Thank you, Mr. Chair.
My name is Katherine McDowell, and I'm the current president of the Alberta Mortgage Brokers Association. With me is our past president Adil Mawji. We are both licensed and practising mortgage brokers in the province of Alberta. Also joining us is our executive director, Amanda Roy. We appreciate the opportunity to share our thoughts with this committee.
The Alberta Mortgage Brokers Association is the oldest mortgage industry association in the country. For more than 40 years, AMBA has been the voice of the province's mortgage community, including brokerages, lenders, insurers, and industry service providers. More than 2,200 mortgage brokers representing 377 companies make their living in our province by helping Albertans achieve their dream of home ownership.
Canadian mortgage brokers represent $80 billion in annual economic activity and are changing the landscape of mortgage borrowing for the next generation, with 50% of first-time homebuyers using brokers. In Alberta, our members contribute heavily to the provincial economy by arranging financing for new home constructions, resales, and refinances for home improvement and debt services. Mortgage approvals alone in the province generated more than $30 billion as far back as 2010, according to Statistics Canada. We are seeing first-hand the negative impact of the mortgage rule changes across Canada, especially to the Alberta consumer and economy.
The unintended consequence of what we believe were mostly unnecessary changes at this time is a weakening of the middle class through the transferring of wealth in the form of higher interest costs and mortgage insurance costs for the consumer.
Alberta has been the poster child for what regulators fear. There have been two years of solid recession. According to the regulators, these changes were made to protect consumers from any impact resulting from higher unemployment rates or interest rate increases. We are not against a stress test in some form, although not as it currently exists, but our province has already been a test environment for the effects of unemployment. Prudent underwriting rules previously put in place for those very reasons have already given us the ability to weather that storm.
In 2014, Alberta had an unemployment rate of 4.7%, and the number of households in arrears was 0.27%, which was just under the national average. By 2016, our unemployment rate had drastically increased from 4.7% to 8.5% by the fourth quarter, and the number of households in arrears was 0.41%. An 81% increase to unemployment between 2014 and 2016 resulted in a relatively moderate increase in delinquencies from 0.27% to 0.41% in that same time period, according to CMHC data.
At this time, we don't even know the impact of the wildfires in Fort McMurray in May of 2016, but according to that data, Q2 reported a 0.37% rate of delinquencies, and that number jumped those last few percentage points to 0.41% by the end of Q3. So we ask, what are these changes really protecting the taxpayer from?
We consider the stress test to be a prudent underwriting measure to protect the Canadian taxpayer. However, we do feel the newly introduced qualifying rate and the way it is calculated are too severe, at 200 basis points higher than the average contract rate.
For consistency across all mortgage applications and for consumer protection, we'd like the government to consider slightly tweaking the qualifying rate and how it's calculated in order to better reflect market conditions. As an example, a potential solution that could be explored is contract rate plus 1% to be applied across all mortgages.
Other presenters to this committee have previously explained how securitization works, but what hasn't been explained is how it directly affects the middle class. Since October 2016, those attempting to buy a home without default insurance have been adversely affected by the transfer of wealth due to increased interest rates from this policy. This is also true for those refinancing.
For example, a middle-class first-time buyer from ten years ago, who has equity in the home and needs funds to renovate in order to move his aging parents into a fully developed basement, is forced to pay more to do so now. Refinancing for this purpose or for other investments typically helps build wealth in the household. The policy change of removing refinances from portfolio insurance will cost these individuals more through increased interest costs, resulting in a decrease in the potential middle-class wealth.
Canadian consumers are now forced to pay more for their mortgages because of the new OSFI guidelines, which make mortgage insurance more expensive to the lenders. As a result of the requirement from mortgage insurers to hold more capital against mortgages they insure, we have seen mortgage insurance premiums increase for both low- and high-ratio mortgages. The effect of this increase on mortgage lenders, both bank and monoline, has been to build that cost into the interest rate charged to the mortgage borrower.
Today we are seeing discounted interest rates on all high-ratio insured mortgages. However, for any low-ratio insured mortgages and any uninsured mortgages, the cost of implementing the capital requirements has been passed on to the mortgage borrower to bear by way of increased interest costs.
Interest rates have been adjusted to reflect the added costs of portfolio insurance or the added cost of capital for lenders to hold these mortgages on their balance sheet. In some cases, these increased costs have almost negated increases to the Canada child benefit.
If a consumer claiming the Canada child benefit for a one-child family makes $90,000 a year, their tax savings would be approximately $1,120 per year. If they have an uninsured mortgage, they would have to earn nearly $1,100 more to pay the additional interest costs on a $400,000 mortgage.
For the high-ratio consumers putting 10% down, due to increased insurance costs their future home equity decreases by $2,700, which is reflective of the amount for an extra premium on a $400,000 mortgage as well.
In closing, we would ask the committee to consider making changes to the new rules in five areas.
We ask that you reconsider the reinclusion of refinances in portfolio insurance.
We recommend the modification of the current stress test to a more market-plus approach.
We ask that you review the increase to the capital reserve requirements and ask more questions about how it was balanced. Alberta, for example, had a significant increase to unemployment, topping at 9%. What was the increase in losses year over year for the insurers? Was it proportional to the increase in insurer capital requirements?
We also request a study into the potential ill effects of regional-based pricing for insurance and request that you consider the effects of regionality as part of the risk-sharing model. We believe that over time it will become very detrimental to Canadians in economically challenged areas where stimulus, rather than added costs, is needed.
In moving forward, we would also ask that the Alberta Mortgage Brokers Association as well as all stakeholders who have testified before the Standing Committee on Finance be considered key stakeholders to be consulted when the committee reviews all real estate finance changes in Canada.
Thank you, Mr. Chair, for your time. We are prepared to take any questions you may have.