Right now our industry is being inundated with news of change and uncertainty. I really don't know where to start but I do want to share some of my thoughts with you. At times, my writings can be somewhat lengthy --this is one of those times. If you just want to peruse this message, I have broken it down to a number of sub sections. Read them all or pick a favourite.
It was August 2007 when we felt the first ripple on the Canadian financial landscape. That's when holders of approximately $30 billion of ABCPs (Asset Backed Commercial Paper) were facing the prospect of huge losses. What followed was a period of tightened liquidity, the unravelling of the U.S. mortgage securitization markets, loss of confidence in the markets, plummeting U.S. home values and bailouts.
That seems like such a long time ago. The saying "time heals all wounds" is a reminder that we desensitize with the passing of time, when the reality we lived through becomes a mere memory. What has helped us here in Canada is that in the midst of the global economic crisis, when the rest of the world was in meltdown mode, we felt only small waves. Today, our housing markets are strong, we continue to borrow and invest, our employment numbers have remained relatively healthy (in comparison with those in the G20), our arrears numbers have remained at less than half of one percent, and our economy continues to grow.
Our Government, our lenders and our own industry have been working on the premise of needing to protect Canadian consumers. Protect their future with respect to increased future borrowing costs. Protect their housing investments by trying to stave off the notion of a real estate bubble. And protect their ability to manage their debt levels on incomes that are not rising in step.
As mortgage professionals we must maintain our belief that we provide value. As a client's advocate we are uniquely positioned to explain to them the context of all this news and noise. At the same time we are personally in the middle of it with respect to our livelihood. There are fewer products, more restrictions and more competition from both inside and outside our channel. I feel we are living through one of the most interesting story lines of the current economic recovery. Strong companies and successful hard working brokers and agents will succeed. Now is not the time to dwell. Now is the time to lead.
OK, now on to some specific comments on the issues we face.
Lenders in the wholesale channel
When barriers are low and there are perceived market opportunities, new entrants flood a market. When profits are threatened and opportunities vanish so too do some market players. During the last decade there were many new entrants into the mortgage market in Canada - Accredited, Xceed, GMAC, Merix, Street Capital, Cervus, ICICI, Canadiana, Moncana, just to name a few. In the past few years some have also exited the market including Accredited, Macquarie, Abode, BMO, GMAC.
Our industry is a dynamic one. Consolidation (Maple Trust with BNS), Innovation (Paradigm with white labels) and Change will be a constant in the wholesale channel in Canada. I am also encouraged to see a few new entrants in our market in recent months.
FirstLine has represented much of the headline space this past month, perhaps because it has been a great incubator for our industry or perhaps because of its sheer size and leadership in our channel. I don't know what is rumour or what is fact. I don't know who potential buyers are or what specifically CIBC is selling. I am watching, along with the rest of the industry, to see how the answers will unfold. I don't like the thought of having a large funder leave the business but have to think if CIBC is indeed selling there will be interested buyers.
I am watching this news with much interest as both a FirstLine alumnus and as an industry participant. What I do know is that we, as brokers, offer something special to the market we serve. We have distribution. And while our market share will have peaks and valleys, we represent the unique interests of the clients we serve. That will not go away.
BMO 2.99% 5 year fixed rate
Just when I thought this story ran its course, HSBC decided to comment on it in the news. From my perspective it is really quite simple. Notwithstanding some high level concerns about debt levels, BMO felt it had an opportunity to increase market share during an otherwise slow period at an acceptable return. This actually demonstrates to me that both the risk and treasury people inside the bank felt that both the return (margins) and risk were worth the volume trade off . a signal of a healthy market.
There were two things I liked most about this story. First, that our market is efficient. What I mean is that within days, if not hours, the market responded with other competitive offerings - for example, 4 years at 2.95%, 10 years at 3.79%. If everyone were under water the market would not have reacted so quickly. Second, it got our clients talking. Our phones rang and our social media buzzed (if that is a fair analogy to a phone ringing). And in the end you assisted many clients who took advantage of these spectacular rates and locked them in for years.
Would I be upset to see a bank make this kind of noise again? Not for a second.
CMHC $600B debt ceiling
This one is a little trickier. You may recall the issues with raising the U.S. debt ceiling last August. The reason it made headlines is because, unlike so many times in the past, the process this time was not automatic. The same was the case with the CMHC debt ceiling. And that it was (or is) not automatic is a good thing. It causes us to ask questions. The biggest question perhaps is how did the amount of insured debt grow so quickly in such a short period of time? The obvious answers would be in the fact that homeownership rates have increased, prices have increased, and debt levels continue to skyrocket. Those would all be correct answers. Another (and very large contributing) factor lies in the fact that banks have been insuring a large portion of their conventional book as well - in particular their 70-80% LTV tranches.
Traditionally, banks would have kept conventional mortgage assets on their balance sheets and not have purchased additional mortgage insurance on these assets. However, in recent years banks have had opportunities to create covered bonds and sell these assets in secondary markets. The risk people have no doubt advised the banks on the cost versus the value of offloading any potential risk by insuring conventional mortgages. In doing so banks have accelerated the amount of CMHC mortgage product that is insured.
Yes, the private insurers, Canada Guaranty and Genworth, now have the opportunity to pick up some of the slack, and they will, but what is also likely to happen is that the CMHC debt ceiling limit will be raised again just as it was from $450B to $600B back in 2008. When it is adjusted, certain limits and restrictions may be imposed to restrict the ability for some to use it for conventional insurance on balance sheet lending.
Mortgage changes coming down the pipe:
This is one of my favourite topics and one I have been writing about for two years. If you believe the headlines, additional mortgage changes are a foregone conclusion. Instead of commenting on the changes themselves -- amortization reductions, LTV restrictions, CONDO fee calculations, I will look at the response by lenders and CAAMP to the threat of these additional changes.
As you know, lenders have changed some of their credit guidelines, specifically stated income, equity, rental and some conventional lending products. Some of these changes may have been initiated by the perceived risk of certain programs and/or may have to do with liquidity and funding issues --maybe the CMHC ceiling was a catalyst. Perhaps there is more risk with Business-for-Self clients though I have not seen any loss figures that would substantiate that. In any event, the mortgage business, in many ways has become much more complex. We have more regulators, more economists, and more risk and credit personnel involved in mortgage decision making. I have no issue with them advising on necessary changes; my concern is for our clients when one channel -- the broker channel for instance -- is governed by a different set of criteria.
CAAMP has taken the bull by the horns with respect to the potential guideline changes and has done exactly what it said it would do. CAAMP focussed on Government Relations and informed decision makers on both the risks of making additional changes, namely that tipping the scales of the housing market could lead to a slow down, and presented facts of the current borrowing environment. This is not a commercial or an endorsement for CAAMP, ok maybe it is an endorsement, but it is our national association. Its voice certainly carries a lot more weight when it represents a large number of constituents. This is a voice we must continue to support -- fragmented voices carry fragmented messages.
Perhaps the most over-hyped ratio in the mortgage lending environment in the past few years is debt-to-income. Its upward sloping line on a graph has been etched in our minds. We have been warned about it, we have been endlessly compared to the U.S., our Minister of Finance has take actions to alter lending guidelines and the Governor of the Bank of Canada has repeatedly warned us of the consequences. What seems to be forgotten in the whole discussion are two pretty important words, "debt" and "income". Let's examine these terms:
Debt - this includes all debt, secured and unsecured. Secured lending in the form of mortgages is the slowest growing segment of the debt world yet it is the cheapest. The most common use for refinancing is debt consolidation. The second most common reason is home improvements and renovations. It would seem that in restricting refinances to 85% LTV we are actually making it more expensive for Canadians to borrow. I realize that doing this is one of the ways the Government is looking at slowing down the pace of borrowing, which it has, especially in the refinance market; however, there is the potential consequence of removing a significant tool for consumers to get their financial houses in order.
A legitimate concern is that these same borrowers will have difficulty making their mortgage payments come renewal time. That said, we qualify clients in lesser than five year terms at an artificially high benchmark rate. We have also taken away the flexibility of longer amortizations -- a safety net in the event that rates do increase.
It is important to understand that all debt cannot be attributed to outstanding mortgages. While it catches the majority of our attention it is really our debt siblings -- credit cards and secured and unsecured credit lines -- that are contributing to the fast pace growth of consumer debt and yes, at higher interest rates. While it is often the case to focus on the "oldest child" in this case we need to turn our attention to the rest of the family.
Income - this one is a little simpler. When calculating debt to income ratios we divide total debt by total income. If income goes up and debt remains constant the ratio decreases. What we are seeing in Canada is the inverse. Income is not rising. So as much as this is being portrayed as a debt issue in actual fact it is very much an income issue as well.
CIBC published an interesting market report recently on this issue and compared us to other countries --Canada held up very well. The report also said that debt is a very generic term and that those heavy habitual debtors are taking on even more debt, which means the majority of consumers with manageable debt loads are being painted with the same brush strokes as the few heavy debtors.
The big finish
For me, I have found that all the news and noise surrounding our industry has allowed me to be even more engaged in the conversation. I am a regular reader, and sometimes contributor, of news articles, blogs, TV interviews, and online commentaries. Our once docile industry is now a major topic in financial conversations. What was previously thought of as a low risk, moderate return (profit) business is now discussed by all levels of the Canadian population- from regulators to consumers, from lenders to government and from brokers to popular media.
And given all this discussion what better place to be then at the centre of it all, promoting the interests of our clients with lenders, regulators, associations and governments.
As always I welcome your comments, questions and concerns.
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