Finance Committee on Feb. 1st, 2017

[The Chair, Liberal, Wayne Easter]

Thank you. Carry on.

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

I think Mr. Taylor responded to the question.

If I could—

[Nicholas Hamblin]

As a mortgage broker, we see—

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

I was about to ask Mr. Soni if he wouldn't mind giving me a sense of his clientele on that front.

Mr. Soni, please.

[Ajay Soni]

Similar question...?

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

Similar question.

[Ajay Soni]

Our average type of client is the average Canadian. We see a full spectrum of mortgage applicants. We see the first-time buyer, which is a large portion of a mortgage broker's business. We also see the full spectrum, to the point where we're doing development projects in the multi-millions—$30 million, $40 million, $50 million. We provide debt consolidations. We provide construction financing for small builders, average builders. The profile is the profile of a mortgage borrower. We see them all. We see individuals with high net worth as well.

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

Compared to the bank, if I could just characterize it that way, would your clientele be more leveraged than the average banker's client?

[Ajay Soni]

It's hard to say.

I wouldn't say that they're more leveraged. Based on our value proposition as mortgage brokers, there are certainly going to be some individuals who could be placed into the higher category of risk area, where we're using alternative sources of financing, but we have a lot of clients. As Paul has said, a lot of our lenders are balance sheet lenders. A lot of our large monoline lenders, like First National or MCAP, are looking for the quality borrower.

Nobody faces as strong, in a sense, a stress test on the underwriting guidelines as a mortgage broker. Our files are scrutinized, they're audited, and they're good-quality Canadian borrowers.

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

If I could understand this—and again help me out here—if your profile is the same as the major banks in terms of whether or not your clients are financially stretched, then why is there such a difference in approach from the testimony we heard on Monday in terms of the effect that these changes could have on the system?

Mr. Taylor.

[Paul Taylor]

I think I can get to the root of this.

There are some lenders who will specifically focus on or target borrowers that have less appealing credit histories. They might work in a marketplace where they will offer a higher standard mortgage interest rate because the risk of default for those clients is different. They are also generally privately funded, though, so that is a separate category of lender, if you will, within our membership.

There's not an awful lot of difference most of the time between the large balance sheet lenders' desired clientele and some of the smaller...I'll call them “residential specialist lenders” within our association.

Each of the large and the small will use the securitization program to a degree. Each of them occasionally will be finding additional sources of capital, whether it's their own balance sheet or through other mechanisms within the marketplace. The big difference between the two and what will cause a reduction in competition in the marketplace is that, because the smaller lenders are relying more upon the securitization mechanism, once that's removed or there's significant reduction of the risks that are eligible for that, the origination of mortgages for those folks is almost impossible without having to find alternate sources of capital, which are more expensive.

Very simply here, when you bundle mortgages into an investment mechanism that's a bond, if it's insured, then the risk for you in the market is quite small. If it's uninsured, the investors require a higher risk premium and, of course, the mortgage holder is ultimately paying for that with the interest rate that they're charged.

[The Vice-Chair, Conservative, Ron Liepert]

Okay, I have to stop you there, sir.

We'll take two more sets of questions of about five minutes each. We have Mr. Albas and Ms. O'Connell, and then we'll conclude.

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

Thank you, Mr. Chair.

Thank you again to all of our witnesses here today.

I'm becoming very concerned because obviously GDP isn't where we'd like it, and we have seen a lot of the forecasts downsize in many different respects. Thirteen percent of GDP in Canada is related to housing, so I think it's important for Canadians to know that when the government adopts a new policy or is looking to adopt a new policy as well, it could have severe limitations or implications for them. For example, from the previous October announcement and the implementation of the policy, things have been taken away. Options have been limited to Canadians.

Let's start with amortization. Some might ask, “Shouldn't amortizations be at a maximum of 25 years?” Mr. Lloyd, you work in Vancouver and the metro Vancouver region, what do you have to say on 25-year amortizations and 30-year amortizations?

[Michael Lloyd]

It sounds like a good idea, but the longer amortizations allow people to get into a home, keep that payment lower when they first move in, and then as they move along, they can increase their payments and pay it off faster. Just because it's a 30-year amortization doesn't mean it takes 30 years to pay that mortgage off. As soon as a client adjusts to biweekly accelerated, it knocks almost four years off of that right away.

It's a simple mechanism. It allows somebody to get into that house faster. To take away that mechanism doesn't make sense because it allows somebody to do that in a very simple way, and in the long run, it doesn't hurt anybody. They end up paying it off faster. Like I said, the majority of my clients never take that long to pay it off, and we encourage them to look for ways to pay extra payments on the mortgage and get it paid down sooner.

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

For a lot of young people, the 30-year mortgage was a good option but that's just not there anymore.

[Michael Lloyd]

It's gone.

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

As well, we're living longer, so obviously people are also choosing in some cases to work longer. They have a longer lifespan cycle to be able to pay for these kinds of things, so to me it would seem strange that we would be eliminating that and forcing some people to use up rental stock, which eventually raises prices in that area because supply isn't any better for rentals than it is for new construction.

Now you also mentioned a gentlemen in the Kootenays who had divorced. We're also seeing that divorces are higher, and another thing that's been taken away is the ability to refinance. These changes impacted Canadians' ability to refinance their homes.

[Michael Lloyd]

Canadians work hard to pay that mortgage down and to build up that equity, and because of these changes, the vast majority of our lenders now can't do that because they are doing what we talked about with bulk insuring and selling off their books. They're not allowed to insure or refinance, so the client can't do anything except maybe go to a big bank that is going to probably charge them a higher rate because it's going to be a smaller and smaller group of people who can do that for them.

It doesn't make any sense to me. A lot of the times refinancing is what we use to invest back into the economy, build businesses, do good things, and buy rental properties.

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

That's a very good point because what a lot of people will do is build up that equity in their home then take it out at some point, which now they may be denied, to either put it into starting a business or enhancing their business, or perhaps creating new rental properties so that they can have that extra money coming in. What happens if someone, today, wants to buy a rental property to use as another way to bring income to their family?

[Michael Lloyd]

They have to have 20% down and they have to go through a bank to get it.

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

Okay. What was that, previous to this policy's being implemented?

[Michael Lloyd]

Previous to that policy we had access to all the non-bank lenders that had various policies.

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

Okay, so this is hurting the economy. It's hurting consumers, because I hear from them in my riding. Particularly when I talk to people in Vancouver, it's crazy. It's making it harder for people to get good rental housing. Obviously, the competitiveness...and Mr. Taylor's really touched upon this as well. I'm concerned that because not only will it put many of the monoline lenders at risk—and by the way, that means less competitiveness—but what will it mean for the market, for Canadians in 10 years?

We've heard from other people, credit unions, who say that they have to add a risk premium to things and they can't do it because they are not allowed to retain earnings. To me, that whole end of the market will shrink. Where will we be in 10 years as far as competitiveness and prices are concerned?

[Michael Lloyd]

I can tell you that I started in 1994 as a loans officer at a credit union. The most we could discount a five-year rate was 0.25%, and that was for our absolute best client. Since brokers in the monoline industry have come along we've grown that. Now a normal discount is 2% off of a five-year rate. It could easily go back the other way when it's back to just the big banks.

[The Vice-Chair, Conservative, Ron Liepert]

Sorry, Dan, your five minutes are up.

Jennifer, and then we'll conclude.