The Winners and the Losers of the New Mortgage Rules with James Laird of Canwise Financial

Everyone in the Canadian real estate world is talking about the new mortgage rules and how they will affect the market. Andrew la Fleur talks to James Laird of Canwise financial, a mortgage brokerage responsible for over $1B in mortgages about the new rules and how they will affect investors, first time buyers, and people looking to refinance their homes.

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Announcer:	Welcome to the True Condos podcast with Andrew Le Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.
Andrew la Fleur:	Okay, it’s my pleasure to welcome to the show first-time guest James Laird. James is the president a broker of record for CanWise. He’s also the co-funder of RateHub.ca. James, welcome to the show!
James Laird:	Thanks for having me Andrew.
Andrew la Fleur:	Thanks for being here. James I wanted to just start things off, let people get to know you a little bit so why don’t you tell us about yourself and how did you get started in the real estate and mortgage industry?
James Laird:	Yeah, so I’ve been in the real estate and mortgage industry for about 8 years now I guess. I started, kind of funny story actually, watching the Dragon’s Den in 2008. I saw a company called True North Mortgage present their mortgage-brokerage business model which was retail-based store locations where you could walk in and get your mortgage. I cold called the founder of that company and ended up buying into the company. This was before I knew anything about mortgages or real estate, but I thought I could figure it out and I liked the business model. He had one of those store-based locations going in Calgary so I went out for a few months, learned the business, and then moved back to Toronto and opened 3 of these mortgage branch type things in Toronto’s PATH. They’re in the financial core and I also spent a summer in Montreal opening up a location there.
	That was the first 6 years. Around 2009 that brokerage, we started looking at the online space and we’re the first purchasers of online lead from a company called Rate Supermarket. That kind of opened my eyes to the power of the internet and so that’s when I partnered with a friend from business school, Alyssa Furtado, to start Rate Hub in 2010. My brokerage was kind of a customer of our other investment being Rate Hub from 2010-2014. 2014 I sold my stake in True North and launched a new mortgage brokerage which is fully owned and operated by Rate Hub called CanLife Financial, so it’s been around for 2 years. We’ve got offices in Montreal, Toronto, Calgary, and Vancouver, about 30 staff, and we’ll close about a billion dollars of mortgages in 2016. That’s kind of my quick 8 year history within the mortgage space.
Andrew la Fleur:	What do you like best about the mortgage industry? What are you most passionate about when it comes to your business and mortgages?
James Laird:	Yeah, so first of all, I do truly love being in my own business and this industry fosters a lot of entrepreneurship, so I love that part of it. On a more detailed level, I like how mortgages and real estate, they’re vitally important to almost every Canadian, so no matter who you meet or talk to, you’re interested in what’s happening with their mortgage and they’re interested in hearing what you have to say. At the same time, mortgages are a huge financial instrument that causes billions of dollars of revenue and profit for major companies both in Canada and abroad. I love the duality that it matters to each Canadian but it’s also a major financial industry as well. I really enjoy those two parts.
Andrew la Fleur:	What would you say, having been in the business for a while, and just speaking specifically to the people who listen to this show, which is a lot of real estate investors and condo investors specifically … There’s a lot of good mortgage brokers out there, but there’s very few great ones, as in any industry. You’ve obviously risen to the top of your world and you’re certainly known as a great mortgage broker. What do you think separates the great mortgage brokers from the good ones?
James Laird:	I think within the mortgage brokering industry, there’s a tendency sometimes to look at things not through the eyes of the customer but through the eyes of what’s good for me as the mortgage broker or the mortgage brokering industry, and I think that can sometimes lead to not a good customer experience. I think that as technology has changed, as customers are demanding more speed, more efficiency, and quite frankly, better pricing better interest rates, sometimes people in the industry are a little bit slow to react. I think that it’s really important if you want to be a great broker then look at things through the eyes of your customer and deliver what your customers are asking for.
	Make sure you’re aware of how times might have changed. What customers wanted 15 years ago might not be what they want in 2016. I think that’s been kind of a key, the key to building my business has been to just build it in a way that people want to use you. I’m always very clear on my value proposition and I think as long as you’re clear on why should someone choose your brokerage over another brokerage and another bank, if you’re very clear on why and it makes sense to you then it should make sense to at least a percentage of the market available.
Andrew la Fleur:	James, obviously want to get your take today on the new mortgage rules that everybody’s talking about. In this industry, mortgage and real estate, everyone wants to talk about these new mortgage rules that just came out last week. What are the new mortgage rules and how to you think they’re going to affect the market? I know it’s a big question but that’s sort of a starting point. We’ll have a discussion, but that’s basically what we’re trying to answer here today is what are these new mortgage rules and how are they going to affect the market?
James Laird:	Let’s start with what the new mortgage rules are. The easiest one to understand is going forward, customers who put less than 20% down and get a 5 year fixed rate, until recently they were able to qualify for their mortgage at the actual interest rate that they will pay, so for example 2.29, 2.39 are the current 5 year fixed rates. Going forward, that will still be the interest rate that they pay, but you’ll have to qualify at a higher rate set by the Bank of Canada. Today that rate is 4.64 You’ll still pay that lower rate, 2.29, but the amount of mortgage that you can qualify for will be dictate by that higher qualifying rate. That’s reduced affordability by about 20%.
Andrew la Fleur:	Wow, so 20%. It’s reduced affordability by 20%. I guess another way you could look at it is, in a sense, the government, for those buyers that you just described, which is a lot of people, the government in effect just raised prices of all real estate by 20%.
James Laird:	Yeah, that’s another way of looking at it. Certainly [inaudible 00:08:20]
Andrew la Fleur:	What other rules are there? What else is coming into play and are there some things that we don’t know exactly what the rules are yet?
James Laird:	Yeah, so the other major announcements from last week was a tightening of the types of mortgages that are eligible for bulk insurance in Canada. For anyone listening bulk insurance is something that’s used by both bank lenders and non-banks. What it is is they can take a pool of conventional mortgages, so people have put more than 20% down, they can take a pool of these mortgages which the consumer has not paid high ration insurance and get bulk or portfolio insurance on a big pool of mortgages.
	Why this program has been important is because it helps the non-bank lender specifically sell off their pools of mortgages to investors, usually with big balance sheets. What this program has done is bring competitiveness to the large banks. It allows non-bank lenders like First National, like M Cap to offer very competitive rates, often through mortgage brokers to compete with the big banks and make sure that the banks aren’t gouging us too hard on mortgage interest rates. That ultimately has been passed along to the Canadian consumer in the form of more choice and a more competitive mortgage environment, therefore lower mortgage interest rates.
	Going forward there are 4 transaction types which will no longer be eligible for this bulk insurance program. They are rental, mortgages for properties being used for rentals, any refinance, which is a major category. Mortgage with amortizations longer than 25 years and mortgages on homes with a purchase price of higher than a million dollars. It does cover a fairly broad spectrum of the mortgages currently being done, particularly refinances, so those are the rule changes and what will no longer be available for bulk insurance.
Andrew la Fleur:	Right, so we’re getting a bit technical here, James. Obviously we may have lost some people here, but that’s okay, no worries. The people that are still with us are getting a lot of value out of this conversation and it is a very important conversation to have. A lot of people, it’s one of those things that the average consumer’s not thinking about it. Certainly, the average person who’s not an active, either an active real estate investor or somebody looking to buy a home for themselves, it’s just not something people are thinking about, but it is something that will affect a huge, huge percentage of Canadians potentially.
	Basically from my understanding, the way you’re describing it, it sounds like the non-bank lenders, which as you mentioned, the First Nationals, the M Caps, the people who give Canadians mortgages who are not one of the Big 5 banks, those people are, severe restrictions have been put on those entities which is going to make it harder for them to lend money. Is that basically a good summary of that?
James Laird:	Yeah, that’s a fair way of stating it, yup.
Andrew la Fleur:	How is this going to affect the consumer? How is this going to affect the … again, in particular, the people who are listening to this podcast, real estate investors?
James Laird:	Well, like so real estate investors, if you were able to stay with me through that detail, one of the types of mortgages that isn’t available for bulk insurance is rental properties, so we’ve actually seen many of these non-bank lenders actually cancel their rental programs. They may try to re-launch something with higher interest rates eventually, but as of now, they’ve lost their ability to sell off mortgages for rental properties. We all know that whenever there is less competitive pressure, it means prices go up, so ultimately I think it means that there’s less choice for which lender an investor can go with and that the banks will have more of a monopoly on this type of mortgage, rental mortgage. We know banks love their profit, so higher prices, less choice, so ultimately it’s not good for a rental investor.
Andrew la Fleur:	Right, so just to be clear on that, it’s potentially not good in the sense that there may be less choices in the marketplace for the rental investor …
James Laird:	To place their mortgages.
Andrew la Fleur:	Right, they’re still free to go to the Big 5 banks and to the knowledge … Has anything changed? Let’s talk about that? Has anything changed from what you have heard or understand with the way that investors will, if they’re going to a Big 5 bank to get a mortgage, has anything changed there or is that still the same?
James Laird:	Yes. Prices, interest rates will go up there as well. See, the big banks, they have a balance sheet, so they have the ability to loan their own money, but in most cases they were still buying this bulk portfolio insurance anyways because it, I won’t get into details, but they were using this program. They didn’t need to use it but they were still using it to a great degree, so them not being able to securitize these rental mortgages means that funding them is more expensive for the bank, so even those lenders who can still offer this type of mortgages will be charging higher interest rates because it’s not as profitable to do so any more.
Andrew la Fleur:	Are there particular banks of the Big 5 banks, are there from your knowledge, are there certain ones that were using this bulk insurance versus others that we not using it?
James Laird:	No, they were all using it to a very high degree. 70-80% of the loans on the balance sheets would carry bulk insurance.
Andrew la Fleur:	Okay, so they are no longer eligible to purchase this bulk insurance and to bundle up these mortgages and sell them off to other institutions.
James Laird:	Again, we’re getting technical, but once a pool of mortgage has this bulk insurance, it becomes the highest quality of assets available because it’s backed by the government of Canada and our banks actually need to keep a certain percentage of this highest quality asset on their books to meet regulatory requirements. Without the insurance it no longer meets that highest quality of asset test anymore, therefore it’s not as valuable.
	Yes, banks have huge balance sheets, but there’s a limit to those and so they don’t love using up their balance sheet without getting the highest asset class available.
Andrew la Fleur:	Okay, so there’s restrictions, there’s tension, there’s a constricting of the funds available. There’s potentially … explain to us how the cost will rise. Does this mean the banks will have to sort of self-insure so their costs will rise to lend money?
James Laird:	Yeah, that’s a reasonable way of looking at it. Let’s us First National for example, the largest non-bank lender in the country, who, they fund about 10 billion dollars per year. They’re going to have to go back to the companies who were buying their pools of mortgages and say, “I know you used to buy these pools of mortgages with insurance. Will you still but them without insurance, and if so, for what price?” I do believe that some companies will say, “No, we can’t buy this anymore because it’s not a risk-free asset guaranteed by the government of Canada,” but some will say, “Yeah, we’ll still buy them, but it’ll just be at not as good of price, i.e. we need a higher interest rate on this stuff.
	That again will just mean that First National charges a higher interest rate to the consumer so that they can still sell off that portfolio of mortgages now without insurance.
Andrew la Fleur:	Right. Okay, let’s talk about first-time buyers. Obviously at first glance it seems like first-time buyers are maybe the biggest losers out of this whole scheme, at least from my perspective. What’s your … Would you agree with that assessment or what’s your take on that?
James Laird:	Yeah, there definitely hit hard. They’re mostly affected by not this technical bulk insurance stuff we’ve been talking about but more by the tougher qualifying criteria, i.e. the Bank of Canada rate applying to everything. As we were discussing earlier, the affordability drops by about 20%, which is tough.
Andrew la Fleur:	Yeah absolutely. How do you think it’s going to shake out in the market itself? What are the implications in the marketplace of this in your opinion? You’re talking to first-time buyers every day, like you’re telling them one day, “You can afford a million,” and then next week you’ve got to say, “It’s $800,000.” How do you think people will actually respond and what will happen in the market?
James Laird:	Yeah, so I think one of three things will happen to that first-time home buyer who was all set to buy but now they can afford 20% less. I think that they will either:
	1) Remove themselves from the market for a period of time, so i.e. rent a little bit longer while they save up, perhaps a larger down payment so that they can put 20% down and they’re not susceptible to this new qualifying rule, or their income’s increased so that they can qualify for more mortgage.
	2) They will, we are seeing a lot of wealth transfer from the Baby Boomers to the Millennials so they will basically shake down their parents for more money so that they can still get that house that they wanted under the old rule, so just get a large down payment so that they can still get the same amount of house.
	3) They’ll still buy and they’ll just buy less house, so that would probably mean that the person who was thinking they were going to get a semi-detached house, they might be buying a condominium now. That type of thing. I think one of three things will happen and then those are the three.
Andrew la Fleur:	Right. Do you think, again, you’re dealing with buyers from across the country interested to hear your take on, like do you think Toronto and Vancouver will feel this differently from the rest of the country, and if so, how?
James Laird:	Yeah, absolutely. The markets in Toronto and Vancouver are so strong and as you know the supply of housing available to purchase has been low. It’s been less than the demand, so does this have a cooling effect in those hot markets? It absolutely does, but do I think it’s enough to cause a correction or this type of thing? I really don’t. I think certainly cooling effects on Toronto/Vancouver, but not to a degree of a correction. In the smaller markets where prices were pretty flat to begin with, I do think this could cause a downward pressure on prices.
	An example would be Calgary. Calgary’s prices were already down about 5% year over year, so this removes more people from the market. They can qualify for less, which increases the downward pressure on prices, so I do think this is going to push places that were flat or declining already are going to be pushed down even further.
Andrew la Fleur:	Final question about this whole thing in terms of how it’s being implemented. If you’re speaking to the Department of Finance, the Federal Government, what would you say to them? What would be your advice on this policy? Would you say “Good job,” or would you say,” It’s horrible,” or would you say “It’s good, but implement it in a certain way”? What’s your advice? if you were speaking to the government right now what would you say?
James Laird:	Yeah, so I think if I’m speaking to the government I knew that they had to act, I get that. They needed to do something and I think all of us within the industry both within it and investors and all that, we like to see stable appreciation. We don’t want to see booms and busts and that type of thing, so we do appreciate ensuring that we’re not getting into a bubbly type situation. These rules and some of the rules in the past that have sort of tightened things up, many of them I think have been prudent and well thought out.
	The things I’m most concerned with really are a fundamental change to the competitiveness of the lending landscape in Canada. I think that, again, we’re talking about the bulk insurance rule here where it looks like it has fundamentally changed the ability or the non-bank lenders to compete with the banks. I think that’s a detriment to everyone in Canada whether you got your mortgage from a bank or not. If you got your mortgage from a bank, you still are happy that the non-bank lenders are there in the marketplace keeping the banks honest, providing competitive pressure, keeping rates at market levels. If some of these disappear, then our banks which make the most profit per capita than any banking system on earth will be able to make even more money. A tightening of some of the qualifying criteria, reducing amortizations from 30 to 25 years, yeah, these things are not illogical, but a fundamental change that helps the group that’s already fairly monopolistic in our country and hurts the smaller business trying to compete with them I do not think is good policy.
	I don’t think that’s what they had in mind either, so I’m hoping that as they understand the ramifications and how it’s helped one group and hurt the other that they may tweak some things, change some things to make sure that we still have a vibrant mortgage brokering community backed up by banks and non-banks alike to bring choice to Canadians and to keep interest rates low for everyone.
Andrew la Fleur:	Well that’s great. Well said, James. Is there anything else that I didn’t ask you about these new mortgage rules that I should have that we didn’t cover?
James Laird:	At the risk of getting technical, there are still some more changes coming about. We know that they’re looking at increasing the amount of capital that all lenders in the country have to keep when they provide a mortgage loan, so to an investor, to a consumer, all that means is once again, it’s more expensive to do mortgage business in the country, so that puts upward pressure on rates again. That change is still to come. They’re examining it right now, so I expect an announcement with regard to that in the next 2-3 months. There’s lots of change to come and we’re definitely not through talking about how mortgages and how they affect real estate are changing in Canada.
Andrew la Fleur:	That’s great. Well, it’ll be very interesting next couple of months as this all shakes out. James, if people want to get a hold of you or reach you or find you online, what’s the best way for people to do that?
James Laird:	Email is james@canwise.com. You can find me on the website canwise.com. Phone number’s 416-504-3379.
Andrew la Fleur:	Great, okay, thank you very much James. Appreciate your time today and hopefully we’ll have you kn the show again soon.
James Laird:	Thanks very much for having me.
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