Lenders counting on new homebuyers to help offset defaults on the horizon as government aid winds down
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Aug 14, 2020 • • 4 minute read
Evan Siddall has been an outspoken CEO of Canada Mortgage and Housing Corp., but his latest salvo, which has been interpreted to take aim at competitors and the mortgage underwriting business at Canadian banks, has ruffled more feathers than usual.
The point of contention is a letter Siddall wrote to lenders this week in which he suggests they not give mortgages to riskier clients — even if CMHC’s competitors are willing to insure such loans.
In the letter, Siddall expressed disappointment that private market mortgage insurers did not follow CMHC’s lead of tightening standards on July 1 to curtail excess borrowing in uncertain times, and noted the Crown insurer was now ceding market share to these competitors.
Privately, some bankers said they are concerned Siddall’s stated intent of trying to protect Canada’s housing market and economy by reining in mortgage lending could backfire by interfering with demand by first-time homebuyers. Lenders are counting on new homebuyers, at least in part, to help offset defaults on the horizon once government-sponsored pandemic relief including wage replacement and subsidies for lost work winds down.
“There is no question that there will be pain in the system but the question is how much and whether incremental demand picks up some of the slack,” said Gord Nixon, former chief executive of Royal Bank of Canada, the country’s biggest lender.
Employment levels — the key indicator watched by bankers when it comes to assessing the risk of mortgage delinquencies and defaults — have dipped considerably during the COVID-19 pandemic. But household income loss has been muted, for now, by the government programs.
Nixon declined to speak to the Post specifically about Siddall’s letter, but during a television interview on BNN Bloomberg on Thursday, he said the views the CMHC head expressed seemed “a little bit alarmist” to him.
Industry sources say many on Bay Street were surprised to see the CMHC head take aim at private market competitors Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Co.
It is evident that people aren’t reading what we wrote and (are) misrepresenting our views
Evan Siddall, CMHC CEO
One veteran banker also questioned why CMHC was pushing mortgage insurers to set standards for lenders, rather than leaving the job to the regulator, the Office of the Superintendent of Financial Institutions (OSFI).
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Siddall said in his letter to lenders that he was simply explaining CMHC’s rationale for the July 1 changes — which included increasing the minimum credit score required to obtain CMHC insurance and eliminating insurance for those borrowing their downpayment — and trying to ensure the fallout did not undermine CMHC’s market presence “unnecessarily.”
However, part of his rationale — high household debt in Canada — was also questioned by bankers because it is far from a new issue and has been flagged as a risk for years by domestic and international organizations including the Organisation for Economic Co-operation and Development (OECD). Despite these warnings, the residential mortgage sector has remained relatively free of damagingly high defaults through the 2008 financial crisis and the oil price collapse in 2015, the veteran banker noted.
Siddall appears to have intended his views on mortgage underwriting to remain behind closed doors, but he posted the letter on the online networking platform LinkedIn this week after suggesting “someone leaked” it, noting he wanted people to see it in full rather than excerpts of it.
He also took to Twitter, where he pushed back on suggestions he was trying to halt business lenders do with CMCH’s private market competitors Genworth and Canada Guaranty, and said his letter had been “twisted by self-serving commentators” in the days after it came to light.
“Excessive borrowing creates future economic drag and I offered that as reasoning behind our changes,” he wrote. “I acknowledged that our market share would decline, and I merely asked lenders not to allow our competitors to gain share beyond what we are now avoiding.”
Excessive borrowing creates future economic drag and I offered that as reasoning behind our changes. I acknowledged that our market share would decline, and I merely asked lenders not to allow our competitors to gain share beyond what we are now avoiding. Please read the letter.
— Evan Siddall (@ewsiddall) August 14, 2020
In an exchange with the Financial Post, Siddall acknowledged that he appears to have hit a nerve with lenders who are keen to keep their mortgage business going through the pandemic crisis.
He said he hopes publishing his letter and responding to critics — including those such as Nixon, who he said he respects — will counter misconceptions about his viewpoint.
“It is evident that people aren’t reading what we wrote and (are) misrepresenting our views,” he told the Post.
A spokesperson for Office of the Superintendent of Financial Institutions said the regulator is monitoring lending practices in the housing market, and is relying on established guidelines for the assessment of a borrower’s ability to pay their loan under a variety of conditions.
“OSFI will continue to monitor lender practices and will be proactive with lenders when it identifies areas requiring attention,” said Michael Toope, a senior communications adviser at the regulator.
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