi 141 au Québec et de son impact dans le secteur immobilier et hypothécaire, L’EXPERT IMMOBILIER PM cherchait un partenaire d’affaires, partageant les mêmes valeurs et  qui serait en mesure  de faciliter sa croissance. L’Expert Immobilier PM compte plus de 380 courtiers immobiliers travaillant à travers le Québec.

Les systèmes de support, la formation et la technologie de TMG nous ont impressionnés", a déclaré Pierre Breton, fondateur et président de L’EXPERT IMMOBILIER PM. «Ils jouissent d'une excellente réputation dans l’industrie canadienne, ce qui viendra compléter notre solide position sur le marché québécois. Les valeurs de TMG correspondent à nos valeurs et nous sommes impatients de travailler avec ce groupe. « 

 Claude Girard, vice-président, Québec, Le Groupe Hypothécaire TMG est tout aussi enthousiaste. «Nous sommes ravis de travailler avec ce groupe Immobilier dont les valeurs sont notamment orientées vers l’expérience client, où autant les clients que les courtiers sortent gagnant de la relation professionnelle , a-t-il déclaré. De plus, l’équipe de L’Expert Immobilier, est orientée par un respect strict des codes d’éthiques du courtage immobilier, ce qui rejoint nos propre valeurs en terme de conformité. «Notre modèle d’entreprise, unique en son genre, permet flexibilité et autonomie. Ils pourront bénéficier de l’excellente réputation de TMG à l’échelle nationale. C'est une entente naturelle. Nous sommes convaincus que ce sera un partenariat gagnant-gagnant. "

 Le Groupe Hypothécaire TMG, TMG The Mortgage Group,  est une bannière nationale créée  il y a plus de 30 ans , qui a reçu de nombreux prix de reconnaissance et qui est la plus importante société de courtage hypothécaire indépendante au Canada

L’EXPERT IMMOBILIER PM est une société de courtage immobilier innovatrice fondée par Pierre Breton en 1993. La société a connu une croissance rapide. Aujourd'hui, l’entreprise continue d’évoluer, utilise une technologie de pointe et emploi des professionnels de l'immobilier compétents et expérimentés.

Le Groupe Hypothécaire TMG Quebec aligns with EXPERT IMMOBILIER PM

TMG Mortgage Group is proud to announce that it has signed a strategic alliance with EXPERT IMMOBILIER PM, a real estate company with offices and brokers across the province of Quebec.

With the upcoming introduction of Bill 141 in Quebec, and its impact in the real estate and mortgage sector, EXPERT IMMOBILIER PM was looking for a business partner who shared the same values, ​​and who would be able to facilitate its growth. EXPERT IMMOBILIER PM has more than 380 real estate brokers working across Quebec.

“TMG's support systems, training and technology impressed us, "said Pierre Breton, founder and President of EXPERT IMMOBILIER PM. “They have an excellent reputation in the mortgage industry, which will complement our strong position in the Quebec market. TMG's values ​​reflect our values ​​and we look forward to working with this group.”

Claude Girard, Vice President, Quebec, TMG Mortgage Group is equally enthusiastic. "We are delighted to be working with this Real Estate group, whose values ​​are particularly geared to the customer experience, where both customers and brokers are the winners of the professional relationship," he said. “In addition, the team of L'Expert Immobilier is guided by a strict respect of the code of ethics of the real estate brokerage, which joins our own values ​​in terms of conformity. Our unique business model allows flexibility and autonomy.

“They will be able to benefit from the excellent reputation of TMG at the national level. It's a natural agreement. We are confident that this will be a win-win partnership,” Girard said.

TMG The Mortgage Group is an award-winning mortgage brokerage and the largest independent brokerage in Canada and has been in business for 30 years.

EXPERT IMMOBILIER PM is an innovative real estate brokerage firm founded by Pierre Breton in 1993. The company has grown rapidly. Today, the business continues to evolve, uses cutting-edge technology and employs skilled and experienced real estate professionals.

TMG The Mortgage Group continues to grow with the addition of SafeBridge Financial Group

TMG The Mortgage Group is proud to announce a new, strategic affiliation with SafeBridge Financial Group.

At a time when incredible change is taking place in the mortgage industry, TMG The Mortgage Group and SafeBridge Financial Group saw a way to align the natural synergy between them to further benefit their respective businesses and offer more value to their clients.

Since 2006, SafeBridge has distinguished itself as a leader in the mortgage industry and has continued to experience substantial year-over-year growth, while at the same time providing essential mortgage, insurance and investment services for Canadians through their Mortgage Centered Financial Planning™ model (MCFP).

“As the market continues to evolve, we looked for an opportunity to align with an organization committed to the future of the mortgage industry. It was absolutely necessary that this organization was also capable of providing each of our mortgage agents with exceptional tools, support and resources,” said Chris Karram, co-founder of SafeBridge. “We are also excited to provide additional products through SafeBridge Wealth Solutions across the TMG landscape.”

“There is a tremendous ‘fit’ between our two firms and our respective cultures,” said Mark Kerzner, President of TMG The Mortgage Group.  “We are excited to bring our industry-leading lender relationships, marketing support and industry tools to the SafeBridge team.”

“Also, we are looking forward to providing TMG brokers and agents access to and support from SafeBridge Wealth Solutions so they can present value-added products and services to their clients.”

 TMG The Mortgage Group and SafeBridge Financial are the only two brokerages that have received the Employer of Choice Award from the Canadian Mortgage Awards.

TMG The Mortgage Group is an award-winning mortgage brokerage and the largest independent brokerage in Canada.

SafeBridge was co-founded as a Financial Planning Firm in 2006 with a vision to drive transformational change in the Canadian Mortgage Industry by redefining the traditional customer experience through their proprietary Mortgage Centered Financial Planning approach™.

The Upside of Alternative and/or Unregulated Lenders

A recent report from the Bank of Canada reviewed the impact of the government’s policy changes on the mortgage market. It found that overall market activity had slowed -- something we knew would happen. The bank also found a correlation between the quality and quantity of credit.  While the data shows a slowdown in “riskier” mortgages, some economists wonder if these borrowers have turned to the unregulated market.

Approximately 20% of the mortgage lending market were made up of people who borrow at least 4.5 times their annual income to buy a home.  That percentage went down to 6% in the second quarter of 2018. That amount of mortgage indebtedness may or may not be a problem for borrowers; however, coupled with other debt, including credit cards, lines of credit and car loans, it may cause some financial problems as rates rise.

History of Mortgage Lending Changes

In 2016, the Office of the Superintendent of Financial Institutions (OSFI) announced a stress test for insured mortgages (mortgages with less than 20% down and requiring mortgage default insurance), stipulating that those buyers must qualify at the Benchmark rate (currently 5.34%).

Then in October 2017, a similar rule was unveiled for uninsured mortgages (mortgages with more than 20% down) stipulating that those buyers must qualify at either 2% more than the contracted mortgage rate or the Benchmark rate, whichever is higher.

These two rule changes -- along with several others, including; increasing minimum down payments, mortgage premium hikes, and decreasing amortization limits – have made it harder for Canadians to qualify for mortgages, which is what the government wanted for borrowers ‘on the margin’. The rationale was to encourage people to take on less overall debt, including less risky mortgage debt, which would, in theory, keep housing markets safe and protect borrowers in the event interest rates increased.

The Fallout

Mortgage brokers can attest that the impact was seen almost immediately. The rate of clients who may have qualified previously but no longer did from large banks and traditional monoline mortgage lenders went up as much as 20%. 

As a result, alternative lenders saw an uptick in business as brokers presented highly credit worthy homebuyers and refinancers with borrowing options in the unregulated space including private lenders, mortgage investment corporations (MICs) and credit unions. Some credit unions opted to include the stress test as part of their mortgage lending requirement.

The Bank of Canada admits that this segment of mortgage lending is growing, although it falls outside their purview. For example, the market share for private lenders in the GTA has grown by 50% since last year, and now makes up nearly one out of every 10 borrowers, the bank said.

There are now questions about risk in the unregulated market; however, the market is not necessarily riskier, it’s just not under OSFI’s purview.

What the unregulated market is seeing are better quality mortgage clients. Hali Noble, Fisgard’s senior vice-president of residential mortgage investments and broker relations said in an interview, “A lot of these people should be bankable, but they’re not (when applying the new stress tests).”

So, many good quality borrowers have to shift down the ladder to lenders with a higher risk tolerance. The one downside is it comes with a higher cost, but not necessarily more risk.

Borrowers who don’t fit into the mainstream box are now not limited to those with past credit issues, and may include those who are self-employed, those who are new to Canada, and even “A” clients. They simply don’t fit into the new box.

The Unregulated Market

The unregulated market is primarily comprised of private mortgage lenders -- companies and individuals -- who fall outside the purview of Canada’s banking regulators. Private lenders offer mortgage rates higher than traditional mortgage lenders for shorter terms. Typically, borrowers who could not qualify for traditional lending turned to alternative lenders.

Alternative mortgage lenders or private lenders, also known as “B” Lenders, are more willing to look at each situation on a case-by-case basis. They do have criteria, but consider a borrower’s “story”.  For example, if a borrower had a bankruptcy or have some credit issues, they want to know why. For self-employed borrowers, they will consider other documentation to prove income rather than a tax return, which may reflect business write-offs.

Interest rates

Yes, are higher compared to “A” lending, because the borrower profile is considered riskier, but remember it’s only a short-term solution.

You can also expect to pay a larger down payment, from 15% to 35%, depending on both your situation and the property you’re financing. And, there may be lender fees and mortgage broker fees.

Usually, the pre-payment privileges are flexible but there may be a charge for paying out the mortgage early. Alternative lenders are strict about missed payments, and service fees may be higher as well.

Whatever the reason for needing to use an alternative lender, the goal is to get back into the “A” lending space.

Is there cause for concern?

Maybe, maybe not. The reason for all the changes was to ensure that borrowers could manage their debt loads in the future, as interest rates rise.  Inadvertently, the new rules have grown the unregulated market, which may or may not defeat the purpose. People want to buy homes and will do what they need to, to get one.

The increase in demand has caused interest rates to go up even in the private sector, but these lenders are short-term lenders. There must be an exit strategy. There is the risk that borrowers will rely on the private funds for longer terms, which may have a negative financial impact.

The Bank of Canada is also concerned about the potential for mortgage default and bankruptcies. Consumer insolvencies peaked during the 2007-08 financial crisis and have been relatively stable since 2012. Around 120,000 Canadians went insolvent last year, less than 0.4 per cent of the country's population.

•   Mortgages in arrears across Canada have fallen this year, to one of the lowest levels in history. Only 11,641 mortgages fell into arrears at Canadian banks in January, representing 0.24% of all mortgages held.
• The biggest indicator for potential arrears is a worsening unemployment rate.

Unregulated lenders are not going anywhere. They have been in the mortgage industry for many years. They continue to fill a need by allowing homebuyers to get into the housing market who otherwise may not have qualified for a mortgage.