Good afternoon, honourable members. Thank you for the opportunity to contribute to this important work you are all doing.
Dominion Lending Centres is Canada's largest network of accredited mortgage professionals, with over 5,000 active brokers nationwide.
Together with our affiliated companies, we facilitate approximately 38% of all mortgages brokered in Canada, more than any of the big five banks.
At DLC we pride ourselves on both being experts in the finances of real estate and having our ears to the ground, when it comes to the concerns of the Canadian consumer.
Each year our mortgage professionals work alongside lenders to provide Canadian families the opportunity to realize the dream of long-term financial security in a home.
Before we begin, I want to make it clear that mortgage brokers are neither part of a big bank nor monoline lenders. Mortgage brokers originate one-third of all new mortgages in Canada each year. We provide competitive tension between lenders, and choice and options for consumers, and we serve not only major urban centres but also the small underserved regional communities that make up the landscape of our country.
Our job is to find consumers the right mortgage for their family at the best rates. We are agnostic as to which solution is right for each family, and we are agnostic as to which lender funds that mortgage.
We are, however, an authority on value. We find, broadly speaking, that a lot of the new rules that have been proposed here would drive down affordability. Our biggest issue with these proposals is that the government did not consult with our industry, our brokers, our monoline partners, our credit union partners, our two competitive insurers, our real estate partners, our housing partners, or anyone outside of the big banks for that matter.
Policy-makers did not have the benefit of our intimate perspective when they made these changes unilaterally, something that will end up hurting all Canadians. These proposals skew consumers in the direction of the already dominant big banks, and while those may represent viable solutions for some Canadians, for many others, the monoline lenders better fit their needs.
When policy favours the big banks, it reduces overall competition in the mortgage marketplace, and that hurts Canadian consumers, regardless of what solution they use for their homes.
The other thing I want to emphasize before we begin is that these national-scale changes are impacting the entire country, whereas they're clearly directed at two hot housing markets, Toronto and Vancouver. We think that a smart policy would be to implement whichever proposals are enacted, on a regional basis, taking into account differences across the country.
While we understand and agree with the government's desire to protect consumers, Dominion Lending Centres disagrees with certain aspects of the recent mortgage rule changes as they make housing less affordable, not more affordable.
Let's begin with the stress test. The net effect of the stress test on many homebuyers is that their purchasing power has now been reduced by upwards of 20%. This has a significant impact not only on first-time homebuyers, but on many middle-class Canadians who need extra room for their growing families. As a result, housing is less affordable rather than more affordable, and individuals and families who have had their purchasing power reduced have to look at purchasing condos with monthly fees, or smaller homes in less desirable locations that require them to commute to work and school.
Others, who now must postpone home purchases to save more money, are falling further behind as house prices in many regions rise and become further and further out of reach.
We agree with the government's core objective of reducing the risk of a major rise in defaults should rates increase. We also agree that a stress test is the most prudent policy to achieve this. But what I can also tell you is that even with a hot housing market, there is a very low chance of the kind of defaults witnessed in the United States in 2008, given that the current default rate is 0.28%. That's right. It's roughly just one-quarter of one per cent. It's important to remember that when setting the rate at which the stress test is implemented.
Let's move to the restrictions on low-ratio mortgage insurance eligibility requirements. While traditional lenders, the big banks, have multiple revenue streams to finance mortgage loans, giving them the ability to effectively insure their own loans, the same cannot be said of non-bank or monoline lenders. Monoline lenders access funds through the mortgage-backed securities market, which can be accessed only with insured mortgages. They rely on portfolio insurance to finance their lending activity.
As a result of the new requirements, investors are less inclined to fund monolines that now must charge higher rates, as investors expect a risk premium that must be priced in and passed along to the consumer. This, again, puts the banks at a competitive advantage as the monoline rates and costs go up. Mortgage credit availability is reduced to the extent that some monolines will now be forced to close or merge with other institutions, also reducing competition in the marketplace. Again, just like the new stress test rules, the net impact on the consumer is negative, making housing less affordable.
Because the new rules prohibit insurance on non-owner-occupied properties, there is an added strain on the already tight rental market, as those who invest in rental properties now face higher rates and much fewer borrowing options.
We recommend that the government reverse these changes or at least allow refinanced mortgages and mortgages on homes valued at up to $1.5 million to be portfolio-insured, given that in some major markets homes over $1 million are commonplace and not a luxury. We would also be open to seeing the threshold reduced to a 75% loan-to-value ratio, rather than removing eligibility for these products entirely.
With regard to mortgage insurance rules and lender risk sharing, we believe that a lender risk-sharing program would raise the risk associated with funding mortgages and increase the amount of capital that lenders require. Again, while banks are sufficiently capitalized to retain loans on their books, smaller lenders are not and thus they would need to increase mortgage lending rates to offset additional risk, increasing costs to consumers. Even the banks are likely to pass off the costs of risk sharing to the consumer, increasing fees and mortgage rates, further reducing housing affordability.
In summary, Dominion Lending Centres recognizes and appreciates the government's legitimate concerns regarding the debt load of Canadians and housing affordability. Regardless of whether someone lives in a hot housing market, like the GTA, or in the Prairies, where house prices have remained flat for the past several years, it is important to remember, when setting and analyzing housing and mortgage policy, that 70% of households in Canada own their dwellings. Many Canadians are relying on equity in their home for their retirement cushion. By making housing less affordable and reducing demand—impacting home values and skewing the market in the direction of the large banks—we are unintentionally putting home ownership out of reach for many Canadians and making it more expensive for those already in their homes today.
It will be a sad day when the government unintentionally lops off more than 20% of Canadians' net worth by hastily instituting a policy that radically impacts one of the most admired housing markets in the world.
With regard to mortgage rules and recommendations, and in addition to the recommendations I've mentioned here today, we echo those put forward by Mortgage Professionals Canada, as well as many of the insurers and monoline lenders. We think that, as this is an industry that handles more than one third of all mortgages in Canada, it's important to consult mortgage brokers and industry stakeholders in advance, before setting these types of policies.
In summary, we have five proposals.
Number one, allow 12 to 18 months to study the impact of all changes made to date before considering any further changes.
Number two, modify the stress test to better reflect future rate expectations, and mandate that banks have to qualify all conventional mortgages at the same stress test threshold, eliminating the existing unlevel playing field.
Number three, given the number of further damaging consequences, do not proceed with the risk-sharing model.
Number four, reverse the decision and allow portfolio insurance on refinances and rental properties. If an 80% loan-to-value ratio is objectionable, reduce the threshold to 75% rather than removing that eligibility entirely.
Number five, continue to work closely with other levels of government and industry to study and address individual housing markets at the regional level.
One last point I would make, which I think is pertinent, is that it has to be clearly understood by everyone that we are not against the “big five” banks in Canada. They are great partners to us, and we do a lot of business. As a matter of fact, we do more loan origination through them than through any of their other partners. We're on their side, and we've been very supportive of every mortgage rule change since 2008, more than two dozen of them.
This is the only time ever that you've made a change unilaterally, and very quickly, without proper consultation, which is having a massive impact on Canadians and their families. This is the only time when the industry has come together universally and said, “Listen, we want to at least provide our feedback, because we think that there has been an error this time. We think that this is not prudent policy.”
I'll wrap by thanking all of you for the opportunity. Thank you for having us here today.
