Good afternoon.
The Canadian Credit Union Association welcomes the opportunity to brief you in relation to the Canadian housing market. Our comments focus on recent regulatory developments and the government's proposed mortgage insurance risk-sharing framework. Our message to this committee is two-fold.
Credit unions believe, much like the CBA, that it is time for a pause and review. The myriad regulatory measures that have targeted the housing finance market and mortgage insurance over these last number of years have created a situation where consumers and associations such as ours need to take a step back to really understand the objectives of the government, and particularly what the impact of these measures on first-time homebuyers and those in rural and remote regions really looks like. It's not clear to us that the government has allowed itself that opportunity.
CCUA does not support the government's proposal to introduce a mortgage insurance risk-sharing framework for lenders. In our view, there is no strong empirical justification for introducing the framework, and the models will likely exacerbate mortgage price and availability issues for first-time homebuyers and for Canadians living in rural and remote regions.
Since the financial crisis, the federal government has announced at least 15 housing finance-related measures aimed at addressing household debt vulnerabilities, housing price pressures, and managing government exposure. These cascading measures have produced a secular decline in the rate of mortgage origination in Canada since 2008, with the rate falling from a peak of around 13% to its current value of around 6%.
The recent changes to high-ratio and low-ratio insured mortgage underwriting requirements are still working their way through the market. Observers, including ourselves, expect them to exert a significant downward impact on market activity.
A CCUA survey of credit unions indicates that, if the rules announced in late 2016 had been in place on January 1, 2016, high-ratio mortgage volumes, on average, could have been down by nearly 37% last year.
The largest impacts are in B.C.'s Lower Mainland, with potential denials of high-ratio mortgage applications ranging from 35% to 69.5%, depending on the credit union. The second-largest projected impact would be in the GTA with potential denials of high-ratio mortgage applications ranging from 22% to 50.7%. In Alberta we saw ranges from 13% to 46.4%.
Based on 2016 approvals, our survey suggested that first-time homebuyer approvals could be down nearly 20%.
We also expect significant declines in rural and remote Canada. Tougher qualifying requirements for low-ratio transactional mortgage insurance would have made the product unavailable to nearly 50% of qualified borrowers based on our 2016 data. Low-ratio transactional insurance is often used by credit unions in rural and remote areas to give the lender greater protection in the event the home cannot be easily sold in a liquid market. It appears that mortgage credit in these areas will be less available or come at a higher cost.
We stress that these are estimated impacts based on credit union 2016 approvals. Of course, people may choose to delay buying or buy smaller homes, and the bank of mom and dad may contribute further to a down payment. That said, we believe that when the spring buying season commences, these measures will have a significant impact on the market, whether it be urban or rural, with high or low growth.
Tightening mortgage insurance eligibility requirements also impacts the competitive balance in the financial sector. New eligibility requirements have reduced the pool of mortgages eligible for insurance. This hits the mortgage funding side because these insured mortgages can be securitized. This is a concern for credit unions that have been involved in securitizing mortgages to help fund growth across the country.
This funding channel has now been significantly curtailed and this forces credit unions to fall back on deposits and retain earnings to fund growth. Meanwhile, large banks are able to attract funding through other channels not available to co-operatively-owned credit unions. Inadvertently, these new rules have tilted the competitive balance towards the already dominant banks.
In our ongoing policy dialogue with the Department of Finance—and congratulations on your appointment as the new parliamentary secretary—we have recommended that it is time for the federal government to pause and review the impact previous measures are having on the market. We reiterate that recommendation today. Officials must consider whether, from a policy perspective, the impacts on first-time homebuyers, rural and remote regions, and the competitive balance in the financial sector are necessary, desirable, and well calibrated.
CCUA would welcome such an ongoing dialogue.
In late October 2016, the Department of Finance announced it would be consulting Canadians and stakeholders in relation to implementing a risk-sharing mortgage insurance framework. The proposals envision a significant departure from Canada's current practices.
Currently, many regulated lenders are required to transfer mortgage risk to mortgage insurers and indirectly to the federal government's guarantee of mortgage insurer obligations. Borrowers pay premiums to obtain this blanket coverage, and lenders can also choose to transfer risks on other mortgages that they elect to insure. Lenders pay premiums on those mortgages. It should also be noted that these lenders can see insurance claims denied if they do not meet underwriting standards set by mortgage insurers and the government.
The risk-sharing proposals would see lenders accept more losses associated with defaulting mortgages and make more of their capital available to cover these losses. Lenders would be exposed to loan losses in both a normal loss situation as well as in extreme loss events. Policy-makers expect that this prospect of losses will further discipline lender risk management practices and result in a tightening of lending criteria.
CCUA acknowledges the federal government's theoretical rationale behind their risk-sharing proposals; however, we don't believe that a strong empirical argument has been made to date for these proposals. To elaborate, the logic underlying the government's proposals suggests that incentives exist that promote risky lending because lenders can use mortgage insurance to off-load the risk associated with mortgage lending.
However, we have not been presented with evidence that illustrates this happening. In fact, CMHC numbers suggest that arrears on insured mortgages are incredibly low. Between 2010 and 2015, the 90-day arrears rate on insured mortgages averaged 0.36%. As of September 30, 2016, arrears on mortgages in the CMHC's National Housing Act mortgage-backed securities program sat at 0.2% for federally regulated institutions and 0.13% for provincial institutions, including credit unions. These numbers hardly suggest lax insured mortgage underwriting practices in Canada. While this lack of supporting data should give the federal government pause before implementing their risk-sharing proposals, there are other issues that should also be considered.
These remarks that I have just given have noted concerns about mortgage credit for first-time homebuyers and those living in rural and remote regions. In our view, the introduction of risk sharing will exacerbate the challenges already faced by those consumers. Lenders will respond by increased capital provisioning to offset anticipated losses, reduce lending as a result, and increase the cost of credit to demographics and regions perceived to be higher risk yet also very much in need of mortgage credit. It is also possible that insurers will increasingly calibrate premiums to assessment of local markets and the concentration risk of the lender that the insurer now has exposure to. This could further increase mortgage costs in rural and remote regions and negatively impact small local lenders.
Of course, these developments are a particular concern to credit unions that often service rural and remote regions and with a membership that will face these practical consequences.
Thank you for your time.
We welcome your questions.