Back in May of this year, CMHC surprised many by predicting home prices would fall 9-18% and warned that Canadians were teetering on a debt-deferral cliff. Since then, amidst uncertainty, we have seen quite the opposite: home prices are up and debt-deferral, for many analysts, appears to be less of a concern. But despite the surprising activity in the housing market, President and CEO of CMHC, Evan Siddall, continues to sound the alarm, doubling down, even as many other risk managers appear to disagree. Today’s guest, David Larock, joins Adam & Matt to discuss why Siddall and CMHC seem to be taking such a strong stance against the analysis of other mortgage insurers, many in the real estate industry, and the personal assessments of many home buyers since Covid-19. Is Siddall’s ‘father knows best’ stance justified? Are there other factors potentially at play for Siddall? And should the President & CEO of a Crown Corporation be engaging in late night Twitter wars and calling out an entire industry? We know Evan Siddall may be mad as hell, but it is David Larock who is not taking it anymore on today’s episode! Now off to delete our Twitter account!
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Who is David Larock?
David Larock is a mortgage broker and interest rate commentator working out of Toronto. I’ve worked in the mortgage business for 20 years, spending half of that time in lending. I started in one of the largest banks, moved to an online bank and then to a smaller lender. I became a mortgage broker about 10 years ago and decided that’s what I wanted to be when I grow up!
You recently published a post, “A Theory on Why CMHC President Evan Siddall Went Rogue Last Week.” Can you tell us about CMHC’s role in Canada?
They ensure mortgages against default. They provide default insurance, and they are the dominant player in that industry. I believe they were started after WWII so the government could increase housing affordability. It used to be that if you didn’t have 25% down payment, you couldn’t buy a house. CMHC allowed people to put down smaller down payments, which were riskier, by insuring those loans. They made those mortgages bullet proof. Their mandate was to increase access to home ownership through this program.
Once borrowers pay for this default insurance, which protects the lender, they get the best rates available. Once you, as a borrower, make your loan bullet proof, you get the best rate because there’s no risk to the lender. So, you get the best rate, but the cost of the insurance is not cheap. You don’t have to write a cheque; you can roll it into the mortgage. But the overall cost, even with the lowest interest rate, is higher due to that insurance fee.
How has CMHC’s approach changed under Evan Siddall’s leadership?
When Evan Siddall came along in 2014, CMHC was still responding to the US housing crisis of 2008 and pulling back. For most of its existence, CMHC has tried to increase access to borrowers. But after the recession, the Ministry of Finance and through them, CMHC, started to reign in their lending. In 2014, we were about halfway through that process. Siddall wanted to increase housing affordability but ensure that by increasing access to credit, CMHC wasn’t creating conditions for financial instability.
You have to separate Siddall from CMHC. I chose the title of my article because this isn’t the first time, he’s gone rogue – he’s opinionated and controversial. He’s a smart guy. I felt, with all due to respect to Evan Siddall, that he was too far out from his mandate. He said he thinks we should be doing more and made some bold predictions. He said if the Ministry of Finance doesn’t listen, he’s going to do it himself under CMHC.
Siddall is proposing tightening credit when everyone else wants to open the taps. The government has called this pandemic the greatest shock to our economy since the Great Depression.
Why is he going against the grain now?
Well, the cynic in me says it’s because he’s leaving this year. Siddall doesn’t have to worry about staying on anyone’s holiday card list, so he doesn’t have to be as diplomatic. He has had a high-profile job so who knows where he will be heading next? In his mind, I think he wants to be on the right side of history. If things blow up later, he wants to say he did his best. He’s a big boy and I think he’s deserving of the criticism.
The predictions he made were 9-18% declines for Canadian housing. Can you tell us about the letter Siddall wrote to lenders?
Let’s back up a minute. At the start of COVID, the Bank of Canada slashed its policy rate by 1.5% after years of no rate cuts. They are buying $5 billion a week of government bonds to keep rates low. They want to keep mortgage rates low however they can. The federal government has engaged in unprecedented levels of stimulus directly to the pockets of Canadians. And behind the scenes, there’s lots of liquidating.
As time goes on, we will debate whether or not the government should do less or more. But in the short term, everyone agreed they needed to do all they could.
Siddall’s first public comment was to recommend to the Ministry of Finance to increase minimum down payments from 5% to 10%. I thought this was strange at the time, as it is credit tightening, in the midst of all this credit loosening. If you’re supposed to increase housing affordability, increasing minimum down payments pushes out the people at the very edge of the market. To cut back access to credit from borrowers who are trying to enter the market seemed to be the worst possible idea. The Ministry of Finance clearly agreed as they thanked him for his opinion but moved on with their plans.
Siddall seemed chastened by this and decided to make his concern public. He made this bold prediction about house costs declining by 9-18%. He may be right about things softening in the long run, but he’s been spectacularly wrong so far.
Siddall then decided to make the tweaks within his own shop. He made minor tweaks within CMHC, but the market impact was very minimal. If CMHC wouldn’t insure the mortgage, there were other programs that would.
Siddall then sent out a letter to 100 lenders to further express his thoughts. In the letter, he told the lenders he couldn’t convince the Ministry of Finance or other default insurers, so is now appealing to them. He asked them to follow his view of what’s right for the economy, despite their best interest, and to continue to support CMHC, despite them cutting back their offerings. Lenders are not going to voluntarily cut back on lending policies because it’s what Evan wants.
He got what he wanted because the media reported on it. Siddall insisted it was a private letter but that was laughable. He obviously wanted it to be made public. And the lenders went on with their business.
The fact that he’s leaving in December can’t be overlooked. So, my article looks at the “why.” Not just focusing on the letter but looking at the entire timeline and trying to figure out why he’s doing this. It’s all a public relations campaign. To me, he’s saying, “I think we should be doing more and we’re not. And if it all blows up, I want it well recorded that I tried to do more, but people wouldn’t listen.”
He’s undermining confidence in our systems and economy at a time when our markets are vulnerable. So, to me, there is a cost to what he’s doing, and I think it’s ultimately for personal gain.
I don’t make it my business to call people out. But when you do things this publicly, this consistently and so nakedly self-serving, that changes it.
Why does Siddall seem so adamant on targeting real estate professionals and people in the mortgage industry?
If you look at the worst people in the real estate and mortgage industries, they deserve all kinds of criticism. Much of what Siddall says is valid. There’s a natural profit motive that creates a bias in all of us. But nothing sells like honesty. You don’t have to betray your profit margin to tell people there is risk when interest rates stay low for a long period.
But when Siddall paints us all with the same brush and says we don’t have a right to share our opinions, he’s saying you can’t make a profit and look after a client’s best interests. I think that’s naive. No one who has found success in this business did so purely through self-interest. I’ve told people who sit in my office that now isn’t the best time to buy. And those people come back to me years later when the time is right and they’re loyal clients.
Our industries do deserve some criticism but there are lots of us who are responsible when asked about risk and who work honestly. If Evan Siddall was a newspaper commentator, sure, he can say what he wants. But when you’re a senior bureaucrat at the head of a crown corporation charged with increasing housing affordability, that is not the role for you to be saying whatever you want to say.
How is the lending environment? What predictions do you have for 2020/2021?
In Toronto, it is nuts right now. Everyone with a mortgage wants to refinance to a lower rate, but the penalties are high. There’s lots of action. We didn’t have much of a spring market thanks to COVID, so our spring market moved to the fall. We’re seeing lots of offers and bids. The reason we’ve had such an incredible August is because we didn’t have a spring. But you can’t compare it to past August markets as it’s usually a sleepy time when spring deals are wrapped up and everyone goes on vacation.
As far as interest rates go, we’re at record lows. Almost all of my rates are starting with a “1” and I don’t think they’re going anywhere for a while. The Bank of Canada has said it’s policy rate is staying low for a long time.
But what is a long time? I took a shot at that in a recent article and argued the Bank of Canada wouldn’t make a move before the US Federal Reserve. The US Federal Reserve said they weren’t doing anything with their policy rate until the economic recovery was well underway. They released a dot plot chart, which is notoriously ahead of actual timing, saying the average answer for when rates will rise is at the end of 2023. If they hit that date, it would be the first time in 10 years they’ve ever hit it; a betting man would say it would be 1-2 years after that.
So, it’s a safe bet that the Bank of Canada won’t raise theirs until then too. The Bank of Canada may stop buying bonds before then, which would raise fixed mortgage rates, but I doubt it. I think we’ll stay, at a minimum, two years at current levels and rates will bottom out at less than 1.5%. A lot of things can change but I don’t see any upward pressure for a long time. However, we should root for rising rates because it means the economy is recovering. But I think we’re going to be here for a while.
Would you be going with a variable rate right now?
When COVID first started, rates spiked. Back then, I was saying you should go variable. If you go variable, you have the option to go to fixed at any time with no penalty. Now, just a few months later, folks who started at high 2-point variable rates (with the COVID risk premium) are converting to fixed rates under 2%. We’re getting gradual cuts as we go along.
If you go with variable, you get a rate lower than fixed today, as close to a guarantee as possible from the Bank of Canada that rates aren’t rising for a few years, you can convert to fixed at any time for free, and the penalty to break it is only three months’ interest.
On the fixed rate side, the five-year fixed rate is at a record low. Could it go lower? If you look at the other G10 countries, they are in the negatives. If that policy rate continues to go down, fixed rates will fall.
With a variable rate mortgage, there’s always a risk it could rise. But it’s lower today than I can ever remember it being in my 20 years in business. It gives you a ton of flexibility. And fixed rates are continuing to fall.
There are two types of borrowers: those who worry they’re paying too much and those who worry their rate might go up. So, I wouldn’t talk anyone out of a five year fixed mortgage if you need that peace of mind.
Read more of Dave’s thoughts at https://www.integratedmortgageplanners.com/blog/