Finance Committee on Feb. 1st, 2017

[Bob Finnigan]

That process of landholding amongst very few large developers is something that's been going on for 50 years in the GTA. On the land availability and the rate at which it is actually being brought to market, if there are any cases at all, there would be very few. For every developer I know, including me, the only way we can proceed to our next development is to proceed with the development we currently have, and we can't get to them.

In my example, I bought a piece of land in 2003. It was supposed to be developed in 2006, 2007, and 2008. For growth plan 2006, I was delayed till May of 2016. I'm not going to deliver the final house in that development till 2020. Do I want to wait that long? Absolutely not. It impedes my business, my ability to buy future sites, and everything else. It's 100% as a result of the government policy that was put in place in 2006.

[The Vice-Chair, Conservative, Ron Liepert]

All right. Thank you.

We'll move to Mr. Albas for five minutes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

You know, I find it hugely ironic, Mr. Chair, that we have someone who is saying that big players shouldn't be able to dominate, but that's exactly what this policy is doing. It actually is making the market less competitive.

If we had a completely free market in your area, you wouldn't have a situation...because you'd have small firms. There would be lots of competition, but because of the ongoing taxes and regulation, only the big players can play. That's what I'm afraid is happening in this case. We're actually going to be weeding out large amounts of.... Maybe they're considered non-traditional, but they have supported a lot of Canadians to get into their homes. Remember, 69% of Canadians enjoy that right. We've heard that the rest, maybe for the 6% that are waiting for social housing, want to join in. They want to have the benefits of that home ownership.

It's interesting to see that they want the benefits of competition but they don't see that this policy right now is reducing it.

I'll get right into it and ask this of the gentleman from First National. On my point of competitiveness, what do these new federal measures do to groups like First National, again, for non-bank mortgage lenders?

[Stephen Smith]

I would say there were two changes. I think the biggest change wasn't particularly in the October regulations but in the changes announced by the Superintendent of Financial Institutions in mid-November increasing the mortgage insurance premiums on loan-to-values below 80%. We compete directly with the schedule I banks, and we've competed on interest rates. The first change the minister made was that we can no longer provide refinancing on.... When a borrower comes to us and it's a refinance loan, we can no longer purchase mortgage insurance.

The double whammy—it almost makes the first one irrelevant—is that the superintendent increased the capital that mortgage insurers have to hold to two to three times a similar amount of capital that a bank has to hold. The mortgage insurers just increased all their insurance premiums, and they've increased to a point where we can no longer afford to pay those premiums. As a result, we're not competitive with the schedule I banks any longer. It has probably eliminated our ability to deliver a competitive mortgage product in the conventional space.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

The credit unions said something very similar.

[Stephen Smith]

Theirs would be a very similar message. This morning I reviewed their testimony from Monday night, and I think it's a similar message.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay.

Now, there seems to be a lot of consternation around the stress test, not the idea of it, but.... To me, the fact is that somebody either qualifies as a low risk or they don't. That's something your industry has done quite well. In fact, we've heard testimony saying that traditional lending and non-traditional both have very similar rates for defaults, which to me says that everyone is doing their homework to make sure no one gets loans who cannot afford to pay them.

That being said, do you have anything specific you'd like to mention in regard to those changes or any future changes?

[Stephen Smith]

I'm not nearly as fussed about the stress test as maybe some of the people who have appeared. I think there's a lot to be said, in that if you're taking a mortgage out at 2.69%, you should be able to handle an increase in interest rates, maybe not 200 basis points but maybe 100 basis points, or some increase.

I think it's appropriate. What I can't understand is why you're applying it mainly to first-time homebuyers. If we're concerned about people having stress, why are we only doing it in 30% of the market that's insured? Why aren't we doing it for the entire market? Why isn't OSFI bringing those rules in for people who are borrowing $1 million or $1.2 million? They're going to have the same type of stress in five years, yet that doesn't apply to those people. You still have 70% of all mortgages now that are qualifying at the contract rate, and the first-time homebuyers are now being contracted at the Bank of Canada rate. It seems inconsistent to me.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay.

When it comes to talking about putting more of the risk onto the private sector vis-à-vis what Ms. O'Connell was mentioning, that's a policy choice. In Canada we've always taken the policy route that we want to make cost as efficient as possible so that as many people as possible can own a home. That's part of the Canadian dream, so to speak. Again, 69% of people have very successfully done that and built up a lot of equity.

In regard to that and any future changes, that to me would say that if we're going to bring it to the private sector, the private sector will say, okay, if there's added risk to it, then we're going to price that in. Will that make the market ultimately more expensive and not just less competitive, as we've heard?

This is open to everyone.

[Stephen Smith]

I would like to comment on the issue. I think there's this view that somehow the government is backing all the mortgage insurance, and I'll speak for the mortgage insurers. The two private mortgage insurers have capital to support their obligations to a double A level. This is comparable to the capital level of the Royal Bank of Canada. It's a very strong type of covenant. The shareholders who put the money in and collect the premiums actuarially determine premiums that can handle those liabilities. In fact, OSFI has increased the capital that mortgage insurers have to have in their businesses by 40% to 50% in the last five years.

These are very well-capitalized businesses. This government backstop guarantee steps in only when these double A institutions have gone bankrupt. It's very comparable to CDIC insurance.

[The Vice-Chair, Conservative, Ron Liepert]

Dan, I have to stop you there. You're way over.

Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much, Mr. Chair.

Thank you all for coming today. I'm glad that you've been able to be here.

If I had more time I'd be able to ask questions of all of you but I'm going to try to focus in a bit on some things. To help me understand where we're at, Mr. Charles, and also Mr. Smith, you both indicated that it is inequitable that the stress test would apply only to insured mortgages.

If I can just take two steps back here, is it a good thing for people to put down, to have conventional mortgages? What is the benefit of having conventional mortgages in your opinion?

[Andrew Charles]

The immediate benefit for conventional borrowers in Canada is that there's no insurance premium they have to pay. I think that would be an immediate benefit. I think what we're trying to suggest is that if the stress test is an effective tool for first-time homebuyers, and the first-time homebuyers now represent somewhere between 30%, potentially 20%, of the marketplace, are the government regulations more effectively applied from the point of view of moderating the housing market if that same stress test is applied on the conventional business?

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Let me look at this from another perspective. Sorry, Mr. Smith.

Are the folks who are able to put down a larger down payment on their home a more secure client? Are they more resilient to any what they call exogenous economic events?

[Andrew Charles]

They certainly have more equity in their homes. I wouldn't necessarily say that the strength of the borrower is fundamentally different between a conventional mortgagor and a high-ratio mortgagor. Certainly, in the event of default, they have more equity in the house.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Can you walk me through the concern that you may have over applying that stress test to those who are not first-time homebuyers?

[Andrew Charles]

I would only take the view that, at a macro level, the first-time homebuyer segment has continued to be diminished and represents a smaller component of the overall housing market. It strikes me that if it's prudent for one part of the housing market that's not necessarily creating any of the challenges in today's housing market, those being the elevated pricing in Toronto or Vancouver, which are largely not first-time homebuyer markets, then it strikes me as at least a prudent consideration to contemplate having a stress test on all mortgages in Canada.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Your business model is that you want the least, the smallest default rate possible, of course.

[Andrew Charles]

Yes, 100%. That's right.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Again, if you have a client who is seeking an insured mortgage and has a higher debt-to-income ratio, aren't you concerned that if something were to happen—the markets change, interest rates go up—that this puts your business at risk with a higher potential for default?

[Andrew Charles]

On the first-time homebuyer market, the insured segment, I want to talk a bit about the due diligence that is undertaken. It's essentially a dual underwriting that happens in Canada, with the lenders underwriting the first-time homebuyer, and then secondly, the mortgage default insurer doing a review and re-underwriting the file.

I referenced earlier an average credit score of 753. Contrast that to seven or eight years ago when the equivalent score was about 700. It's a tightly regulated marketplace and it's a tightly underwritten marketplace. Frankly, it has performed quite well over the last 10 to 20 years. I'm entirely motivated to have zero default and economically motivated to have zero default. I think it's a particular segment that has performed well. What would cause that to be different would be unemployment.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Just in terms, sorry—

[Andrew Charles]

What would cause that to be different would be unemployment.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Sorry, Mr. Charles, I certainly don't want to cut you off. It's just that I know the chair is not going to let me go on much longer.

Has the method to assess credit scores changed over the last seven to 10 years?

[Andrew Charles]

There are two providers for credit scores in Canada. Both have made significant changes in their credit scoring capability, their algorithms, over the past few years.