Perhaps it's just that I am feeling a little nostalgic today or perhaps it's the Toronto heat and humidity starting to get to me, but I was curious to see just how far we, as a mortgage industry, have come over the past number of years.
There are many of you who were not working in this industry at the end of the last decade, a time when institutional 'A' lending included beacon scores of 620 or higher. In fact, there was a 'sandbox' that allowed lenders to extend as much as 3% of their loans to clients who had beacon scores as low as 580.
At the same time 'A' lenders were able to provide loans on stated income; 65% equity deals were commonplace; rentals and refinances could be had up to 95% loan-to-value; mortgagors could amortize to 40 years and purchasers could borrow with $0 down.
Perhaps we went too far.
On the policy side
When the Global Financial Crisis (GFC) hit, we witnessed a market collapse in the United States. Canadian regulators, policy makers and government did not want to expose us to the same fate. They enacted a series of regulation and policy changes, which did a good job to ensure prudent lending practices.
- Amortization terms were reduced
- Loan-to-value limits were changed for refinances and rental properties.
- Restrictions on lines of credit limits were introduced
- There were more stringent underwriting guidelines, including higher beacon scores
- And so on
And while recoveries were muted in other countries, our economy, fueled by a buoyant resource sector and low interest rates, allowed our housing market to remain robust. With low interest rates and a healthy housing market, prices continued to rise.
The increase in home values has been most noticeable in Toronto and Vancouver. Policy makers and regulators who were once viewing decisions based on ensuring strong credit standards are now also viewing decisions under the microscope of appreciating prices and increasing debt levels.
In the early winter of 2015/6, we saw the introduction of larger down payment requirements for higher-valued homes. We are now hearing about increased capital requirements for homes in certain geographic areas and most recently, there have been suggestions that we deal with supply side constraints with demand side policy restrictions. These latest recommendations are all in an effort to help slow down a housing market to prevent a potential crash.
On the mortgage supply side
Around the same time as the GFC started to impact liquidity, lending guidelines, etc., the composition of the Canadian lending environment also started to change.
First, a number of alternative lenders left the market; for example: Accredited and GE Money. Then, a number of 'A' lenders either shut down or stopped originating loans through mortgage brokers such as FirstLine, HSBC, ING, VanCity.
While we have lost a number of lenders, which has the potential to impact competition and ultimately the rates offered to clients, a number of new entrants have entered the market as well. RMG emerged stronger than before as well as Marathon Mortgages and Manulife Financial, to name a few.
And while guideline changes have made it much harder for many borrowers to qualify for 'A' lending products, there has been a resurgence in the alternative and private lending markets to fill that void.
Putting the two sides together
When I look back on our industry I feel a huge sense of pride. We have navigated through constant change with leadership and professionalism. In fact, broker share has grown from approximately 23% to 30% during these tumultuous times.
The strength of the mortgage broker channel is leading to consumers saving significantly on their mortgage costs as well. A 2011 study by the Bank of Canada
said the average discount of borrowers who use a broker was 19 bps.
Even if that number of 19 basis points is overstating today's savings and we reduce it by nearly half, say to 10 basis points, that means that of the approximate $75B in total mortgages originated by brokers, Canadians save nearly $75,000,000 (per year) in their mortgage payments.
Furthermore if the entire mortgage market is $225B in annual mortgage production and the remaining $150B not originated by brokers saved only 5 bps on their mortgage transactions due to the competition enabled by the broker channel, Canadians saved a further $75M in payments annually. Those funds could be used for spending or to pay down more expensive forms of debt.
The mortgage industry was once thought to be a low risk, moderate return business for the banks. It certainly was not front page news. Today, discussion about interest rates, home values, qualifications, and economic drivers from housing seems to be part of our regular conversation. As Canadians access more and more information, they continue to select mortgage brokers to present them with options to help them secure home financing solutions best suited for their unique needs.