Canadian Mortgages Get New Guidelines After Mass Risks Materialize 

Canadian real estate markets top global bubble lists, but speculators still pile in. Global observers struggle to understand why, but they only need to look at the latest guideline from the Financial Consumer Agency of Canada (FCAC). The government watchdog for consumers recently released the Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline), outlining their expectations for lenders. The Guideline notifies federally regulated financial institutions (FRFIs) they’ll need to pull out all the stops for those in over their head in debt—from proactively identifying stressed borrowers, to giving discounts on fees, and even lowering interest expenses. 

Canadian Banks Make Lehman Look Like A Sunday School 

Canada is home to the G7’s most indebted households, ignoring international agency warnings. Instead, various solutions to get more cheap credit to people were devised. When it wasn’t cheap enough, households began to borrow adjustable rate mortgages with fixed payments. These loans have fixed payments, but the amount applied to principal varies with the cost of interest at the time. If rates rise, less is applied. 

The loans, not particularly popular prior to 2020, became the loan of choice as investors piled in. As rates began to normalize, less and less principal was covered. Sometime last year, many began to cover no principal at all— and not even the full interest. It’s called negative amortization, and about 1 in 4 mortgages now fit this description. Some aren’t expected to be paid back for 70+ years, despite the maximum length being 35 years.

One would assume this would lead to a regulator crackdown, but the opposite is appearing. They’re endorsing these moves, and even ordering them to go further. Speculators are getting the message loud and clear.

Canadian Mortgage Lenders Asked To Identify Over leveraged Borrowers & Make Accommodations

The FCAC is the latest regulator endorsing the reckless lending from lenders. FRFI are expected to develop procedures to identify at risk mortgage borrowers, including:

  • Proactive monitoring and identification of early stress; 
  • A criteria for offering mortgage relief;  
  • Disclosure of information to the consumer to ensure express consent; 

Once identified, the lender is to make accommodations to mitigate any risk, including:

  • Waiving prepayment penalties; 
  • Waiving internal fees and costs; 
  • “Not charging interest on interest”;
  • Extending amortization; 

A lot of mortgage borrowers must have been hit with adverse circumstances, right? Not exactly, and the move will produce more risk than it mitigates. 

Investors Are Consumers Too!

Canadian regulators are scrambling to help “households,” but who are they helping? Only a third of households have a mortgage, and less than a third of the balance is variable rate. The risk is also concentrated in recent purchases. Buyers prior to 2021 have significant equity and resources to mitigate most risks. 

Recent buyers swimming in debt might sound like first-time buyers. However, low rate stimulus helped investors displace first-time buyers, warned the country’s largest bank. Investors also bought half the new supply created, concentrating on low priced homes. Those are the units first-time buyers typically seek out.

Speaking of budget-sensitive, first-time buyers—don’t expect the same red carpet rollout. High-ratio mortgages, geared to first-time buyers, are ultimately taxpayer backed. The head of Canada’s state-owned mortgage insurance company took a firm stance, warning they can’t/won’t honor insurance on extended amortizations. She’s apparently the only adult in the room.

On the upside, these mortgages typically have lower rates than uninsured loans. 

To put it short, regulators are selling the public on consumer protection. Not exactly a lie. They’re just omitting the consumers they’re scrambling to protect are primarily investors.

Canadian Regulators Are Reinforcing High Home Prices, Creating Taxpayer Liabilities

Every move has a reaction, so it’s important to understand this isn’t an issue of special treatment. At this scale, during a housing crisis, it will produce huge liabilities for the economy. The two biggest are higher home prices and financial system risks.

Pressed by policymakers, Canada’s bank regulator admitted the extended amortizations bolster prices. Spreading payments out over a longer term is a great way to increase the credit capacity of home buyers. Anyone can afford any price if they’re never going to pay it off, and that means sellers can ask for more. They’re neutralizing the mechanics of higher interest rates. Ultimately that means higher rates are needed to balance the impact.

Extending amortizations keeps costs lower, helping boost profits for  investors. It also reduces supply, since it skews the balance in favor of over leveraged investors. A bad investment is now a great one, since the state mitigated the risk for its comrades. Managing your risk feels like losing, since those consumers didn’t enter a risky trade assuming the state will fix it. 

Moral hazard is the term for these circumstances, and it overshadows other problems. If the consequence for being overleveraged is special treatment such as lower costs, and longer repayment terms—what’s your takeaway? It sounds like a great deal to me. 

The FCAC is the latest regulator to send the message that the only loser is a person not engaging in risk. Experts have warned that mitigating the housing downturn will increase the risk of a financial crisis. But those are the same experts that were ignored when they warned households are carrying too much debt. 

At least they’re helping investors. Uh, Consumers.

28 Comments

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  • J_Morrow 11 months ago

    #FML

  • Schadenfreude 11 months ago

    We just bought on the south shore, NS and expected rates to go up. Put em up and end this madness or the whole enonomy is super-screwed. Choke the investors out!

  • How M 11 months ago

    Who are they helping?

  • Joe M 11 months ago

    Does this apply to reverse mortgages also or just conventional ones?

  • Scott 11 months ago

    So does this mean we should divest ourselves of Canadian bankkk in g stocks?

  • Martin 11 months ago

    I second that sentiment. I’ve been shaking my head since 2006.

  • Jo 11 months ago

    How far will they go to avoid seeing everything topple?! Just when you think they’ve run out of tools, they create new ones.

    What a sobering article.

    “Everyone, deep in their hearts, is waiting for the end of the world to come.” – Haruki Marakami

    Well, maybe not the end of the world, but an end to this housing thing.

    • Duddly-Do-Right 11 months ago

      It is definitely sobering, depressing and discouraging to read this article, which explicitly explains how they just won’t let the RE bubble pop. For those of us anxiously waiting for it to finally pop and prices to come back down to Earth, this article hits hard and it hurts. Anyone financially responsible, also feels the pain of this article. All the financially irresponsible end up being the winners. How sane is this?

      • C G 11 months ago

        Why do they prop ‘investors”? Since investor treat housing stock like a stock. If you borrow on margin you reap the full consequences of your action. You’re told to sell to mitigate your losses. Makes no sense if those with investment properties are not told to do the same.

        • J 11 months ago

          All levels of governments have political and financial gain to keep households biggest asset high to court votes.

          No one wants the responsibly of popping the bubble. So they do the opposite and kick the can down the road.

          They’re so reliant (addicted) on foreign cash for paper GDP growth. Money corrupts with the level of privacy of Canadian LLCs snow washing the world’s illicit cash.

          Sad state of affairs.

  • J 11 months ago

    I don’t know if a 70 year amortization is a win or a loss.

    I guess it beats going broke cause inflation will eventually erode that debt.

    To me it feels more like they want to slowly deflate it, force a slower melt down, rather then prop up to new highs … maybe I’m optimistic…

  • Foolish Worker 11 months ago

    I always wondered, “Why elite can not see, what everybody knows.”

  • Raj 11 months ago

    Will these rules still apply when the mortgage borrowers get a sticker shock at the time of the mortgage renewals. With such high outstanding mortgages, with little to no amounts going towards principle, will most these of these over leveraged investors and so called FTHB be able to renew their mortgages without making additional balloon down-payments. These self-proclaimed, pseudo-benevolent, end-consumer well-wishing bureaucrats can just defer bursting of this RE bubble, they cannot stop it. And the longer it stays inflated with all these decrepit measures, the bigger will be the BAANNNGGGG!

  • J 11 months ago

    Even with a soft landing, the only people benefiting are money launderers.

    Canadians need to protest if they want change.

    Just a thought.

  • Stu 11 months ago

    I believe the new guidelines are only applicable to primary residences and not available to “investors”

    • Trevor 11 months ago

      Flippers “live” in their primary residence, and a good chunk of Boomer investors with paid off houses have been “moving” to their investment properties to bring down requirements. Some brokers have even said they’ve seen divorces to make the investment property registered as primary for tax free gains.

      People tend to do very unexpected things when there’s a gold rush, which is why fraud signals also double.

    • Lai Chen 11 months ago

      It’s less about helping investors directly, and more about creating liquidity so it’s not trapped via the assistance. The US did it to avoid the crash in 2001, and it helped create the crash in 2006.

    • Mac 10 months ago

      I came to the comments section to say this same thing.

  • shoham mookerjee 11 months ago

    If only regulators also provided the same safeguards for stock market investors… I really want to gamble on the stock market and be confident that the govt is going to bail me out..oh wait that already happened and it caused a major recession.. but surely it won’t happen with the housing market

  • M.Bury 11 months ago

    Cap rate = 3%
    GIC rate = 5.3%

  • Dan 11 months ago

    how about increasing the vacant home tax and foreign buyers tax. that would solve way more and faster.

  • Iron Bibby 11 months ago

    Canada is DEDICATED to protecting real estate valuations at all costs

    It’s all Canada has

  • Sergio 11 months ago

    “Law is the will of the ruling class, elevated to law and enforced by state mechanisms.” Lenin.

  • Bob Vila 11 months ago

    What I don’t understand is the distinction between the ‘consumer’ who has an existing mortgage and the ‘consumer’ who is buying a new mortgage as a first-time homebuyer lets say. The FCAC protects the former group and requires banks to offer a benefit for them while regulations ban the other group from taking the same consumer benefit. We are all consumers of mortgages. One group can have a 90 year amortization, the other group cannot. I’ll take one at this point to be able to afford a home at these prices. I’ll be long dead before I pay it off, but I’ll live well with the much lower payment, and my children won’t have to pay it off either in Canada.

  • Gordon 11 months ago

    The FCAC guidelines are directed at principle resident holders only. How can the banks be extending amortizations to ‘investors’ as well? This can only bode poorly for the banks as well as the people still in the FOMO psyche! It would be very enlightening to have you investigate this issue. The Liberal budget directing the FCAC to save distressed mortgage holders is short sighted, maintaing home prices above what 50+% of Canadians can afford to help out the ‘investor’, maybe themselves.

  • Gord 11 months ago

    The FCAC guidelines put in the last Liberal budget suggest help for distressed principle owners not ‘investors’. It is near sighted by the Liberals to prop up house prices by trying to prevent a collapse that is inevitable due to the unsustainable debt of the distressed mortgage holders. These actions only prolong the time 50+% of Canadians who cannot qualify for a mortgage to even buy a small condo, have to wait, renting in this inflated market. Let the natural course of the markets correct.

  • Hugh 11 months ago

    Why are there so few houses on the market?

  • Lou 10 months ago

    Shorter-term lending (as opposed to U.S.) contributed this main impact. Consumers and investors (both cut under amortizating extension). Wonder now how can housing prices go down (and availability) with these measures where interest carriage cost twice in time alone not including higher interest cost? Erodding the value from within (while maintaining the system and banks). The ultimate bubble is 2 systems (Can. USA) 1 measures (rates).

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