Finance Committee on Feb. 13th, 2024

[Joanne Thompson, Liberal, St. John's East, NL]

I want to touch on the previous conversation around mortgage stress tests. Obviously they were introduced when mortgage rates were lower.

Would you argue that without the stress test, during high interest rate environments like the one we currently find ourselves in, the situation for mortgage owners would have been far worse?

[Judith Robertson]

The stress test is a prudential tool, so it's not my area of expertise. It is a macroprudential tool principally, but of course it does have a microprudential impact, which is that there are likely some borrowers who were saved from overextending.

[Joanne Thompson, Liberal, St. John's East, NL]

Could you speak to the banks' compliance with FCAC's mortgage guidelines? Has the compliance been high?

[Judith Robertson]

Yes. I'd be happy to turn to Frank, who has more detail on the preliminary reporting we've received to date.

[Frank Lofranco, Deputy Commissioner, Supervision and Enforcement, Financial Consumer Agency of Canada]

Thank you, Commissioner.

Thank you for the question. It's a pleasure to be with you here today.

The guideline does have a requirement for reporting. We are to receive periodic reports from the financial institutions subject to the guideline. We recently received our first set of complete data. That data is at a fairly high level. More detailed data will be submitted to us in the coming months. That's the data we hope to examine and report on.

At a very high level, we're quite satisfied currently with industry's response. The reporting shows that institutions have put procedures in place to deal with the guideline. There is evidence showing that mortgage accounts that are at risk have been identified and that people have been proactively contacted to discuss options early enough to make informed decisions. We also know that some relief measures have already been put in place with respect to some of those mortgage accounts.

At a very high level—these are estimates—the reporting shows that there are about five million mortgage accounts in relation to our guideline, that is, residential principal residences. Of those, less than 1% have been identified as at risk. Of that 1%, approximately 10% have been benefiting from relief measures. That's about 35,000 accounts deemed at risk, for which about 3,500 to 4,000 accounts are benefiting from relief measures.

Again, those are estimates. I feel confident enough to share them with you, but we're really looking forward to the detailed data that will arrive in the coming months, with a view to putting something out publicly in the summer. As was noted earlier, we'd be happy to return to the committee and share that with all of you.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

Could you speak to the enforceability of the guidelines?

[Frank Lofranco]

Absolutely. To understand enforceability in relation to our guidelines, it would help if I take a moment to step back to situate it within the supervision framework that the FCAC has established and works within. Quite simply, the supervision framework is organized around three pillars of activity: promotion, monitoring and enforcement. Specific to the guideline, the guideline is a tool to promote compliance by way of establishing clear expectations from a regulatory perspective.

I'll stick with the example of the guideline. As it relates to monitoring, we actively engage on a regular basis to identify emerging issues with respect to implementation to either get out ahead of them or ensure that corrective actions are being planned and taken with respect to them. In the case of the guideline, there is the added requirement for reporting, so obviously the reporting allows us to monitor.

With respect to enforcement, we have a bit of a graduated model, which is to say that as issues surface and we assess them against risk, we increase the intensity of our oversight and supervision. The guideline does include some important provisions—those related to the offering of appropriate products and services. There are provisions in relation to disclosure and how that's provided so that it's clear and not misleading. There are also provisions with respect to express consent, which means receiving written confirmation of whatever you've agreed to.

When these provisions are found to be non-compliant, we undertake investigations, and when those investigations confirm the non-compliance, we will issue an enforcement action, of which we have more than one type depending on the nature of the non-compliance.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Thompson.

Now we'll go to MP Ste-Marie.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Welcome to all the witnesses.

Ladies and gentlemen, thank you very much for being here; it's much appreciated.

My questions are for Ms. Robertson and concern what is known as "negative amortization".

Do you have any data on the number of mortgage holders who are currently in negative amortization? We talk about negative amortization when the interest they are unable to pay is added to the capital.

[Judith Robertson]

Thank you for that question.

If I understand correctly, you're asking if we have a picture of the number of mortgage holders who are currently in a negative amortization. It's a serious issue, and we have great concerns about that.

We do have some numbers, again on a preliminary basis.

Frank, do you want to speak to the amount?

[Frank Lofranco]

Absolutely. Negative amortization is specific to variable rate mortgages with a fixed payment. Negative amortization will kick in when a particular interest rate triggers a situation in which your payment no longer covers your principal. If interest rates continue to change, that payment will not even cover all of the interest, thereby causing the accrued interest to be charged interest.

Our guideline specifically identifies that as a potential relief measure. I should open up parentheses here and note that FCAC does not prescribe relief measures to financial institutions, but the guideline does identify some that may be relevant. One of those is to not charge interest on interest.

This is a serious issue. It's something we're monitoring closely. Institutions do have the obligation to ensure that the products offered are appropriate for the circumstances that consumers find themselves in.

With respect to the data, again it's very high-level, and negative amortization is happening in the range of about 150,000 to 200,000 mortgage accounts. The sum total is $5.2 million. Relatively speaking, things seem to be in hand, but we need early engagement by way of financial institutions speaking about options available to mortgage holders. That's accompanied by an expectation that institutions provide sound advice and refer customers to other reputable sources of advice to allow consumers the time to make an informed decision on how to handle that.

The guideline does have options, which I'm happy to explain further, but in principle, I think that gives you a sense of scale relative to the issue and a sense of the risk relative to the product.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you for providing such a comprehensive answer.

The negative amortization situation is indeed very worrying.

Can you give us more details about the options you mentioned, the ones that financial institutions can put in place?

[Frank Lofranco]

Yes. I'm happy to do so.

One option spelled out in the guideline is to allow for a lump sum payment to deal with the situation of negative amortization and to waive any fees or costs associated with lump sum payments. Those are typically called prepayment penalties or payment penalties.

More importantly, when dealing with amortization and the possibility of extending it on a temporary basis, there is an expectation that, one, it will be for the shortest period of time and, two, it will be accompanied by a plan to return the consumer to the original amortization period and the time will be reasonable in nature. It's also accompanied by a requirement for the consumer to have details around the long-term implications of those kinds of decisions.

The long-term financial well-being of consumers is the primary consideration, and lengthy amortizations by definition are not in the best interests of consumers. We're hoping the guideline will serve institutions and customers well to enable informed decisions to deal with the issue.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Once again, thank you for providing such a comprehensive response.

The committee will continue to monitor the situation.

It's obviously very worrying to see holders of variable-rate mortgages in such a situation.

My next question is still for FCAC and concerns the report on financial well-being that you published last June.

Do you expect to see an increase in defaults and late payments over the next six months as a result of the financial difficulties faced by mortgage holders?

[Judith Robertson]

We certainly do anticipate, as everyone does—and by that I mean our colleagues in the federal oversight system—that in the coming months and over the next two years, as consumers hit renewal rates or hit trigger points, there will be increased recognition and realization of challenges. Those could very well result in higher levels of defaults or missed payments. I think that's a reasonable thing to anticipate. As so many mortgages were put in place at much lower rates, there's going to be an impact as those get renewed or refinanced.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste-Marie.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

That's the time. We're a little over.

Thank you, Commissioner Robertson.

Now we're going to MP Blaikie for six minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much to the agency for being here.

I'm curious to know what circumstances you think you have to get to in order for people in a negative amortization situation to get back to their regular amortization, short of winning the lottery or having an inheritance that allows them to exercise a lump sum option. Is it really just a matter of hoping that interest rates come down fast enough so that by the time they renew, they can get back to regular amortization? What does it mean for people who have already accrued a negative amortization and are trying to get back onto a 25-year track?

[Judith Robertson]

It's a very serious issue. It is a concern, and it is a concern about the product. We share the superintendent's concern about the variable-rate fixed payment, because it's a complex product and it has risks that are being realized and that may not have been fully appreciated.

What we do see happening for those mortgages where possible, as Frank mentioned, is that lump sums have apparently happened and allow for a return. That is not the case for everyone, of course. We have also seen people switching to a fixed-rate mortgage with some other debt consolidation that is more reasonable.

It's very difficult to generalize. That's one reason we have emphasized the need for tailored relief measures. Each individual's circumstances and their possibilities are different, but everybody's situation will be enhanced by at least addressing and understanding the issues earlier and understanding where they have options. That could be up to and including the consumer-led sale of the residence.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Are you concerned that there's an issue of fairness for folks who were on a fixed term with fixed payments, had to renew in a high interest environment and really didn't have any option at all? Had they chosen a fixed payment with variable interest, negative amortization would have been an option for them, presumably, because it's something that banks seem to be doing quite a bit.

Are you concerned about what this means for folks who, as they look at a difficult economic situation, maybe regret not having chosen a fixed-payment, variable-interest option in order to access another relief tool that folks on fixed terms weren't able to get?

[Judith Robertson]

I'm not sure I understand the question exactly.

There is no difference in the guidance about tailored relief measures and types of relief measures—depending on what type of mortgage you have—regarding the fairness in how banks treat any consumer, regardless of the type of mortgage they have, if they are at risk of default.

If that is what you were asking—

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Negative amortization is not coming up in the context of folks who were on fixed-interest, fixed-payment mortgage terms. They have to renew, and then either they can renew or they can't renew. There may be some other relief options. Those relief options would also be available to folks who were on a variable-interest, fixed-payment mortgage. In addition to that, people in that category have been able to access negative amortization as a temporary relief tool.

Do you think any issue of fairness arises by having negative amortization be a temporary relief tool for some mortgage holders and not for others?

[Judith Robertson]

No, I don't, because I think it's just a different mechanism. If you're on a fixed-rate mortgage and you skip a payment, you add the interest. It is akin to negative amortization, just a different mechanism, so no, I don't think there's an unfairness there.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. I think I'm satisfied on that question.

I want to ask our witness from the FCM a question on the surrounding infrastructure required to build more homes and particularly to increase density in urban downtowns.

Could you point to a federal program under the national housing strategy that does a good job of making allowances for the kind of peripheral infrastructure—by which I don't mean non-essential—required to increase housing density?