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Why Canada’s banks are so silent on mortgage changes

A broker puts up a For Sale sign before an open house in Toronto in this 2015 file photo.

Darren Calabrese/The Globe and Mail

One by one, the list of critics is growing. First, mortgage brokers made a stink about Ottawa's new mortgage rules, then alternative lenders spouted off. On Friday, the Canadian Real Estate Association warned that first-time home buyers will suffer, and cautioned the Canadian economy could, too.

Amid all this hating, one group has been notably silent – Canada's big banks. And there's a particularly good reason why: They largely approve of the crackdown.

The banks have been timid to say much publicly, for fear of ticking off the federal government. They are also cautious of public perception, and don't want to be seen as overly influencing Ottawa's policy. But behind closed doors, they are now showing much more support for housing market reforms than they let on.

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In conversations over many months, and particularly in the past week, executives at the highest levels of these institutions made it clear to me that there have been changes of heart. What used to be blatant willingness to win business by offering lower mortgage rates – remember when 2.99-per-cent rates were a big deal? – has been supplanted by doing what's best for the market's long-term health.

Most of these executives strongly support three policy changes Ottawa announced this month, which include cracking down on foreigners who sidestep taxes on housing gains, limiting the federal insurance available for their mortgage portfolios and forcing all Canadians to qualify for mortgages assuming much higher rates.

They are particularly keen on the last change, because it removes the biggest threat to the mortgage market: Borrowers defaulting when refinancing their loans in a fast-rising rate environment.

The support is so strong that many bankers even told Ottawa to go farther by raising the required down payment on homes over $1-million to 25 per cent from 20 per cent, and boosting the minimum down payment for houses below that value for all buyers to 10 per cent from 5 per cent.

As for the fourth potential change Ottawa tabled, regarding risk sharing, it's still up for discussion, but the banks privately acknowledge they've found some religion on that, too.

Two distinctions must be made. The banks are not a homogeneous group, so the depth of their feelings varies from institution to institution. They also draw a clear line between their sentiments on the broad market and their thoughts on their own mortgage portfolios.

Away from the public eye, the banks have scrubbed their mortgage books in every way imaginable, and the people who run these portfolios have gotten to know every nook and cranny of the market – some can name the dozens of subregions in and around Vancouver by their "FSA," or the first three digits of their postal code.

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"You would be stunned by how clean and how strongly our portfolio is, and has been, performing," one executive said. Publicly available loss rates back this up, with losses on mortgages sitting around one or two basis points – that's one or two one-hundredths of a percentage point.

Why the banks haven't been shouting this from the rooftops is beyond me. It could be they feel most people wouldn't believe them anyway. They were incredibly candid about the likelihood of manageable losses on energy loans earlier this year, yet almost everyone tuned them out. It took months for investors to realize they weren't lying.

However, some lenders are starting to see the light on messaging. Canadian Imperial Bank of Commerce recently outlined its risks in a doomsday scenario, and losses on mortgages in Toronto and Vancouver would be less than $100-million, or one tenth of one quarter's profit.

All that said, bank executives' feelings on systemic mortgage policies have evolved. They know household-debt levels keep growing; they appreciate many rounds of federal finance rule changes haven't been enough; and they acknowledge price appreciation has quickly accelerated in Toronto and Vancouver in the past two years.

The last point is particularly important. Nothing forces action like the market. "All lenders concern themselves when they see eye-watering [price] increases in urban markets," John Webster, head of real estate secured lending at Bank of Nova Scotia, said in an interview last week. So they've started to play ball with Ottawa.

Independent rivals gripe this might simply be because the banks are likely to benefit from stricter mortgage rules. The alternative lenders who made riskier loans face the biggest threats to their future revenues.

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Think about that for a second. Many rivals chased bad business and offered rock-bottom mortgage rates that barely had any margin built into them. Isn't that exactly what Ottawa should be discouraging?

Healthy competition is crucial in financial services because it keeps the bank oligopoly in check, but what's been proposed isn't so tough that it should decimate the likes of alternative lender First National, which is one of the more conservative and better-run rivals.

Policy changes are never easy because governments can't make everyone happy. If some lenders' futures are severely hurt by what's on the table, then their business models ought to be questioned.

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