Finance Committee on April 4th, 2022

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 36 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2) and the motion adopted at committee on January 12, 2022, the committee is meeting on inflation in the current Canadian economy.

Today's meeting is taking place in a hybrid format, pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. Per the directive of the Board of Internal Economy on March 10, 2022, all those attending the meeting in person must wear a mask, except for members who are at their place during proceedings.

I would like to make a few comments for the benefit of the witnesses and members. Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mike. Please mute yourself when you are not speaking. With regard to interpretation, for those on Zoom, you have the choice at the bottom of your screen of either the floor, English or French. For those in the room, you can use the earpiece and select the desired channel.

All comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can. We appreciate your patience and understanding in this regard.

With regard to a speaking list, the committee clerk and I will do the best we can to maintain this consolidated order of speaking for all members, whether they're participating virtually or in person. The committee agreed that during these hearings, the chair will enforce the rule that a response by witness to a question will take no longer than the time taken to ask the question. That being said, I request that members and witnesses treat each other with mutual respect and decorum. If you think the witness has gone beyond the time, it is the member's prerogative to interrupt or ask the next question. Please be mindful of others' time allocations during the meeting.

I also request that members not go much over their allotted question time. Though we will not interrupt during a member's allotted time, I'd like to keep you informed that our clerk has two clocks to time our members and witnesses.

To members and witnesses, this portion of the meeting will conclude at 12:30, at which time we will move into our in camera portion of the meeting for committee business.

At this time, I'd like to welcome today's witnesses.

With us today, from Canada Guaranty Mortgage Insurance Company, are Andrew Charles, president and chief executive officer, and Curtis Gergley, chief risk officer. From Sagen Mortgage Insurance Company Canada, we have Stuart Levings, president and chief executive officer, and Craig Sweeney, senior vice-president and chief risk officer.

Welcome.

We will begin with Canada Guaranty Mortgage Insurance Company. They will have five minutes for their opening remarks.

The floor is yours.

[Andrew Charles, President and Chief Executive Officer, Canada Guaranty Mortgage Insurance Company]

Good morning and thank you very much for the introduction, sir.

I'd like to thank the finance committee for the opportunity to participate at today's hearing.

Canada Guaranty is a 100% Canadian-owned private mortgage default insurer competing against the government-owned CMHC and Sagen in the private sector, which is here today. Our core business is to provide mortgage insurance for Canadians who purchase a home with less than a 20% down payment; these are primarily first-time homebuyers.

Our business, the mortgage insurance business, is extremely pro-cyclical, and while we're currently at a point in the economic cycle that features improving unemployment rates, rising house prices and relatively low interest rates, I would point out that mortgage insurers are still seeing borrowers default from mortgages that were originated during the global financial crisis in 2007 to 2009, which reflects the long-tail nature of our business. The key tenet of our business is to ensure that we're there to provide stability to the financial sector when the economic cycle turns and the situation would be the opposite of what it is today, where we'd see elevated unemployment rates, high defaults and weakened house prices.

Our business is closely regulated by OSFI, which requires all mortgage insurers to hold appropriate capital levels to be able to withstand a significant and prolonged increase in mortgage defaults during a variety of stressed economic scenarios. Our industry's product offerings are also limited to a defined sandbox as determined by the Department of Finance.

These two key guardrails serve to strengthen and stabilize the Canadian mortgage insurance framework. Since the global financial crisis, there have been no less than 10 demand-side regulatory interventions that have reduced demand for mortgages. These include reducing amortization periods from 40 years to 25 years, eliminating high ratio rental mortgages, and eliminating mortgage refinances from the insured marketplace. As well, since 2017, all insured mortgages have had to qualify at a stress tested interest rate that is several points higher than the contract rate. This has served to create an important stability buffer to protect borrowers' ability to retain their payment ability when interest rates rise. At Canada Guaranty, we have supported all of these interventions as being prudent and necessary to support a sustainable and responsible home ownership market.

During the recent federal election, a variety of housing-related proposals were put forward by all parties. One platform related to arbitrarily reducing mortgage insurance premiums. I would point out to the committee that mortgage insurance premiums are derived from an actuarial analysis based on capital levels insurers are required to hold to retain claims payment capability during a variety of stress scenarios and economic downturns. Minimum capital levels are set by Canada’s federal regulator, OSFI, and are a key part of Canada’s financial stability. Arbitrarily reducing premiums without the appropriate actuarial analysis would be a concerning precedent and would weaken Canada’s housing finance system.

For the benefit of the committee, I'd like to take a moment to describe Canada’s typical first-time homebuyer. The average high ratio first-time homebuyer ranges in age from 25 to 40, has average household income in the $80,000 to $120,000 range and an average mortgage size of $390,000 with a very strong credit score of north of 750, which demonstrates a very high level of creditworthiness.

Insured mortgages overall represent a relatively small component of Canada's mortgage originations; we estimate that the insured segment represents less than 20% of the overall mortgage market. In addition, the insured market has a maximum $1-million purchase price cap, which was implemented in 2012 and has not been adjusted. This maximum cap of $1 million for a home purchase price is now a key factor in reduced accessibility for prospective first-time homebuyers in the greater Toronto area and greater Vancouver area, two key markets where over 50% of home purchases are over the $1-million cap.

I'd like to turn my comments to what I think is the core aspect of this committee, and that is the house price inflation. In recent years, house price inflation has made affordability increasingly difficult for many first-time homebuyers. Canadian house prices are up 15% over the past year and have increased by 26% over the last 24 months according to Teranet. Let me describe what we consider to be the most significant factors causing house price inflation in Canada, and we believe there are both supply and demand-side contributions.

The most important issue is the lack of timely housing supply. Many municipalities have seemingly constrained development and have been unable to create urban housing supply for prospective new home owners. Land use and zoning bylaws in many of Canada's key cities appear to be out of sync with Canada's immigration policy and growth aspiration. Canada has the strongest population growth of any G7 nation and our housing supply in many of our key cities has not been able to keep pace.

Housing supply has also been constrained by lack of homes for sale during a changing housing market dynamic, with buyer preferences triggered by the pandemic. Canadians are staying in their homes longer and are hesitant to move into assisted living centres. The pandemic has also significantly altered and slowed the pattern of international people movement, with Canadians seemingly more hesitant to pursue international employment opportunities.

On the demand side, over the last 18 to 24 months, we have observed three notable changes to domestic demand.

[The Chair, Liberal, Peter Fonseca]

You'll just have to start wrapping it up, please. We're well over time.

[Andrew Charles]

Low interest rates have resulted in homebuyers having a much stronger personal balance sheet, and from the pandemic itself with the change to hybrid work from home.

If I could provide any perspective to your consultations, my last two comments are to avoid arbitrarily decreasing mortgage insurance premium rates, and to increase and index the current $1-million purchase price cap on insured mortgages to reflect the substantial increase since 2012.

That concludes my comments. I apologize for going over time.

[The Chair, Liberal, Peter Fonseca]

No problem. Thank you, Mr. Charles. You'll have a lot of opportunity in the question and answer time to add more to your opening remarks.

Now we'll hear from Sagen mortgage insurance company for up to five minutes, please.

[Stuart Levings, President and Chief Executive Officer, Sagen Mortgage Insurance Company Canada]

Thank you very much.

Good morning to you all.

You will necessarily hear some repetition here, as our businesses are, of course, very similar.

Let me begin with a bit of background on us and the subject of mortgage insurance. Sagen is the country's largest private mortgage insurer. Canada Guaranty, as you know, is the other notable private sector player. We both compete with CMHC. In 2021 Sagen was Canada's largest insurer of high-ratio mortgages with about 40% of the market share.

The insurance we provide reimburses lenders for the losses they incur when homebuyers default on their mortgage. Mortgage insurance is mandatory for homebuyers with a down payment of less than 20%. Thus, we primarily serve first-time homebuyers.

Mortgage insurance is an unqualified public policy and commercial success. It has helped many first-time homebuyers responsibly access affordable mortgages while also protecting our housing and financial sectors from downside risk. We are very well capitalized, tightly regulated and deeply experienced to properly manage mortgage-related risks.

There are a couple of important things to keep in mind when thinking about mortgage insurance.

First, mortgage insurance premiums are paid in full by the lender at the time that the mortgage is originated. The lender is then reimbursed for the premium by the borrower by adding the premium amount to the mortgage, which is then paid off on the same amortization schedule as the rest of the mortgage.

Second, mortgage insurance coverage lasts for the entire amortization period of the mortgage. As the premium is paid in full at the time a mortgage is originated, mortgage insurance cannot charge additional premium when economic downturns occur. Consequently, we price our product based on a full business cycle, as we must rely on our capital and unearned premiums to pay for future claims.

Our insured first-time buyers are the most tightly regulated, rigorously underwritten borrowers in the market today. The stress test has only served to fortify that rigour. Mortgage insurers act as a second set of eyes on every high-ratio loan application, ensuring that only borrowers who can afford their mortgages are approved.

Our insured buyers reside in all regions across Canada with a majority ranging in age from 25 to 45 with stable jobs and an average household income of $100,000 to $120,000. The credit scores are strong, averaging above 750,and they typically purchase homes priced below market averages. This is especially true for borrowers in Vancouver and Toronto.

Before turning to your questions, I want to say that we agree that the rising cost of homes is a challenge for homebuyers, especially first-time homebuyers. Housing demand is driven predominantly by the need for a place to live, and our population growth has been strong. A lack of appropriate supply to meet this demand is the fundamental problem that afflicts Canada's housing sector and drives up prices.

In support of the committee's work, we would make three observations.

First, the federal government should do everything it can to boost the supply of housing that is affordable—not just affordable housing. That means playing a coordinating and supportive role with provinces, municipalities and the private sector. It means taking direct action creating incentives to boost supply.

Second, we believe that it would be imprudent to alter the mortgage insurance pricing structure when things remain so volatile. The risk of unintended consequences is too great. For example, if prices are lowered arbitrarily, mortgage insurers will be forced to reassess risk, and there's a real possibility that it will lead to tighter underwriting with the effect of making homebuyers who would have qualified for a mortgage today unable to do so in the future.

Finally, boost the accessibility of homes for new buyers. One specific move would be an increase in the cap on insured mortgages that was established in 2012 to something greater than its current $1 million. This is particularly important in markets such as Vancouver and the greater Toronto area.

Thank you for your time.

We look forward to your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Levings.

You will be getting many questions from our members.

We're starting with our first round, which allows each party to have up to six minutes of question time.

The Conservative are up first with MP Albas for six minutes.

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

Thank you, Mr. Chair.

I'd like to thank both Mr. Charles and Mr. Levings for coming and lending their expertise to the committee's attention today.

I'm going to start with some general questions about why the mortgage space is as it is, and perhaps some possibilities for some innovation.

The previous governor of the Bank of Canada, Stephen Poloz, has lamented a few different times in a few different formats the lack of innovation in your space.

One of the proposals that I've seen is to have a longer than five-year term. Five years seem to be the default for most of the market, although some Canadian financial institutions are doing seven and ten years. I would like to hear from your perspective why the seven-year to ten-year mortgage is not utilized that heavily in Canada versus the United States, where it's purchased every day by homeowners.

Perhaps we'll start with Mr. Charles and then we'll go to Mr. Levings.

[Andrew Charles]

That's a very thoughtful question because the seven-year and the ten-year mortgages have existed in Canada for a fairly significant period of time. In my background and experience, we have only seen modest uptake of that seven and ten year historically. It's largely in eastern Canada and more rural markets of the country, perhaps. I think it's an absolutely fair question.

Perhaps some of it is just consumer behaviour and consumer comfort that the five-year fixed-term product historically, as it relates to first-time homebuyers, sir, has always represented somewhere in that 70% to 80% range. In fact, 85% of our portfolio is in the five-year term.

I think there should be more emphasis placed on how we can expand beyond the five years to give that longer certainty of payments for borrowers. By and large, that's going to have to be a lender-driven initiative as opposed to a mortgage default insurer initiative.

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

Mr. Levings, do you have any comment?

[Stuart Levings]

I think another mindset of consumers, particularly first-time homebuyers, is that they are aware there's a penalty if they break their mortgage term.

Most first-time buyers view their first home as a starter home with the intention of probably moving up at some point as they expand their families, etc. They are likely to want to err on the shorter side of a term versus the longer term that might appeal to someone who's more in their forever home and has a view that they can manage through a seven-year cycle.

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

On the case for looking at longer-term mortgages, in a C.D. Howe article, Michael Feldman talks about addressing the mismatch between term and amortization. He argues that there are some legislative barriers. Potentially, taxpayers' exposure to the housing market could be reduced if a market were to develop for residential mortgage-backed securities, or RMBS.

What kind of place would such a market have for your companies? Would you see that as another alternative where you could sell your products?

[Stuart Levings]

Is there any preference in who starts?

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

Why don't we start with you, sir.

You have the floor.

[Stuart Levings]

I think the issue with that seven-year term and the residential mortgage-backed security market is just the predominance today of the five-year funding structure for lenders and the issuance of five-year commercial bond paper.

I do think that if they were to see merit and acceptance of a longer-term securitization vehicle, it would promote higher usage or higher offering of that term and perhaps at more appealing rates.

For our business, the longer the borrowers are locked in on a rate, the better. It does add more financial stability and more protection from rising interest rates. We know from experience that first-time buyers in particular have a higher risk profile in the first three to five years. Generally speaking, that's when they are establishing themselves in their careers and figuring out the cost of managing a home. Once they get past five years, the risk of default goes down tremendously.

If you can extend more seven-year type paper to borrowers, we think that would be very constructive for our industry. It comes down to again the funding structure that's currently available, the RMBS market, the securitization market and, finally, consumer behaviour on whether there would be penalty if the have to break their mortgage.

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

Fair enough.

Mr. Charles, did you want to jump in?

[Andrew Charles]

Yes, I would agree with the essence of what Mr. Levings has indicated.

I would point out, sir, that the RMBS market is still in its relative infancy. We have seen a variety of RMBS issuances. We think that's going to continue to grow and develop, albeit not perhaps at the pace the industry would want to see it develop at.

The other comment I would make around five-year terms for first-time homebuyers is that there's a general a belief that if you're working you're going to get promoted once or twice in the next five years and there will to be certain lifestyle implications for you. You may inherit money or whatever the case may be. At the end of five years, economically, the borrowers are going to be further advantaged as it relates to transferring or renewing their mortgage versus being locked in for that seven- to ten-year period.

The longer the term, the better it is for the mortgage insurance from a default point of view.

[The Chair, Liberal, Peter Fonseca]

Thank you, and thank you, MP Albas.

We're moving to the Liberals, with MP MacDonald for six minutes.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair, and thank you to the witnesses for being here today.

I want to go back to you, Mr. Charles. In your opening remarks you talked a little bit about actuarial analysis. I was wondering if you could expand on that for the cost approval and benefit approach. How do you analyze that?

[Andrew Charles]

Each year as an OSFI-regulated mortgage insurer we need to calculate the amount of potential claims that exist, or potential mortgage defaults that exist, within our portfolio—both what's in our existing portfolio, and also, sir, the new flow of volumes coming in. Each year we do an actuarial analysis to ensure that we have more than sufficient reserves to pay potential claims in a variety of economically stressed environment. That is the analysis that all three mortgage default insurers do on an annual basis. It's very much a science-driven exercise versus there being any degree of art form per se.

[Heath MacDonald, Liberal, Malpeque, PE]

It doesn't really have anything to do with interest rates or anything like that, but is based solely on investment, on the other side of your ledger type of thing? Or how does that work?

[Andrew Charles]

It's based on a variety of economic scenarios. The number one reason for a mortgage default in Canada is unemployment rates. That's the number one consideration and factor, and our actuarial analysis incorporates a number of base scenarios and stress scenarios, as I said, to ensure we have sufficient reserves to pay for ultimate claims.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

Both of your companies talked about the $1-million cap that's presently in place. I'm just wondering what number are you looking at, and how did you come up with that number? Are there any statistics that you can show us on what the number is you're seeking?

[Andrew Charles]

With regard to the number that we're seeking, we're generally comfortable with the platform that was expressed, I believe, by the government, which moved from $1 million to $1.2 million. Our sensitivity, sir, is that the $1-million purchase price maximum was put in place in 2012 when home prices were fundamentally lower than what they are today. What we'd want to see is a movement from the $1 million to at least the $1.2 million to allow Vancouver and Toronto first-time homebuyers to really enter that marketplace.

As I indicated in my opening comments, over 50% of house purchases in those two markets are in excess of $1 million. To answer your question, we'd like to see the $1 million rise to $1.2 million, but more important, sir, is the implementation of an annual house price index, or an inflationary index, to be applied to whatever that new base level is.

[Heath MacDonald, Liberal, Malpeque, PE]

We talked about the $1-million cap, and thank you for that. Just on the amortization period, lending authorities are asking to have that increased to 30 years on the amortization side. I'm wondering what both of your opinions are on increasing the amortization to 30 years.