First National’s President and CEO Jason Ellis took centre stage at the Mortgage Professionals Canada Conference on October 16, 2023 in a show of support for mortgage brokers and in keeping with our commitment to empowering growth together for our industry through an exchange of perspectives. During the Lender Panel, this is what Jason had to say.
Market regulators are unlikely to walk back their restrictions on mortgage lending. For proof, refer to OSFI’s ongoing consultations on Guideline B-20: Residential Mortgage Underwriting Practices and Procedures. In its position paper released today, OSFI indicated that it still intendeds to pursue targeted supervisory actions that will monitor federally regulated institution’s individual exposures to high household indebtedness over time. This may include a more prescriptive approach to GDS/TDS ratios. OSFI did, however, indicate that changes would be implemented “incrementally and sequentially”. In addition, OSFI said that it favoured a “proportional implementation” of changes based on a variety of factors, including individual financial institution’s business models.
We must and will continue advocating for our industry with policymakers. Regulators do listen to market participants including lenders and brokers as illustrated by OSFI’s public consultation process on B-20. As a result of these entreaties, we may see at least see a more dynamic approach created for the application of the stress test and other debt servicing measures.
With interest rates where they are now, it is time the government revisited its decision to remove default insurance eligibility for high ratio mortgages on homes valued at more than $1 million. This was misguided policy when introduced in 2012, responding to a perception of housing risk being transferred to Canadians via government guaranteed default insurance. The implications of this policy have been exacerbated over time because the price cap is not indexed to inflation nor is it sensitive to prevailing prices in different regions of Canada. While it is understandable that the government did not want to further stoke housing demand/activity during the pandemic by increasing the cap, a more appropriate approach for the future might include a sliding scale based on LTV.
Mortgage lending has faced more scrutiny than other forms of consumer lending since the financial crisis. While bearing the brunt of legislative action over many years and seeing the pendulum swing toward ever more restrictive policy, lending regulations enacted over the past decade can be viewed as necessary and appropriate to protect all market participants. In some cases, including minimum down payments and maximum amortizations, those changes brought the market back to a more sensible time.
First National borrowers who use adjustable-rate mortgages showed their resiliency throughout 2022 and through the summer of 2023. Approximately 20-25% of our portfolio under administration consists of adjustable-rate mortgages with fixed-rate products representing the balance. The arrears rates on both books are identical. As payments steadily increased on adjustable-rate mortgages our borrowers kept pace without any apparent signs of stress.
If adjustable-rate mortgage holders are showing their resilience, it is conceivable that variable rate users will also. Variable-rate borrowers have fixed payments. As rates have increased, their amortization has lengthened. Extended amortization, however, should not be confused with borrower stress. Longer amortization is an expected outcome on VRMs in a rising rate environment. Whether you are an adjustable or variable rate borrower, wage inflation over the past five years has made it possible for many borrowers to cope with today’s higher interest rates.
First National has a strong pre-approval process and for it to function well for all considered, requests submitted in a timely way are appreciated. Orderly submissions allow for better servicing levels as well as interest rate hedging that improves cost of funds. Waiting until notice of higher rates is published to submit pre-approval applications is a burden on the program and service levels.
Housing affordability is a long-term issue but the government has made two recent changes to move the needle. One is the elimination of the GST on the assessed value of completed rental units. The other is an increase in the size of the Canada Mortgage Bond (CMB) program focused on multi-family apartments (a policy prescription First National has long advocated). These actions should substantially stimulate the construction and preservation of rental stock, particularly in Canada’s large urban markets where immigration-driven population growth is most pronounced.
Tax relief is a tremendous and important concession to developers at a time when they face significant inflation in building costs and higher interest rates. Several provinces have announced that they will join the effort by eliminating PST. First National clients have said this will help get shovels in the ground.
The housing market surprised many commentators in the early months of 2023. Originations and default rates defied the more conservative predictions of many housing market commentators despite higher interest rates.
The Canadian market should remain resilient in 2024. Recent housing market activity suggests slower origination ahead. Nonetheless, the combination of strong population demographics and the lack of housing supply will support the market.
Buying a home and taking a mortgage are two of life’s biggest and most complex financial decisions and in making those decisions, Canadians need advice from mortgage professionals. So, while technology and distribution channels evolve and the mortgage journey increasingly starts online, that journey will inevitably continue to make its way to the doors of independent mortgage brokers who possess the specialized skills and broad connections to get Canadians the very best financial solutions.