Financial Stability and the Mortgage Market: Canada s Policy Framework Allan Crawford, Bank of Canada This paper was presented at Housing, Stability and the Macroeconomy: International Perspectives conference, November 14-15 2013. The conference was sponsored by the Federal Reserve Bank of Dallas, the International Monetary Fund, and the Journal of Money, Credit and Banking. The conference was held at Federal Reserve Bank of Dallas (http://dallasfed.org).
Financial Stability and the Mortgage Market: Canada s Policy Framework Housing, Stability and the Macroeconomy: International Perspectives Conference Dallas, Texas 14 November 2013 A. Crawford Bank of Canada
Outline Canada s experience during the financial crisis Canada s housing finance system Factors contributing to resilience Policy responses (2008-2013) Lessons learned 3
Canada s experience during the financial crisis
Mortgage delinquencies lower than in the U.S. over history and rose much less in 2008-09 Mortgage balances in arrears 90 days or more as a per cent of total mortgage balances outstanding 10 % 9 8 7 6 5 4 3 2 1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Canada United States Sources: U.S Mortgage Bankers Association, regulatory filings of Canadian banks and Bank of Canada Last observation: 2013Q2 5
Canada s housing finance system 6
Regulatory framework About 80% of mortgages are originated by federally-regulated lenders Most other lenders are provincially regulated Risk-weighted capital requirements are supplemented by an unweighted leverage ratio System of early intervention 7
Government guaranteed mortgage insurance Lenders must have insurance for mortgages with LTV ratio 80% - Premium depends on the LTV ratio Three mortgage insurers - Two private (about 25% market share) - One publicly owned: Canada Mortgage and Housing Corporation (CMHC) Provides an important policy lever for controlling risk - Qualifying rules set minimum underwriting standards 8
Other institutional features Mortgage lending is dominated by large nation-wide banks Funding Less reliance on securitization Securitization dominated by insured mortgages (which are subject to qualifying rules) Non-prime mortgages (Alt-A, near-prime and sub-prime) about 7% of outstanding mortgages in 2012 9
Other institutional features Legal framework Recourse for almost all mortgages Non-deductibility of mortgage interest payments 10
Mortgage debt decreases more rapidly with age in Canada Per cent of homeowners with mortgage (2010) % < 35 35-44 45-54 55-64 65 + 100 90 80 70 60 50 40 30 20 10 0 Age Group Canada United States Sources: Survey of Consumer Finances and Canadian Financial Monitor 11
Policy responses (2008-2013) 12
Response to crisis: Bank of Canada lowered policy rate to effective lower bound % 7 6 5 4 3 2 1 2007 2008 2009 2010 2011 2012 2013 Discount 5-year fixed mortgage rate 10-year government bond yield BOC target overnight rate 0 Source: Bank of Canada and ING Direct Last observation: October 2013 13
Low interest rates stimulated domestic demand and led to higher household debt Aggregate debt-to-income ratio % 170 160 150 140 130 120 110 100 90 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 70 Canada United States Sources: Statistics Canada (Canadian household credit market debt to disposable income ratio adjusted for U.S. concepts and definitions) and U.S. Federal Reserve Last observation: 2013Q2 14
Policy actions 1. Tightened qualifying rules for mortgage insurance (2008-2012) to promote long-run stability of housing and mortgage markets Maximum amortization of 25 years, and maximum LTV ratio of 95% for new purchases (reversed changes in 2006) Maximum LTV ratios of 80% for mortgage refinancing and investor purchases Limits on debt-service ratios Minimum credit score 15
New mortgage rules contribute to trend decline of household credit growth Year-over-year percentage change, monthly data % 14 2008 2009 2010 2011 2012 2013 Consumer credit Residential mortgage credit Total household credit Average total household credit growth from 1992 to present Source: Bank of Canada 12 10 8 6 4 2 0 Last observation: August 2013 16
Policy actions (Cont d) 2. Tightened supervisory guidelines for mortgage underwriting 3. Strengthened oversight of public mortgage insurer (CMHC) 4. Public communication of risks related to household debt and the housing market 17
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