Commentary: OSFI’s Testimony
Are regulators oblivious to the consequence of their own mortgage policies? That’s what certain industry stakeholders and MPs suggested to Parliament’s Standing Committee on Finance this past week.
Well, observers can now decide for themselves, based on officials’ own comments—starting with those of OSFI Assistant Superintendent Carolyn Rogers.
Rogers testified last week. Below are a sampling of her statements, with commentary on each…
- On the Destruction of Lending Competition: MP Dan Albas asked Rogers if the harm done to competition is a concern, stating, “We’re not just making life tougher for consumers, we’re also making the market less competitive.”
National Bank Financial (NBF) substantiated that concern in an unrelated report this week, stating: “…We believe increased portfolio insurance premiums could materially impair residential mortgage origination capabilities of mortgage finance companies (MFC)…Increased premiums shift both pricing power and market share control to balance sheet lenders like the Big Six Canadian Banks, highlighting that further downside risk could emerge for MFCs…We believe increased portfolio insurance premiums could materially impair MFCs’ ability to originate residential mortgages in the 65% to 80% LTV ratio range, which we estimate at 35% to 45% of (their) total residential mortgage origination, including insured and uninsured mortgages.”
Rogers, for her part, expressed no such concern. She responded to the MP’s question by acknowledging only that the government’s rules are having a “disproportionate impact” on bank challengers. Her testimony made little effort to elaborate on the serious “side effects” noted above. Nor did she make an attempt to help parliamentarians grasp the extent of those repercussions on consumers and lenders.
- On Refinancing: Rogers stated that the new rule landscape “doesn’t preclude any one lender from doing refinancing.” This was either a tacit admission that she/OSFI doesn’t understand lenders’ funding challenges, or refuses to acknowledge them in public. For as every mortgage professional in Canada knows, there are indeed lenders who have lost their ability to offer refinancing to their customers. Most can still do refinances but with a serious rate handicap versus the major banks. NBF estimates that MFC rates on 80% LTV purchases and renewals have had to rise up to 30 bps due to premium changes alone. We’re seeing 15-50 bps rate premiums on MFC refis. A 15-50 bps rate disadvantage cuts the knees out from most securitizing non-bank lenders, pushing volume into the arms of OSFI-regulated lenders. This is solely the result of a deliberate government agenda.
- One-sided Stress Tests: Rogers failed to elaborate on how her agency chose not to apply the new “stress test” to uninsured low-ratio mortgages. OSFI’s decision has created an enormous bank advantage over MFCs (which must apply the test to all mortgages, or incur much higher funding costs). OSFI could have coordinated with the Department of Finance to apply the same test to banks. This would seem logical given the Bank of Canada’s public warning that uninsured mortgage indebtedness (e.g., the ratio of uninsured borrowers with loan-to-income ratios over 450%) was rising to concerning levels. OSFI and/or the Department of Finance consciously chose not to subject banks to the same standard as insurers and (by extension) non-banks.
- On the Policy-maker’s Intentional Failure to Consult Non-bank Stakeholders: Albas said he was told by officials in October that the government chose to only consult with the likes of major banks, despite roughly 2 in 5 mortgages being originated by non-bank lenders. Rogers had no answer to why policy-makers failed to confer with industry experts before making such game-changing rules.
- On the Regional Aspect of OSFI’s Rules: Rogers stated that OSFI’s policies “are regionally neutral.” How this can be true when the new capital requirements specifically use location in their formula is anyone’s guess.
- On Higher Resulting Mortgage Rates: Rogers essentially disclaimed responsibility for hiking costs on consumers, saying “Pricing decisions belong to the lender. We (OSFI) don’t set prices. We set capital requirements. And if lenders and insurers choose to pass the capital requirements on to consumers in the form of higher prices, that’s a business decision and not a regulatory decision.” Meanwhile, considerably higher funding costs have ravaged certain MFCs’ businesses, with some lenders reporting a 30 to 50%+ drop in year-over-year volume. Why? Because they had no choice but to terminate products and jack up rates, thus harming consumer choice. OSFI and the Department of Finance knew this would result from their capital changes, or at least they should have.
Rogers’ testimony omitted the true impact that OSFI’s capital changes are having in the marketplace, contained statements that could be interpreted as misleading, and failed to provide any substantive evidence justifying her agency’s changes. She delivered this testimony snidely at times, at one point scoffingly commenting, “I might have guessed…that was the source…” after it was revealed that an MP’s concern was related to a worry from mortgage firm DLC.
This hearing will cast serious doubt on OSFI’s credibility and motives. For as CMHC CEO Evan Siddall has stated, the market consequences of the government’s actions were “fully intended.” The rule changes thus appear to have been purposely targeted and premeditated based on false (or at least questionable) pretenses.
Government officials said in their testimony that they want consumers and the industry to be resilient to future potential shocks. That’s a worthy and necessary goal. But, we all must remember that the prior system:
- was a product of extensive prior rule tightening (over 30 new lending restrictions since 2008 alone)
- held defaults on MFC’s insured mortgages to half that of the major banks (MFC arrears were a minuscule 14 bps, said the Bank of Canada in December)
- limited prime mortgage arrears to a paltry 45 bps during one of the worst recessions on record
- was mostly based on a level playing field among lenders, unlike today.
Despite all this, regulators once again failed to share any meaningful evidence that Canada’s prior time-tested regulatory system:
- was immoderately risky
- justified OSFI’s and the Department of Finance’s devastation of non-bank lenders
- justified forcing hard-working Canadians to pay thousands more in interest.
In his questioning, MP Albas suggested policy-makers were “spinning” their position, to convince Canadians these rules are in their best interests, while simultaneously taking away critical financing options and raising costs on Canadian families. Rogers’ testimony did nothing to counter this charge. In fact, her statements demand legislators’ immediate scrutiny on her agency’s one-sided decisions, to confirm the unparalleled cost of those policies justify OSFI’s purported benefits.