Evidence of meeting #67 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was mortgages.
A video is available from Parliament.
Liberal
The Chair Liberal Wayne Easter
Thank you.
Just while you're on that point, in your submission you did mention “modify the stress test to better reflect future rate expectations”. What would be the components of that modified stress test, if I could put it that way? Can you break that down? What do you really mean?
President and Chief Executive Officer, Genworth Canada
Certainly. What we're saying is that, if you think about the Bank of Canada's neutral rate currently set at 3%, we recognize that mortgage rates are going to rise above the current level, but if we were to implement something around the level of 100 basis points stress test from current contract rates, which are in the 2.5% to 2.75% range, you're looking at a stress test of 3.5% to 3.75%, which would be reasonable in our view. As the rates go up, so to with the stress test. That would be a far better approach on a national basis to dealing with protecting consumers from rising rates in the future.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
While I totally understand what you're saying, at the same time, when you apply something as generic as an interest rate and say, “Okay, as this goes up, we're going to stress it on every level”.... What if someone changes their employment? What if someone gets a promotion? We don't account for those kinds of things that allow for that. What if someone lowers their debt or, for example, they pay off their car? This is the challenge.
I can understand why policy-makers...it can happen. I do appreciate there being some common sense in saying perhaps a less severe one would be appropriate because based on the norms we probably wouldn't see that.
We talked about the harm this has obviously done to many consumers, particularly young families who are trying to get into the market. Life is getting much more difficult because that goal of home ownership has been pushed away. We've also talked about the economic consequences where we see less economic activity. The government continues to tap down demand rather than supply.
I talked a little earlier about the new eligibility requirements. I noticed the Credit Union Association particularly has said:
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....
I'm worried about the competitiveness of the market. Credit unions are not like regular banks where they can issue more shares or issue bonds, etc., to be able to capitalize these investments. Also, we've heard from monoline lenders as well, that they may end up consolidating.
With this policy may we see some lack of competitiveness, which may end up causing prices to be raised for consumers? I'll start with the Credit Union Association, and we'll just work it out. I would love some comment on that.
Senior Policy Adviser, Canadian Credit Union Association
As we said, it certainly surprised the market. It surprised us. To the extent that the system is involved in securitization, yes, it puts us on a back foot.
We have probably about north of 40 issuers in the country. We have about 283 credit unions overall. It's predominantly some of the big ones that have had to deal with this, that are involved. On the one side you have a bunch of restrictions on what you can portfolio insure now. When you portfolio insure, that's what you do when you go in to securitize. That's reduced the ability to release the availability of mortgages that could be put through that pipe.
But also, you just reduced the whole pool of higher-ratio mortgages that could be securitizing. Institutions are competing for those high-ratio mortgages because they know they can securitize them. It's perverse in a way because you're getting competition for the higher-ratio mortgages going on, when more conventional mortgages that are now outside that pool might be higher quality in real life.
I'll just leave it at that.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
This can cause damage to the competitiveness, because, again, credit unions and other lenders may not be able to capitalize and be able to play in that pool. Is that correct?
Senior Policy Adviser, Canadian Credit Union Association
Right. As co-operative institutions we basically take deposits, fund off deposits, and loan off deposits and retained earnings. The mortgage securitization process was another conduit to fund a small bit of what we're doing, but it still was an important conduit.
Banks have other ways of issuing paper, as you said, but also they have the covered bond tool that the government has come up with. Currently we don't have the aggregate volumes to use that tool right now, so yes, it's hit us on the funding side as well as on the actual market side.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
What does that mean for consumers? What if someone comes to you and says they want to get a mortgage? Do you have to turn them away?
Senior Policy Adviser, Canadian Credit Union Association
I will say that in some markets it will be harder for us to compete. It means they probably will be dealing with the banks more.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Mr. Chair, if you remember back a few months ago, we had the credit unions in here talking about the cost of new regulations that would come into effect this July 1. I did speak with a very small credit union in one of my areas. They said that right now, between FINTRAC and some of the other requirements federally, they're spending about $100,000 a year just to do the paperwork that is associated with the federal government.
We're seeing a lot of touchpoints on groups like credit unions and whatnot. I'm quite worried when I read, going back to Dominion Lending Centres, that they feel that further consolidation and lack of choice for consumers will be a result. Again, I have nothing against banks being able...but they just have different tools at their disposal and that makes me concerned about this policy.
Does anyone have anything else to say on that particular area?
President and Chief Executive Officer, Genworth Canada
I would just add, to the point that risk sharing is being considered or studied, that this would further exasperate that situation, because you'd have even more risk sharing put onto the small lenders, which would raise costs for consumers and/or reduce choice, a big concern of ours.
Director, Credit Market and Economic Policy, Canadian Bankers Association
As I mentioned in my remarks, we have 59 banks as members. It's very diverse, from larger institutions to some smaller institutions. For the larger institutions, NHA MBS is a securitized vehicle. It's been getting a little bit more difficult over the last few years to use that model. The larger banks are less reliant on that model. Our smaller institutions, which are probably more reliant on the NHA MBS model, would need a pool of mortgages to securitize.
So some of our smaller institutions will have been hurt as well from these recent changes.
Senior Policy Adviser, Canadian Credit Union Association
I just have one more thing to follow up on in terms of risk sharing. With the risk-sharing model, credit unions or small lenders will become a counterparty to the insurers. Given that we are basically local, concentrated in particular markets, my guess is that they'll start tying premiums to what they consider to be their counterparty risk in those regions, which will have to be passed on through higher rates to our members in, say, rural or remote Canada.
Liberal
The Chair Liberal Wayne Easter
Mr. Albas, you're two minutes over. We'll come back to you if we get a chance.
Mr. Sorbara.
January 30th, 2017 / 6:50 p.m.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you, Mr. Chair.
Welcome, everyone.
I'll start off with Mr. Morrison. I'm happy to report that in my riding of Vaughan—Woodbridge, which is within York region, we are actually getting an affordable housing project. There are two or three happening in York region, one of them in my riding, for 162 units. The scary thing, though, is that the wait time for affordable housing in York region is seven years for seniors and 12 years for families. Rest assured that our government is working hard to develop an affordable housing strategy with the provinces and with the municipalities, led by Minister Duclos.
I'll leave it at that, because I have a few other comments to make.
Mr. Hogue, you're an RBC economist. In December, just before Christmastime, you were on TV. You commented on the lack of the supply of housing in the GTA and how that was impacting prices. In 30 seconds, please, with regard to the price increases we're seeing, what portion is due to the lack of the supply of housing? I believe it's at historical lows for detached, and for condos it isn't that robust either.
Senior Economist, Royal Bank of Canada
It's hard to know exactly the percentage. As the previous panel mentioned, there were so many factors playing a role in it. Certainly on the single detached home side, the fact that now there are about half as many being built as about 10 years ago in the GTA certainly is a constraint on the supply side.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you.
With regard to the credit unions, I grew up in northern British Columbia with Northern Savings Credit Union, a very local credit institution. We had the big banks there as well, which I later worked at for a number of years, and they were big participants in our local community organization.
I've heard a number of comments on the changes that were made in October and also a number of comments on risk sharing. I think risk-sharing credit unions, because they tend to operate in small rural towns, less-served areas versus urban areas, could have an impact potentially on rates for those customers in those areas, because in areas of Canada where economic growth maybe isn't as robust as, say, Toronto, you'll no longer have that cross-subsidization. You could have the impact on a first-time homebuyer in northern Manitoba and other areas—say, northern Ontario or Quebec—paying 30 or 40 or 50 basis points more than in other areas.
But there's one area that I think we also need to touch on, and this is my question for you. When a mortgage is in arrears, there's a large incentive for the insurers to work with the banks to keep the homeowner in the house. With risk sharing, I believe those dynamics change.
I'll go over to the credit union. I want you to comment on the competitive landscape and what you'd like to see going forward.
Senior Policy Adviser, Canadian Credit Union Association
There are a number of things in there. I just wanted to comment on the risk sharing.
I think one thing you're going to find is that the risk-based pricing that institutions will pursue will become much more finely granulated. As you said, we may be in Cape Breton where the market is more liquid, and places like Gimli, Manitoba, or wherever, and people like Genworth and CMHC will be looking at us and saying, “Well, you have some housing market risk there because it's a liquid market and there might be a downturn in the economy. We're going to have to boost the premiums that you're paying, and we're going to actually force higher costs on you in those regions.”
Whereas a larger national bank might be able to spread some of those risks across because they can move their book of business or change up their portfolio. We don't really have that option. Because we're owned by our members, it's not as if we're going to shut down and move to another part of the country or start going outside our province necessarily. I think that's going to be a big issue for us.
Did you have anything you wanted to add to that?
Vice-President, Government Relations, Canadian Credit Union Association
Given your experience growing up in northern British Columbia, I think you also would appreciate that a credit union really represents the community. I think any credit union that I've been exposed to does everything it can to try, when someone's going through financial difficulties, to make sure they can stay in their house. Certainly, with the work of the banks and Genworth and others, it's the same idea. You don't want to displace somebody from their home.
In terms of the competitiveness, it's clear that the changes in October...and from our earlier testimony, 15 policy shifts since 2006 for very small credit unions is very substantive. It's clearly had an impact. You've seen the consolidation within the markets.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I prefaced my comments by saying that we need a stable housing market. We need the quality of indebtedness that consumers are taking on to be good quality, but we also need to understand that our underwriting standards within the marketplace are pretty darn good. The credit scores of a high-ratio mortgage are very constant. The arrears speak for themselves. I know we can't be backward-looking all the time; we need to look forward.
For Genworth, you already pay a 10% deductible. Is that correct? Can you explain that for us, please?
President and Chief Executive Officer, Genworth Canada
That is correct. There is a form of risk sharing already with the private sector in the sense that while we are government-guaranteed, in the event that we are insolvent in a tail event, the lender will face a 10% haircut in terms of what the Government of Canada will pay on a claim. There is, by de facto, a 10% risk-sharing arrangement with the private sector. That's something that lenders will bring up from time to time as a counterparty concern. In fact, it's a form of driving behaviour in terms of how they operate with us.
Director, Credit Market and Economic Policy, Canadian Bankers Association
Because of that 90% guarantee and 10% excess risk, banks have to set aside additional capital to protect against that tail risk. Banks do set aside capital in that instance.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
To the comments about the CMB program, the NHA program, and the covered bond program, they are vehicles in the Canadian market that are very well functioning and they provide a lot of liquidity. Investors pick up those bonds. The covered bond program, issued both in the U.S. and here in Canada, is up to 4% of bank assets, I believe. There are some very fantastic funding vehicles out there that provide liquidity for Canadians to access to get funding to get mortgages.
Is there any anecdotal data that you can provide about the changes that were put in place from October to now? I think maybe this applies to Genworth the most, but this is to the three of you, if you wish to comment.
President and Chief Executive Officer, Genworth Canada
The most obvious change is the reduction in the size of the first-time homebuyers participation rate in the market, which, as we said earlier, could be as much as a third. After considering borrowing behaviour in terms of buying a cheaper home or further out, it might be 15% to 25%. That has yet to be seen, and that's my point. We need to wait and see what that will be, but there are other changes, too, and they are some of the related changes to the low-ratio portfolio rules that were alluded to in terms of eliminating refinance, which certainly does impact a number of our customers more than others and does create some disruption to the competitive nature of the market, impacting both consumer choice and cost.