60 LEXPERT MAGAZINE
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JANUARY/FEBRUARY 2017
much as 20 per cent will only exacerbate a
well-known problem."
If the federal government is worried
about a US-style housing crisis, Gale wants
to remind us that Canada is not the US.
While the US housing market crashed
from 2007 to 2009, the Canadian market
merely slowed. While dozens of financial
institutions failed in the US and other
countries, none did in Canada, where
stricter financial regulation has already
done much to prevent risky mortgages.
Here in Canada, housing prices during the
financial crisis only dipped for about eight
months, then began recovering. "at was
an example, I think, of the market taking
care of itself. … And when you interfere
with the market, it never turns out well."
CAPITAL PROBLEMS
Lawyers are typically loath to speculate on
things like housing market crashes. John
Jason, a partner with Norton Rose Ful-
bright Canada LLP in Toronto practising
in financial regulation, can't be tempted,
though prior to joining Norton Rose he
had insider big bank experience as Senior
Vice-President, Deputy General Counsel
and Chief Compliance Officer at BMO
Financial Group. e big banks, he agrees,
will likely benefit from rules changes an-
nounced so far.
"ey will certainly drive a bunch of
borrowers out of the market," says Jason.
ose will primarily be first-time buyers or
those riskier borrowers with lower credit
scores, who no longer qualify for mort-
gages under the new rules. e changes
could also drive out some competition for
the big banks, as Jason explains, because it's
"the small lenders who have a predominant
share of that [riskier] market." ose al-
ternative lenders — especially "monoline"
lenders that don't use deposits to backstop
their lending — could wind up with far less
of the mortgage business.
But if the big banks are encouraged by
the recent mortgage crackdown, they're not
about to admit it. No general counsel for
Bank of Montreal, CIBC, RBC, TD, Na-
tional Bank or Scotiabank agreed to speak
with Lexpert on the subject. Even smaller
lenders are keeping tight-lipped, with Eq-
uitable Bank, Home Trust Co., MCAP
and a number of other monolines declin-
ing interviews. Echoing the sentiment of
many others lenders, Hilda Wong, Vice-
President and General Counsel at First
National Financial, says her organization
simply wasn't expecting the new federal
rules. "I don't think the industry was. We
ourselves have to digest the changes."
One problem alternative lenders will
face is how to the find the capital neces-
sary to fund mortgages in this new regula-
tory environment. Unbeknownst to most
Canadians, insured mortgages are oen
quickly bundled into portfolios, which
are then securitized and sold off, mainly
to institutional investors such as pension
funds, other banks, trust companies, credit
unions and major investment firms.
"ese [mortgage] originators are re-
ally in it for service fees and an originator
fee," explains Michael Feldman, a Toronto
partner with Torys LLP who has long expe-
rience in residential and commercial mort-
gage securitization. (Originator fees are
tacked on to the principal and range from
about 25 to 100 basis points on a mortgage,
depending on its size and term.)
Monolines can't securitize without
mortgage insurance, which provide the
triple-A ratings that most investors require
before they're willing to buy. at insur-
ance protecting lenders against defaults
comes from three sources: CMHC and
two private insurers, Genworth MI Can-
ada Inc. and Canada Guaranty Mortgage
Insurance Co.
All insured mortgages are backed by the
Canadian government, and thus taxpayers:
100 per cent for CMHC-insured loans if
the Crown corporation fails to cover de-
faults with its own reserves. e other two
private insurers are subject to a 10-per-cent
deductible. at means lenders carry little
to no risk for the insured mortgage loans
they give homebuyers. Nor do the investors
who buy them.
However, on October 21, the Depart-
ment of Finance launched an industry
consultation process on the best way to
"modestly" distribute some risk of loan
losses to lenders and away from taxpayers.
e consultations will wrap up on Febru-
ary 28. OSFI, in addition, issued a new
advisory on January 1, 2017, updating its
Minimum Capital Test guidelines for
federally regulated mortgage insurers, in-
cluding the CMHC. e regulator says it
intends to force federally regulated banks,
credit unions and trust companies to put
more capital aside to ensure they "can ab-
sorb severe but plausible losses."
"e interesting thing about the consul-
tations is there are a few different public-
policy objectives that you are faced with,"
says Mark McElheran, a partner at Stike-
man Elliott LLP in Toronto practising in
corporate finance, including private and
public securitizations.
"On the one hand they're trying to en-
courage lenders to take some of the govern-
ment's exposure to the housing market.
But by the same token you may ultimately
reduce competition in the market because
there are only so many institutions that can
actually shoulder some of that risk. e big
banks might be able to do that and might
be quite happy about that. If they are com-
pensated for it, they will take more of that
risk in whatever form it is."
Selling off mortgages to raise capital is a
far less urgent matter for banks than it is for
monoline lenders. Banks have their deposi-
tors to fund future loans. e monoline and
other lenders lacking depositors can't afford
| IN-HOUSE ADVISOR: MORTGAGE REGULATION |
CRAIG ALEXANDER
CONFERENCE BOARD OF CANADA
The metaphor I like
to use is, imagine you are
driving down the highway and
all of a sudden the road has
become very icy. So now there
is risk. The one thing you don't
do is slam on the brakes,
because that is likely to cause
the very accident you are
worried about happening.
