Canadian bankers plot new mortgage rules on down payments and amortization periods

For some who make their livelihood in the real-estate industry, the lead story in the February 6 Globe and Mail came as a shock. The paper cited a senior banker, speaking on condition of anonymity, saying the heads of the country’s six largest banks held a private meeting with Bank of Canada governor Mark Carney last November to discuss two major housing issues.

According to the article, the bankers told Carney that they wanted the federal government to raise minimum down payments from five to 10 percent of the purchase price and shorten the maximum amortization period from 35 to 30 years. The article conveyed the impression that the bankers wanted a “preemptive” action to forestall any possibility of a U.S.–style housing collapse that could jeopardize the solvency of lending institutions.

Joe Santos, president of the Mortgage Brokers Association of B.C., told the Georgia Straight by phone that if Finance Minister Jim Flaherty were to legislate these changes, it would harm the Canadian economy.

“We feel that the market, although very active in Vancouver, is pretty stable across the nation,” Santos said. “The potential reduction of amortizations to 30 years and increasing down payments to 10 percent would have a very negative impact on the housing market because it would really eliminate a number of first-time buyers from being able to get in.”

He noted that people were motivated to buy last year because interest rates were low and property values had dropped during the recession. “We think a lot of people were motivated to jump in and purchase properties for those two reasons,” Santos said. “Now property values have gone back up. Interest rates are low, but they’re anticipated to go up also. So we think the market is going to be self-correcting.”

Santos’s concerns were echoed by New Westminster chartered accountant Elbert Paul. He told the Straight by phone that he thinks it’s a terrible idea to increase minimum down payments because it will prevent many first-time buyers from entering the housing market. “It’s a very demanding environment for the next generation,” he said.

Last week, the Straight quoted Paul’s concerns about a draft advisory from the federal Office of the Superintendent of Financial Institutions Canada issued last October. The document highlights the need for banks and other federally regulated entities to convert to international financial reporting standards for the measurement of balance-sheet assets. But there is no call in the paper to adjust regulatory limits for financial institutions.

Paul wonders if the bankers’ call to reduce the amortization period and increase minimum down payments is connected to this advisory. The advisory stated that banks were required to begin reporting Canada Mortgage and Housing Corporation–insured securitized mortgages (mortgages packaged into investment products) on their balance sheets on January 1.

In a December 10 letter to Finance Minister Flaherty, Paul stated that because banks don’t make as much money on these securitized mortgages as they do on other financial products, they will be less willing to include them in their asset portfolio now that they are being recorded the same way as other investment vehicles. “It’s not necessarily the Canadian public’s financial interest that they’re concerned about so much as just increasing the profitability of the lines that they’re doing business in,” Paul told the Straight.

Meanwhile, UBC Sauder School of Business real-estate expert Tsur Somerville told the Straight by phone that minimum 10-percent down payments will put downward pressure on housing prices, particularly in expensive markets such as Vancouver. He suggested this is particularly true in the condo market, which attracts more first-time buyers. “The banks want to do this because they’re afraid of the spillover from any sort of housing-market bust into their other lines of business,” Somerville said. “It just works a lot better for them if the government just slaps everything down for them, because then they’re not the bad guys,” he said.

The Canadian Bankers Association declined the Straight’s request for an interview.




Feb 11, 2010 at 11:52am

" ... Tsur Somerville told the Straight by phone that minimum 10-percent down payments will put downward pressure on housing prices, particularly in expensive markets such as Vancouver."

If so, is that a reason to oppose these requirements? I think it's a good reason to support them.

Rod Smelser

Feb 16, 2010 at 10:27am

Tougher guidelines on home ownership will mean more people renting which could increase rents. If anything, these new rules will encourage people to take advantage of the market before new rules take effect in April 2010, thus might cause a temporary surge in housing prices.

Jason Minard

Feb 16, 2010 at 11:58am

Joe Santos’ comments in Charlie Smith’s article, Bankers Plot New Rules, are self serving and irresponsible. The 6 major banks suggestion to increase downpayment requirements and reduce amortization periods for housing loans is a positive step in the right direction because it brings stability to the banking sector. (Is he aware of the reduced regulatory condition in the U.S. that caused the last economic crisis?). The easing of restrictions on lending and borrowing results in only one thing – perpetually rising real estate values. Low interest rates and small downpayment requirements may, in the very short term, increase affordability (usually after a dip in housing costs) but as more of these loans are issued, the real estate market gets flooded with cash and the cost of housing increases. Higher loan values and the increased number of people receiving them increases the number of people bidding on a piece of real estate, resulting in a higher price (great for real estate agent commissions – bad for pocketbook of buyer). The article also noted the bank’s policy, if enacted, would put downward pressure on the housing market. I believe this is great way of increasing affordability. The irony of easing restrictions in the name of affordability is that it increases housing costs. The bank’s stance on this issue is an example of good Canadian prudence in the face of global irresponsibility. I find it refreshing that the banks are taking an interest in the sustainability of our financial system.


Feb 20, 2010 at 9:16pm

Why doesn’t the Finance Minister stop beating around the bush and target the real culprit behind rising mortgage debt load?

Mortgage debt ballooned from $431 billion in 2000 to $871 billion in 2008. Canada Mortgage and Housing Corporation (CMHC) has been insuring 0% down 40 year mortgages in recent years pouring gasoline on a housing market that was already on fire. Not only the government has failed to rein CMHC’s reckless risk taking behaviour, it has rewarded its management with hefty pay increases of 55% to 70% between 2001 and 2008 leading to a salary and bonus of $514,000 for its president in 2008 which is more than double that of any other deputy minister in the government of Canada.

CMHC’s 2009 Housing Observer shows that average house price in Canada was $163,992 in 2000 and reached $303,594 in 2008, a whooping increase of 85%. This is an increase of just over 9 per cent a year. Over the same period, increases in income (3%), job growth (2%) and lower mortgage rates (1.5 per cent) add up to only 6.5 per cent annual growth, a far cry from 9 percent increase in house prices, clearly demonstrating that economic fundamental do not justify house price increases in the last ten years.

It is time that Government of Canada reins in CMHC that has been behind this explosive growth in mortgage lending. Lenders will have never lent this much to borrowers if their mortgages were not insured by CMHC whose debt is guaranteed by the government and the taxpayers ultimately. With nearly $340 billion in liabilities, CMHC has become a major source of concern for all Canadians. CMHC has become too big of a player in financial markets for the government to allow it to fail if the housing market tumbles. The faith of government backed mortgage insurance and securitization organizations such as Fannie Mae, Freddi Mac, and Ginni Mae in the the last few years should set off alarm bells at the halls of power in Ottawa.