Fraser Institute: OSFI’s proposed mortgage stress test is unnecessary, harmful

A new stress test for all uninsured mortgages is unnecessary and could increase costs for homebuyers, a report by the Fraser Institute said Wednesday.

Study author Neil Mohindra wrote the proposed stress test  “will do more harm than good” by limiting access to mortgages for some homebuyers.

“The mandatory standard for stress testing could result in a less competitive and more concentrated mortgage market,” he wrote in the report.

The study comes as the federal Office of the Superintendent of Financial Institutions finalizes new lending guidelines.

Among the changes being contemplated is a requirement that homebuyers who have a down payment of 20 per cent or more and do not require mortgage insurance still have to show they can make their payments if interest rates rise.

The head of OSFI has said that Canada’s banking regulator wants to reduce the risk of mortgage defaults because of high levels of household debt.

“We are not waiting to see those risks crystallize in rising arrears and defaults before we act,” OSFI head Jeremy Rudin said last week.

Canadian household debt compared with disposable income hit a record high in the second quarter. Statistics Canada reported last month that household credit market debt as a proportion of household disposable income increased to 167.8 per cent, up from 166.6 per cent in the first quarter.

However, Mohindra said that instead of a prescriptive test, OSFI could use its existing powers to fix what it believes are deficiencies in policies and procedures.

The Bank of Canada has raised its key interest rate target by a quarter of a percentage point twice this year.

The increases have pushed up the big bank prime lending rates which are used to determine rates for variable-rate mortgages and lines of credit.

The Fraser Institute is an independent, non-partisan organization that tends to prefer free-market policies over government regulation.

Mortgage lenders warn, new rules to dampen home sales in Canada

Excerpted article was written by  | The Globe and Mail

Canada’s mortgage lenders say tougher borrowing rules proposed by Canada’s banking regulator could reduce the volume of home sales in Canada by 10 per cent to 15 per cent annually as buyers find it harder to qualify for loans.

Mortgage Professionals Canada – an industry association representing lenders, mortgage brokers and mortgage insurers – said the economic impact of proposed stress-testing rule changes could result in 50,000 to 75,000 fewer home sales a year in Canada when combined with other mortgage-rule changes announced last year and a recent increase in interest rates.

Association president Paul Taylor said the impact of the change could cascade further as other buyers will still make purchases, but will qualify for smaller mortgages and buy less-expensive homes.

“Essentially, everybody is going to step down a rung or two, which means there will be real pressure on all home prices to also fall by a rung or two,” Mr. Taylor said in an interview.

The mortgage association is the latest group to air concerns about a proposal from the Office of the Superintendent of Financial Institutions (OSFI) to require home buyers who do not need mortgage insurance – those with down payments of more than 20 per cent of the purchase price – to prove they could still afford their mortgages if interest rates were two percentage points higher than they negotiated.

OSFI published the proposed changes in July with a request for public comment, saying it was aiming at implementing the changes in the fall if the plan proceeds.

The Canadian Home Builders’ Association has also voiced concerns about the proposed change, saying Canada could see 20,000 to 30,000 fewer new housing starts annually when combining the proposal with other recent policy changes.

In a submission to OSFI, the builders said a drop in new construction could reduce employment in Canada by between 42,500 and 63,800 jobs annually. Including the impact on resales of existing homes, the total number of jobs lost could be as high as 91,500, the group said.

Builders fear OSFI’s latest proposal has the potential for unintended consequences if it ends up helping to trigger the housing market downturn it is trying to buffer against, said Jason Burggraaf, government relations and policy adviser at the association.

“Our concern is that all these consumer confidence signals that are being put out there could in themselves become a self-fulfilling prophecy,” he said in an interview.

“They sort of pile on top of each other, seemingly without any co-ordination. Each one does its little bit, but it’s eventually the straw that breaks the camel’s back. All of them together especially squeeze the first-time home buyer, who doesn’t have access to a significant down payment for their home.”

OSFI proposed the rule change in July to bring qualification rules for uninsured mortgages into closer alignment with similar stress-testing rules introduced last year for people who are applying for insured mortgages – those who do not have a 20-per-cent down payment. When those rules were rolled out last October, Finance Minister Bill Morneau said they were aimed at ensuring borrowers do not take on mortgages they cannot afford if interest rates climb.

Ontario Real Estate Association chief executive officer Tim Hudak, who represents real estate agents in the province, said last week the latest change must be assessed on top all the other recent policy reforms, including last year’s stress-test rule changes, new foreign-buyers taxes in British Columbia and Ontario, and two recent hikes in interest rates. Mr. Hudak said the cumulative impact “risks capsizing the housing market altogether.”

Both the Canadian Home Builders Association and Mortgage Professionals Canada told OSFI the proposed tougher rules could also increase financial system risk by driving more borrowers to use unregulated lenders who do not have to follow OSFI’s standards.

They also warned the rules could push some consumers away from long-term, fixed-rate mortgages – which have higher interest rates but leave borrowers less exposed to interest-rate volatility – to shorter-term mortgages with lower interest rates that can more easily qualify under the tougher rules. Such a shift could add risk to the financial system as a whole if more borrowers are exposed to short-term interest rate volatility.

Mortgage Professionals Canada urged OSFI to consider a lower stress-test level, suggesting a methodology that would assess mortgage affordability at about 75 basis points – or three-quarters of a percentage point – higher than the negotiated rate.

OSFI has not revealed when it will decide on whether to go ahead with the change as proposed, saying only that it will finalize its guideline after reviewing submissions and expects to set an effective date for later in 2017.

Consumers Rush to Lock in Mortgage Rates ahead of Bank of Canada Rate Hikes

The number of Canadians who applied for a fixed-rate mortgage in August saw a substantial spike, with 59.31% of users on the LowestRates.ca website opting for a fixed-rate mortgage over variable.

Historically, the majority of Canadians who shop for mortgage rates on LowestRates.ca opt for variable-rate mortgages. Since January 2014, 56.56% of users have gone variable, compared with 43.44% of those who go fixed. The shift in August is seen as a reaction to the Bank of Canada’s decision to raise interest rates. On July 12, the bank hiked rates by 25 basis points — the first upward move since 2010. Rates were again raised another quarter of a percent on September 6.

“It’s important for consumers not to panic,” said Justin Thouin, co-founder and CEO of LowestRates.ca. “Data over the past 30 years shows that Canadians have saved more money on interest by going with a variable rate, rather than a fixed-rate mortgage.”

“Yes, a BoC rate hike means your mortgage payments go up if you have a variable-rate mortgage. And this causes some Canadians to overreact and do anything they can to switch to a fixed-rate mortgage,” Thouin adds.  “Doing this might buy you peace of mind if the thought of rising interest rates keeps you up at night.  But based on the past 30 years, staying in a variable rate mortgage is still the right choice in the long run if your goal is to pay as little interest as possible.”

Understanding The Impact of Rate Change

If a consumer purchases a home for $750,000 (with a down payment of 10 per cent amortized over 25 years), at a five-year, variable rate of 1.95 per cent, they would have a total monthly mortgage interest payment of $1,096.88 (keep in mind, this does not include additional costs such as mortgage insurance, principal payment or property taxes).  If the Bank of Canada increases its overnight rate by 25 basis points, that homeowner’s monthly interest payment on their mortgage would be $1,237.50 — an increase of $140.62 per month.

That same homeowner using a fixed mortgage rate — the most competitive fixed product on LowestRates.ca last month was 2.63% — would have a total monthly mortgage interest payment of $1,479.38.  While they can lock in that rate for five years, they’re still spending $241.88 a month more in interest compared with the variable product even after variable rates go up. That’s $2,902.56 a year in increased costs!

“Analysts have a wide range of opinions as to how many additional increases the BoC will make over the next 18 months, but until there is a substantial increase, the impact will be not that extreme,” says Thouin.

About LowestRates.ca

Federal housing agency beefing up ability to detect mortgage fraud, CEO says

By Alexandra Posadzki

THE CANADIAN PRESS

TORONTO _ Canada Mortgage and Housing Corp. is beefing up its ability to detect patterns that may indicate mortgage fraud after being directed to do so by the federal government, the agency’s president and CEO said Thursday.

“There is no evidence that fraud is a widespread problem,” Evan Siddall said following his remarks to the Canadian Club of Toronto.

“But we know it happens, it’s very hard to find, and incentives exist for fraud in the system, so we need to be vigilant.”

Mortgage fraud has been a hot topic following recent events at alternative lender Home Capital, which has been dealing with the aftermath of a scandal involving falsified loan applications.

In 2015, Home Capital severed ties with 45 brokers over fraud allegations. Two of those brokers have been sanctioned by the Financial Services Commission of Ontario, while the other 43 have not.

More recently, Home Capital faced a liquidity crisis after customers started yanking out their savings following Ontario Securities Commission allegations that the company misled investors in its disclosures surrounding the fraud issue. The company has said the allegations are without merit and has vowed to defend itself.

Siddall said CMHC’s stepped up efforts around fraud detection were not triggered by Home Capital, but by a directive formally issued to the agency by Ottawa.

The housing agency is looking at ways to use data analytics to spot patterns that could be indicative of fraud networks or fraud rings. That would allow it to approach lenders when it spots something suspicious.

We’re looking for associations among individuals that aren’t apparent from an individual application for mortgage insurance, but are apparent when you look at a large number of applications, and then you can identify networks and patterns,” said Steven Mennill, CMHC’s senior vice-president of insurance.

CMHC has not seen any increase in mortgage loan defaults as a result of the Home Capital matter, Mennill said.

Home Capital also remains a CMHC-approved issuer of mortgage-backed securities, through its subsidiary Home Trust Company, Siddall said.

We’re monitoring the situation daily, as we do with many lenders,” Siddall said.

Banks sell mortgage insurance, but independent experts say you shouldn’t buy it

Personal finance experts are a pretty soft-spoken bunch. It isn’t often that they say they would “never ever” advise buying a certain financial product.

But that is exactly what they generally say when asked about mortgage protection insurance, according to Anne Marie Thomas of InsuranceHotline.com, an insurance comparisons site.

Mortgage protection insurance isn’t the mortgage insurance most Canadians are familiar with, the one you need to buy, generally from the Canada Mortgage and Housing Corp. (CMHC), when your down payment is less than 20 per cent of the value of your home.

Unlike the better-known mortgage insurance, which protects lenders if homeowners default, mortgage protection insurance is, essentially, a type of life insurance. It covers your mortgage debt if you die or become disabled.

Banks generally try to sell homeowners this type of insurance when they sign up for a new mortgage. Insurance premiums are then seamlessly added to their monthly mortgage payments.

So, what’s not to like about that?

A lot, according to Thomas:

1. The payout from mortgage protection insurance shrinks with your mortgage

These kinds of policies only cover your outstanding debt, meaning the payout gets smaller and smaller as you pay off your mortgage. Insurance premiums, on the other hand, stay the same through the insurance term.

2. You may find out when you file a claim that you aren’t eligible for coverage

Mortgage insurance policies are “typically underwritten after the fact,” noted Thomas. This means that the insurance company will only take a close look at your case once you file a claim. And it may very well find that something in your particular situation violates the insurance contract, which would leave your family without coverage just when they need it most.

If you purchased mortgage protection insurance, comb through your policy carefully to make sure there’s nothing that could potentially exclude you for coverage, advised Thomas.

3. Your might get saddled with higher premiums when you renew your policy

With mortgage protection insurance, you’ll need to renew your policy at the end of your mortgage term, said Thomas.

Your new premium will be based on your — now smaller — outstanding mortgage balance, but that doesn’t mean you’ll be paying less. Because you’re a bit older, your premium won’t necessarily go down — in fact, it may go up, Thomas told Global News.

4. Your bank, not your family, pockets the payout

Assuming the claim goes through, mortgage insurance guarantees your family won’t have to worry about mortgage payments if you die or become disabled.

In case of death, your beneficiaries can counts on a lump-sum payout that will take care of the outstanding balance, according to Jason Heath of Objective Financial Partners, a fee-only financial planning firm. In case of disability, the policy will generally cover your monthly mortgage payments until the debt is extinguished, he added.

But does it make sense to use the money to pay off the mortgage?

Not necessarily, said Heath. Perhaps your survivors could have easily eliminated mortgage by selling the house. Or they might have preferred to use the money for other purposes, while keeping up with your mortgage payments.

Mortgage protection insurance means any payout will flow out to your mortgage lender, not to you or your family, noted Thomas. And that’s much like CHMC insurance.

Consider plain life insurance instead

Skipping on mortgage protection insurance doesn’t mean you have to go without coverage. Instead, you could buy life insurance, both Thomas and Heath said.

With life insurance, your payout remains the same through the term of the policy and the money comes with no strings attached.

For example, if you had a $300,000 mortgage and took out a policy for the same amount, your beneficiaries would still receive $300,000 even if you had paid down your mortgage in full by the time the claim is filed.

And life insurance is generally much cheaper, too, said Thomas.

“It typically could end up costing you half as much,” she said.

Why does anyone get mortgage protection insurance, then?

Many homebuyers, especially those buying their first home, haven’t done enough research to know what they’re getting into, said Thomas.

“Generally, the way it’s offered to [homebuyers] is when they’re sitting there, signing a whole bunch of [mortgage] paperwork and they’re bored and they’re starting at the wall,” said Heath.

When the bank proposes adding mortgage protection insurance, “for most people, it’s a five-second decision.”

Banking and mortgage industry professionals are often under enormous pressure to sell mortgage insurance, and benefit handsomely through commissions when they do, said Heath.

“Your friendly neighbourhood banker is financially motivated to get you to buy mortgage insurance, whether it’s in your best interest or not,” he added.

That may be why, a few years back, Heath himself discovered in his first-ever mortgage statement that he was, in fact, paying for mortgage protection insurance even if he had clearly declined coverage.

Heath eventually got his lender to cancel the policy and refund the premiums.

But many homebuyers aren’t well-informed enough to know they shouldn’t have signed up for the service in the first place.

“Mortgage [protection] insurance is very expensive, but it’s a captive market,” said Heath.

Housing agency now backing $502 billion in Canadian mortgages

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