Proposed federal government measures to cool Canada's hottest local housing markets could have unintended consequences of making it harder for borrowers in some parts of the country to qualify for affordable loans, mortgage industry officials warned.
The changes are aimed at curbing risks in regions of the country where soaring housing prices have vexed policy makers and stoked fears of a broader market correction. But the rules will most likely force lenders to offer different mortgage rates and mortgage insurance premiums to borrowers in different parts of the country, several industry players told the Scotiabank Financials Summit in Toronto on Thursday. Some lenders may stop offering loans in pockets of the country altogether.
Canada Mortgage and Housing Corp. has floated the idea of implementing a deductible on government-backed mortgage insurance to force lenders to share in risks. The Department of Finance recently confirmed it is studying the idea as part of broader review of the housing market.
At the same time, the Office of the Superintendent of Financial Institutions is expected to launch new rules at the start of next year that would require mortgage lenders and insurers to hold more capital against loans in local housing markets in which prices appear to be rising too quickly. The new rules, which are still under review, would likely affect mortgages to borrowers in Toronto, Vancouver, Victoria, Calgary and Edmonton, according to analyses of OSFI's proposal.
Federal regulators "haven't really contemplated that that has a big regional impact, that that will mean that one borrower in one region of the country will be treated differently," said John Webster, head of real estate secured lending at the Bank of Nova Scotia. "I don't think they've thought that all the way through."
CMHC's risk-sharing proposal could make it more expensive for smaller mortgage companies to compete against the big banks and put "more power in the hands of the dominant players," said Stephen Smith, chief executive officer of mortgage lender First National Financial Corp. and co-owner of mortgage insurer Canada Guaranty. "This is a solution in search of a problem."
OSFI's proposed new rules for the mortgage industry will have a "significant" impact on mortgage insurers, said Stuart Levings, CEO of mortgage insurer Genworth MI Financial.
He estimated that the changes would affect as much as 40 per cent of Genworth's business. The new rules will likely lead to higher insurance premiums for some borrowers, provided that CMHC – which sets rates in the mortgage insurance industry – raises its prices when new rules come into effect on Jan. 1. "It will drive some change in the mortgage insurance space," he said.
Government-backed mortgage insurance has traditionally been one way policy makers have encouraged banks to use mortgage finance to support broader economic aims, such as lending to riskier housing markets such as Fort McMurray. New rules that would force insurers to charge higher premiums for mortgages in more volatile markets would undermine that, said Andrew Moor, CEO of alternative mortgage lender Equitable Group Inc.
"We should not be doing things willy-nilly to deal with one relatively small moral hazard in my view that can be managed with oversight and potentially screw up the general system of housing finance."
Instead, industry officials said the government should look to other changes to curb risks.
Scotiabank's Mr. Webster said lenders have told the federal government that they are willing raise their qualification standards for borrowers who take out fixed-rate mortgages, to match higher standards imposed on variable-rate borrowers.
The industry has also been pushing the Canada Revenue Agency to allow lenders to automatically verify the authenticity of borrowers' notices of assessment as a way to crack down on mortgage fraud.