Navigating Canada’s Shifting Mortgage Landscape: An In-Depth Look at Lending Policies and the CMHC Controversy

The Canadian mortgage market is in constant flux, a dynamic environment shaped by economic shifts, policy interventions, and the evolving needs of homeowners and financial institutions. Recently, a notable trend has emerged: mortgage rates continue their downward trajectory, accompanied by a significant adjustment to the mortgage stress-test rate. This crucial qualification benchmark, used to assess a borrower’s ability to withstand higher interest rates, has seen its first reduction since the onset of the COVID-19 pandemic, falling from 4.94% to 4.79%. This easing of the stress test contrasts sharply with the roughly one percent decline in actual five-year fixed and variable mortgage rates from their pandemic-induced peaks, a disparity that often sparks lively debate within financial circles.

While the intricate relationship between prevailing mortgage rates and the stress-test mechanism merits extensive discussion, our immediate focus turns to a more contentious issue: a peculiar and controversial letter penned by Evan Siddall, the outgoing president of the Canada Mortgage and Housing Corporation (CMHC), to a hundred prominent lenders across the nation. This letter, and the events leading up to it, provide a fascinating window into the complex interplay of government policy, market realities, and the future of housing affordability in Canada.

A Decade of Debt Concerns and Regulatory Responses

To fully grasp the context of Siddall’s actions, it’s essential to revisit the long-standing concerns surrounding household debt levels in Canada. For over a decade, financial regulators have voiced anxieties about the increasing indebtedness of Canadian households, recognizing it as a potential vulnerability to the broader economy. In response, these regulators have implemented seven distinct rounds of mortgage-rule changes, each meticulously designed to achieve a dual objective: first, to mitigate overall systemic risk within the Canadian financial system, and second, to establish robust safeguards that would shield individual borrowers from the adverse impacts of potential future rate hikes. These regulatory adjustments, often met with mixed reactions, have been pivotal in shaping the lending landscape, with many experts, including myself, offering full support for their intent while also proposing minor refinements to enhance their efficacy.

The gravity of these concerns was starkly highlighted in March when the Bank of Canada (BoC) took decisive action, slashing interest rates in an unprecedented move to stabilize the economy amid the burgeoning COVID-19 crisis. During this period, a reporter questioned BoC governor Poloz about the potential ramifications of these rate cuts on household debt and soaring house prices. Poloz acknowledged the persistent existence of these risks but unequivocally stated that the Bank’s immediate priority was to address more severe, imminent threats that could materialize if swift action wasn was not taken. This underscored the precarious balance policymakers faced: mitigating a global health crisis’s economic fallout while remaining cognizant of pre-existing financial vulnerabilities.

The Unsettled Economic Climate and Siddall’s Unconventional Stance

Indeed, we are navigating through a period of profound uncertainty, where elevated risks permeate every sector of the economy. In response, policymakers have unleashed an unparalleled torrent of fiscal and monetary-policy stimulus, a concerted effort to resuscitate the economy after the unprecedented COVID-mandated shutdowns. While nascent signs of recovery offer glimmers of hope that the gravest outcomes might have been averted, it remains unequivocally premature to declare victory.

It was against this backdrop of cautious optimism and pervasive uncertainty that Evan Siddall, on May 19, 2020 – precisely as the Canadian economy tentatively began its reopening phase – stood before the federal Standing Committee on Finance and delivered a series of startling and, to many, discordant predictions and recommendations. His pronouncements included:

A forecast that Canadian house prices would experience a significant decline, ranging between nine and eighteen percent, within the ensuing year.
A warning of an impending “debt-deferral cliff” in the autumn, suggesting that up to one-fifth of all outstanding mortgages could be at considerable risk.
A bold recommendation to the Ministry of Finance, urging them to compel mortgage-default insurers to increase the minimum required down payment on residential mortgages from five percent to a more substantial ten percent.

To characterize Siddall’s comments as merely “out of place” would be an understatement. The head of an organization explicitly mandated to “help Canadians access affordable housing options” was advocating for a restriction of credit access at the very moment other government bodies were indiscriminately deploying stimulus measures. This paternalistic, “father-knows-best” approach was met with conspicuous silence from the Ministry of Finance and drew widespread criticism from various quarters, including from this author.

CMHC’s Unilateral Tightening and the Private Insurers’ Defiance

Undeterred by the lack of official endorsement, Siddall returned to CMHC and promptly initiated the drafting of a series of significant amendments to its underwriting guidelines. His strategy was clear: if the Ministry of Finance hesitated to adopt his recommendations, he would leverage his executive authority as the leader of CMHC to unilaterally tighten the corporation’s credit standards. Consequently, on June 4, 2020, CMHC publicly announced a suite of stringent new measures. These included a reduction in the maximum income ratios permissible for borrower qualification, an elevation of minimum credit score requirements, and a prohibition on the use of borrowed funds for down payments.

Historically, any announcement of changes to underwriting guidelines by CMHC, a federal Crown corporation, would invariably be mirrored by the two major private mortgage insurers, Genworth (now Sagen) and Canada Guaranty. This synchronized response was an unspoken acknowledgment that CMHC, while the official messenger, was acting at the behest of the federal Ministry of Finance, which, critically, provides a backstop for a substantial 90 percent of the default risk carried by both private insurers. However, this time, an unprecedented deviation occurred. Genworth and Canada Guaranty opted not to follow CMHC’s lead. Their disagreement stemmed from a different assessment of the market’s needs; they largely believed that additional credit tightening was unwarranted. Their reasoning was sound: the existing mortgage stress test already effectively reduced income ratios, lenders were already implementing stricter credit score requirements, and many institutions had, in fact, disallowed borrowed down payments long before CMHC’s announcement.

It’s worth noting that Siddall’s unilateral move, despite its controversial nature, inadvertently presented a silver lining for the market. CMHC had long dominated the default-insurance sector in Canada. Its strategic pullback created an invaluable opportunity for the private insurers to innovate and expand their market presence. This opening allowed them to develop more flexible solutions, better tailored to match willing investment capital with borrowers who, despite needing additional flexibility, were prepared to pay a premium for that privilege. This shift fostered a more competitive landscape, potentially benefiting a segment of borrowers previously underserved.

Siddall’s Predictions Challenged by Market Realities

The passage of time has not been kind to Siddall’s May predictions. Contrary to his forecast of a significant downturn, Canadian house prices have continued their upward trajectory, demonstrating remarkable resilience. Furthermore, the ominous “debt-deferral cliff” he warned about has proven far less perilous than anticipated. Lenders have recently confirmed that a substantial number of borrowers who enrolled in mortgage payment deferral programs have since opted out prematurely. For instance, Home Capital Group reported 9,903 deferred mortgages on April 30th, but by July 31st, that number had plummeted to just 2,698 actively deferred mortgages, indicating a much stronger recovery capacity among borrowers than initially feared.

Despite this mounting evidence contradicting his initial assessments, Siddall doubled down on his position. He sent a follow-up letter to 100 Canadian lenders, not merely informing them but imploring them to voluntarily impose stricter lending policies, aligning with the very changes CMHC had unilaterally announced on June 4th. To ensure maximum impact and attention, Siddall included a provocative statement, writing, “there is a dark underbelly to this business that I want to expose.” For an individual purportedly preparing to exit the national stage at the year’s end, this was undeniably an effective tactic to command attention. However, for a policymaker whose mandate is to promote housing affordability and, by extension, bolster confidence in Canada’s housing markets and overall financial system, it was an undeniably surprising and, for many, deeply unsettling move.

Deconstructing Siddall’s Letter: An In-Depth Analysis

Let’s delve deeper into the specific points raised in Siddall’s letter to lenders, offering a critical analysis alongside his assertions:

Siddall’s Assertion: Our competitors “remain free to offer insurance to those for whom we would not.” This statement holds true. And notably, Genworth and Canada Guaranty have, thus far, encountered no significant obstacles in raising the necessary private capital to adeptly fill the void created by CMHC’s strategic market retreat. This demonstrates the market’s capacity to adjust and highlights the robust nature of private sector financing.
Siddall’s Assertion: “We have sustained a reduction in our market share … (and) we require your support to prevent a further market erosion of our market presence.” It is crucial to remember that CMHC is not only the largest default-insurance provider in Canada but also a Crown corporation, a public entity fundamentally backed and funded by the federal government. Its operational integrity and existence are not threatened by a loss of market share to private competition in the same way a private company’s would be. The implication that its “existence” is at stake due to market share shifts is misleading at best.
Siddall’s Assertion: “Household borrowing above 80 per cent of gross income intensifies the drag on GDP growth … (and) Canada is well above this problematic threshold.” The elevated debt-to-GDP ratio in Canada is, without question, a widely acknowledged and legitimate economic concern. However, it’s pertinent to note that Canada’s gross debt-to-GDP ratio has consistently exceeded 80 percent since Siddall assumed office on January 1, 2014. The timing of his sudden, emphatic highlight of this “dark underbelly” – just as he prepares to depart in the midst of a global pandemic – raises questions about the motivations behind this belated and forceful revelation.
Siddall’s Assertion: “Exposing mortgagees, and first-time home buyers in particular, to excessive borrowing creates a very significant economic drag on our outlook.” The phrasing here is concerning. No reputable institution is “exposing” mortgagees to undue risk in a manner comparable to a health threat. Canada’s existing default insurance rules are meticulously crafted to provide income-earning adults with access to borrowing based on continually evolving, robust underwriting standards. These standards have consistently and successfully minimized mortgage-default risk for many decades, safeguarding both borrowers and the financial system.
Siddall’s Assertion: “The economic cost of COVID-19 has been postponed by effective government intervention; it has not been avoided.” If one truly believes that government intervention has been effective in postponing the economic costs, why simultaneously undermine these very efforts by concurrently advocating for and implementing credit restrictions? This creates a perplexing paradox. What about the inherent risk that such credit tightening will inadvertently trigger the very economic shocks that the broader policy framework is desperately attempting to mitigate?
Siddall’s Assertion: “We … hope you would reconsider highly leveraged household lending.” To recap the narrative: the Ministry of Finance did not align with Siddall’s stance, and the private insurers explicitly disagreed with him. Now, Siddall expects individual lenders to voluntarily restrict their lending practices simply because he sent them a letter? The “we” in that sentence appears to be a mischaracterization; at this juncture, it seems far more accurately represented as an “I.” This indicates a singular, isolated viewpoint rather than a collective consensus.
Siddall’s Assertion: “Don’t aggravate the impact (of our recent changes) by undermining CMHC’s market presence unnecessarily.” This raises a fundamental question: why not? Has Siddall adequately considered the very real possibility that historical outcomes will ultimately prove his predictions and subsequent policy changes to be erroneous and unnecessary? If, indeed, this turns out to be the case, then why should lenders not increase their support for the insurers who demonstrated a more astute and responsive understanding of prevailing market risk dynamics? Loyalty should be earned through foresight and effective policy, not demanded.
Siddall’s Assertion: “Our ability to respond effectively in a crisis will be weakened if our market share deteriorates significantly further.” The rationale behind this claim remains unclear, particularly given CMHC’s status as a Crown corporation that enjoys the full financial backing and credit of the federal government. Its capacity to respond to a crisis should theoretically be insulated from fluctuations in market share, owing to its governmental support structure.
Siddall’s Assertion: “We don’t think our national insurance regime should be used to help people buy homes with negative equity.” Here, Siddall is specifically referencing the standard default insurance on mortgages covering 95 percent of the purchase price, with an additional four percent default-insurance premium. This particular default insurance product has been a staple of the Canadian housing market for decades and has consistently performed to the satisfaction of policymakers. As previously noted, Siddall made an unsuccessful attempt to persuade the Ministry of Finance to implement this specific change. Now, he is attempting to bypass official channels by urging lenders to adopt it voluntarily, highlighting a continued push for a policy that has already faced official rejection.
Siddall’s Assertion: “Our market share increased earlier this year, as it tends to do in crisis. If you want us in wartime, please support us in peacetime.” This statement contains an internal contradiction. Does Siddall truly believe we are currently in “peacetime”? Did he not just issue a stark warning that the full economic impact of COVID-19 has merely been postponed and not definitively avoided? Furthermore, if Siddall opts to impose stricter conditions on lenders during perceived “wartime” (a crisis), how are those actions expected to foster loyalty and support during periods of “peacetime”? This argument appears to lack a coherent logical framework.

The “Barber Analogy” and the Value of Expert Advice

Siddall recently offered a dismissive critique of mortgage brokers’ perspectives on lending policies, employing the analogy, “Never ask a barber if you need a haircut.” I fundamentally disagree with this characterization. Over the long arc of building a successful advisory business, nothing proves more valuable or foundational than consistently providing honest, transparent, and exceptionally well-informed advice. Mortgage brokers, intimately familiar with the intricacies of diverse lending products and the nuanced needs of individual borrowers, offer a perspective grounded in practical, real-world experience that is invaluable to the market ecosystem.

The Enduring Debate on Debt and the Path Forward

It is undeniably simple to articulate that elevated household debt levels pose a significant risk to our nation’s economic stability and that unchecked over-indebtedness could severely impede future growth. Our policymakers have, with this understanding, already enacted seven distinct rounds of mortgage-rule changes specifically designed to address these identified risks, and it is almost a certainty that further adjustments will be made in the future. However, it is highly improbable that these future changes will precisely align with the specific measures Siddall vehemently lobbied for, and it is even less likely they will materialize before the culmination of his term.

It is also straightforward to predict that our economy, individual borrowers, and house prices will inevitably face challenges and absorb impacts before the full ramifications of the COVID-19 pandemic are truly behind us. The risks are palpable and widely acknowledged across the financial spectrum. Yet, among prominent voices, only Siddall appears to hold the singular conviction that now, amidst the throes of a global pandemic and a fragile economic recovery, is the opportune moment for a drastic tightening of credit standards.

Siddall was undoubtedly aware that dispatching his controversial letter to 100 lenders would not yield the policy changes that neither the Ministry of Finance nor his default-insurance competitors were willing to grant him. Instead, his actions bear the hallmarks of a calculated, attention-seeking maneuver, strategically designed to distance himself from the formidable economic risks that lie ahead. Perhaps, more cynically, it may also serve as an attempt to bolster his credentials and burnish his public image for future professional endeavors, leaving a lasting, albeit contentious, mark on Canadian financial discourse.

The Bottom Line: What This Means for Mortgage Rates

In the immediate term, five-year fixed and variable mortgage rates once again experienced a decline last week. This trend reflects the continued dissipation of the COVID-related risk premiums that had temporarily inflated gross lending spreads. I anticipate this downward pressure on rates to persist over the short term, indicating that mortgage rates should continue their gradual descent in the foreseeable future, offering some relief to borrowers in an otherwise complex market.

Finally, for those seeking a counter-perspective and a robust rebuttal to Siddall’s often ominous forecasts, I highly commend the detailed analysis provided by Paul Taylor, President of Canadian Mortgage Professional, during his interview with Amanda Lang on BNN Bloomberg. Listening to his insights will allow you to critically evaluate the varying perspectives and, ultimately, decide for yourself whether anyone is merely trying to sell you a “haircut” in this evolving financial landscape.