Don’t worry, I’m not going to start this blog with lyrics from “Changes” by David Bowie.

I just like saying “ch-ch-ch-changes.”

I still get goosebumps when I hear Bowie sing it.  It reminds me of my childhood.

Instead, I’m going to give you a different folksy intro today that better explains the topic at hand…

Last week, my wife sent me a text message and said, “OMG I got a speeding ticket!”  She scanned the notice she received in the mail and emailed it to me.

61 KM/H in a 50 zone.

What a joke.

One of those sneaky radar boxes adorning the sidewalk on a Toronto street happened to photograph my wife driving the exact same speed as everybody else.

“But David, if everybody were jumping off a bridge, would you do it too?”

No, but I’m not afraid to point out that only about 10% of drivers on the 401 are going less than 100 KM/H and yet that is the posted speed limit.

My wife was upset.  “I never speed,” she said.  “This makes no sense, I’m like the slowest driver!”

I looked at the time-stamp on the ticket: 3:56pm on a Sunday.  Just as I suspected; that was me driving the car.

“You know that at 3:56pm on a Sunday, on St. Clair Avenue, we’re going to my mom’s for dinner, right?” I asked her.

A series of LOL’s and crying emoji’s appeared along with the text “OMG I’m dying.”  I think she was just happy it wasn’t her!

She asked me if I was going to pay the ticket and I said “no.”  I wanted a trial, or at the very least, an early resolution meeting with the crown.

I had one thing and one thing only to say to the crown:

If you can tell me that this ticket is not about safety but rather about revenue-generation, then I will pay this ticket and you’ll never hear from me again.

I told my dad this and he said, “Oh yeah, they love when people are assholes.  They’ll have a field day with you.”

But you can’t ignore the point I’m trying to make.

Governments need new revenue tools because they’re always in need of new revenue.  That’s because they’re always in need of revenue in general.

Taxes always go up.  Never down.  I remember when GST was reduced from 7% to 5% as an election promise, but that didn’t last long, since PST and GST merged to become HST, and a whole slew of products and services went from 5% or 7% to 13%.  That was a real money-maker!

I also remember discussions about removing David Miller’s land transfer tax here in Toronto, but it would be pretty tough for any Mayor, let alone wet-noodle himself, John Tory, to cast aside a billion dollars per year.

So when the Canada Mortgage & Housing Corporation realized their revenues dropped dramatically on account of their “tightening” of mortgage rules in 2020, was there ever any doubt that they would reverse course?

This is yet another topic that I left in the rear-view mirror, hence my “Monday Morning Quarterback” theme.

Over the past two weeks, we’ve seen more media attention to policy changes at CMHC that, at first, flew under the radar.

Here’s the Globe & Mail’s take from last week:

“CMHC Eases Mortgage Insurance Rules, Admits Tightening Was A Mistake”

From the article:

Effective Monday, the mortgage insurer is lowering the required credit score and loosening other measurements that ensure homeowners have enough income to pay their mortgages and other debts.

Major lenders require mortgage insurance from the CMHC or a private-sector insurer if a borrower makes a down payment of less than 20 per cent of the purchase price of a home.

Under the new rules, borrowers need a minimum credit score of 600 instead of 680 to qualify for the CMHC’s mortgage insurance, and can have a higher ratio of expenses relative to their income.

A borrower’s gross debt-service ratio – the share of monthly household income used to pay the mortgage and other housing costs – can be as high as 39 per cent instead of 35 per cent. As well, a borrower’s total debt-service ratio – the share of monthly income used to cover all housing costs, credit cards, lines of credit and other loans – can be as high as 44 per cent instead of 42 per cent.

Now, just for a moment, let’s backtrack a little and answer this question: what is the role of the CMHC?

Is it to backstop the banks?

Is it to protect Canadians?

Is it to place a massive burden of debt on the backs of Canadians?  Eeek!

Is it to provide “housing affordability for all,” as is noted on the home page of the CMHC’s website?

For years, many TRB readers have commented that the CMHC should be abolished, and/or that their debt load should be reduced massively.  Some readers don’t like the idea that the CMHC insures loans that publicly-traded banks provide, thereby putting all Canadians at risk for several hundred billion dollars in liabilities.

The counter-argument to that would be if not for the CMHC insuring these loans, the banks would be charging much higher interest rates.  That’s of little comfort for, say, a 59-year-old who owns his own house with no debt, and has no intentions of buying any more property.

Personally, I think the true role of the CMHC is to protect the banks in the event of default.  The banks lend money under the protection of the insurance companies and it’s the consumer who absorbs the premium for that protection, not the banks.

So the CMHC is a money-maker for the government, and all governments need money.  We’ve established that.

But how much money does the CMHC make?  Er, how much money did they make?

That is the issue at hand, er, was the issue in 2020, and is why the CMHC walked back their policy changes two weeks ago.

From the Globe & Mail article:

Since last July, the CMHC’s share of the mortgage insurance market has dropped precipitously, according to a research note from Royal Bank of Canada. The bank said the CMHC’s market share was between 45 per cent and 50 per cent prepandemic but slipped to 23 per cent by earlier this year. In contrast, Sagen’s market share climbed to 44 per cent and Canada Guaranty’s to 33 per cent, according to the RBC note.

Can you imagine how much money the CMHC gave up last year?

Their market share went from 45-50% to 23%.

Wow!

Tens of millions?  Hundreds of millions?  You betcha!

Imagine the Canadian government, in an election year, not having the money to spend freely as they did before?

Something was going to give.

Last night, I chatted with my mortgage broker, Tony Della Sciucca.

I had questions, he had answers, and therein is just about everything you need to know about last month’s changes by the CMHC…

Me: “Tony, explain to me why the CMHC enacted this change in the first place.”

Tony: “Evan Siddall.  Remember him?  Before Romy Bowers took over?”

Me: “Of course, how could I forget?  Mr. Eighteen Percent Crash, himself?  I’ve been writing about him all year!”

Tony: “Exactly!  Well, it was his outlook that was responsible for the policy changes.  Evan Siddall inaccurately predicted more defaults on the horizon, thinking people were too highly levered, and that people were putting themselves in a position that if interest rates rose, they couldn’t carry their debt load.  So it was in response to his outlook on the market that the CMHC tightened lending criteria.”

Me: “This is hindsight talking, I guess, but was it really necessary to tighten the rules?”

Tony: “I mean, they already had the mortgage stress test in place so they were already providing a huge buffer when it comes to approvals.  I think the larger indication that it might not have been necessary was the fact that Sagen MI Capital Canada (formerly Genworth) and Canada Guaranty didn’t follow suit.”

Me: “Let me come back to that in a moment, before I forget, is there any chance that Evan Siddall also tightened lending rules in an attempt to cool the market?”

Tony: “Oh, sure, why not?  So many of CMHC’s policies over the years have been aimed at cooling the market, although as we know, few have.  Internally, maybe the CMHC figured that by tightening the rules forced on borrowers that the market would cool, or maybe this was a potential second benefit of de-risking if the market dropped 9-18% like he thought it would.”

Me: “Looking back on this with the massive benefit of hindsight, what’s your opinion on the 2020 policy change?”

Tony: “Well I really have to wonder: what was their agenda?  What information did they have back then that the rest of us didn’t have?  What information did they have that they didn’t disclose?  Why CMHC and not the other lenders?  I think, honestly, that Evan Siddall might have been flexing a little, trying to bully Sagen and Canada Guaranty into following suit, and when they didn’t, Evan Siddall didn’t want to concede that he’d made a mistake.”

Me: “What’s the difference between CMHC and Sagen & Canada Guaranty.”

Tony: “One is public and the other two are private.”

Me: “Right, but what’s the difference in the eyes of the borrower?  Like, why would a borrower have a preference for one or the other?”

Tony: “They shouldn’t have a preference.  Who cares who insures your mortgage?”

Me: “But do you find that many borrowers do care?”

Tony: “All the time!  But it’s the same when it comes to the bigger banks.  Look, if I have a client who’s buying a condo and I have a 2.09% rate through Laurentian Bank and a 2.19% rate through TD Bank, he or she might say that they prefer TD Bank.  But why?  What’s the difference and why do you care who lends you money?  I mean, if Meridian Credit Union is offering you 1.99% and TD Bank and ScotiaBank are offering you 2.19%, what would you do?”

Me: “I think that’s rhetorical.”

Tony: “Yeah, but there are so many borrowers out there that will ask, ‘Who’s Meridian?’ Then they go with TD Bank who’s charging a higher rate and can still bring in the business because of their brand.  It’s the same thing with CMHC.  They’ve done a great job with branding and marketing over the years and they’re a household name.”

Me: “So when CMHC enacted these policies in 2020, did you find that borrowers changed their tune?”

Tony: “Absolutely.  If I had somebody that was trying desperately to get into the market and they could get a higher loan value if the loan were insured through Sagen or Canada Guaranty, they would go with the latter.  But there was an education process at first because so many borrowers didn’t know who they were.”

Me: “And what about the banks?”

Tony: “The banks want to loan money.  They don’t care who insures the mortgage.  The banks and adjudicators would go to whomever.”

Me: “So what happened in the market last year after the CMHC made these changes?”

Tony: “It was really strange.  Despite the fact that the insurance premiums were exactly the same across the board, the rules were different.  CMHC was effectively moving the goal posts, and as I said before, the banks, adjudicators, and borrowers started to say, ‘Hey, what’s going on here?’  CMHC lost a ton of business.  A ton!  If we’re comparing apples to apples, and the products are the same, the benefits are the same, and the consumer is paying the premium, then why does it matter where the money is coming from?”

Me: “So what happens now?”

Tony: “Oh, buddy, now Sagen and Canada Guaranty are in the game!  They’re laughing!  CMHC opened the door for them big-time and they got a ton of business in the last year, so those borrowers might stick with them, or might go with them the next time they buy.  The CMHC is admitting a huge error in judgement now and it makes them look bad.  They’ve lost some credibility.”

Me: “Right, but you said before that we don’t care where the money or the insurance is coming from, so does it matter that they’ve lost credibility?”

Tony: “Nah, I mean, now buyers have more choice.  Before, the lower-end buyers who needed Sagen or C.G. had to go with them because they couldn’t qualify through CMHC.  But now private mortgage insurers have a bigger piece of the pie and it’ll be interesting to see how they respond now that CMHC isn’t dominating the space.”

Me: “Did you like the end to that England/Denmark game?  Seriously, is soccer broken?  The diving – you know I can’t stand it.  NHL hockey players will pull their own tooth out of their mouth and hand it to the trainer like it was a gum-wrapper, but soccer players get nudged in the ribs and they clutch their face and fall down so they can roll around for thirty seconds…”

Tony: “You’re saying this to me because you know I’m a huge soccer fan and the guys at the office won’t listen to your rants anymore, right?”

Me: “Something like that…”

So what do you think?

Not about soccer, because I don’t want to hear that “diving is part of the game,” and that “good players can draw calls.”

I meant about the CMHC, about the changes, and about the ‘need’ to do so in the first place.

Had the average home price in Canada dropped 9-18% last year as Evan Siddall had predicted, perhaps we’d all be lauding him right now for tightening mortgage regulations.  But it didn’t.  And as I wrote in the spring of 2020, his prediction was ridiculous.  This isn’t hindsight talking; I said this last year.

Many of you will feel absolutely unaffected by this, but just consider that the CMHC is insuring mortgages with your money.  The risk is on you.

So shouldn’t we all collectively want the CMHC to lose market share to Sagen and Canada Guaranty?

Well, if they do, then there’s less revenue for the government, and we either benefit from less public spending or our taxes increase.

How’s that for a catch-twenty-two on a Monday morning?