THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, November 9, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:29 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone, and welcome to those who are with us in the room and to those joining us remotely. This is a meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
Let me introduce some of our committee members who are with us today: Senator Bellemare, Senator Deacon (Nova Scotia), Senator Gignac, Senator Marshall, Senator Miville-Dechêne, Senator Petten, Senator Ringuette and Senator Galvez.
Today, we are continuing our discussion on housing affordability. My apologies to our guests and our witnesses for the complications yesterday because we had a vote in the Senate and it required us to cancel our meeting. We appreciate all of your cooperation in being with us today.
For our first panel, we have the pleasure of welcoming in person, representing the Canadian Bankers Association, or CBA, Alex Ciappara, Vice President and Head Economist, Financial Stability and Banking Policy; and Aaron Meyer, Advisor, Household Finance and Mortgage Markets. Welcome to you both. We’ll begin with an opening statement from Mr. Ciappara.
Alex Ciappara, Vice President, Head Economist, Financial Stability and Banking Policy, Canadian Bankers Association: Thank you very much. Thank you for inviting the Canadian Bankers Association to appear this morning to participate in the committee’s review of housing affordability in Canada. My name is Alex Ciappara, and I am the head economist at the CBA. I’m joined tody by my colleague Aaron Meyer, Advisor, Household Finance and Mortgage Markets.
The CBA represents more than 60 domestic and foreign banks employing over 280,000 Canadians that help drive Canada’s economic growth and prosperity. We advocate for public policies that contribute to a sound, thriving banking system to ensure Canadians can succeed in their goals.
For most Canadians, purchasing a home is the single-most-important financial decision that they will make, and Canada’s banks are there to help them throughout the process. Our members have provided over 5 million residential mortgages, valued at close to $1.6 trillion, to meet the financial goals of Canada’s growing population. Our members also provide acquisition, development and construction financing to support new housing supply.
In short, our members, by virtue of their financing activities, serve both sides of the housing affordability equation — housing supply and housing demand. We believe that an imbalance between housing supply and demand continues to be the primary factor contributing to housing affordability in Canada.
The Canada Mortgage and Housing Corporation, or CMHC, estimates that Canada needs to build an additional 3.5 million units above current construction trends to restore housing affordability by 2030. As a result of this imbalance, owning a home in Canada has never been more expensive. According to RBC Economics, housing affordability, defined as homeownership costs as a share of household income, recently hit its worst-ever level, with Canadians needing to devote over 60% of their incomes to homeownership.
The only sustainable long-term option for improving affordability is to expand the supply of housing, including rental units. This is easier said than done as government responsibility for the various functions of building homes is spread over different levels of government — municipal, First Nations, provincial and federal. As such, it is critical that there is greater coordination among various levels of government to address Canada’s housing challenges. A permanent discussion forum for relevant stakeholders, including all levels of government responsible for housing, infrastructure, immigration, representatives of the construction industry and advocacy groups, such as the CBA, should be a part of this group.
Of course, not only should there be a discussion forum, but action should also be redoubled to address this critical issue. From the banking industry’s vantage point, there are a number of actions that we believe will contribute to addressing housing affordability. They can be categorized into three buckets — financing, people and construction.
On the financing side, this is the area where the banking industry has the greatest expertise. There are a number of initiatives that, particularly, the federal government can take to help banks provide more financing.
First, review capital requirements set by the Office of the Superintendent of Financial Institutions, or OSFI, on banks in any number of ways to allow the industry to provide financing to address this problem. For instance, for banks with standardized models, they are required to set aside more capital for multi-unit residential property and development construction than for other types of real estate despite the increased structural demand for residential property. Another example is avoiding adding to the domestic stability buffer for domestic systemically important banks, or D-SIBs, which has just been raised at the beginning of this month by 50 basis points to 3.5% of total risk-weighted assets.
Second on the financing side, CMHC plays an important role in the insurance and securitization of multi-unit residential housing, including for rentals. We applaud the federal government’s recent announcement to increase the annual limit for Canada Mortgage Bonds, or CMBs, for multi-unit rental construction by $20 billion, from $40 billion to $60 billion. In order for the market to fully take advantage of this initiative, it is critical that the federal government remove any remaining uncertainty around the CMB program that is the result of consultations earlier this year to wind it up.
The third part around financing is with regard to improving income verification processes with a third party such as the Canada Revenue Agency, or CRA. This would allow banks to reduce mortgage fraud that serves to drive up costs for borrowers.
The second bucket that I like to mention is people. Our members speak to their developer clients on the front lines building homes. The number one priority is the shortage of skilled trades. According to Statistics Canada, there are close to 64,000 vacant construction jobs in Canada, with a job vacancy rate of 5.1% as of August 2023. A long-term strategy of both encouraging Canadians to take up skilled trades as well as attracting immigrants to the country with these skilled trades is critical to speed up the construction of housing units, not to mention the supporting infrastructure.
Lastly, the third bucket is around the construction, in particular, of social housing. According to Scotiabank Economics, Canada’s stock of social housing represents 3.5% of its total housing stock, among the lowest in the Organisation for Economic Co-operation and Development, or OECD. In the near term, we encourage the federal government to accelerate financing assistance, funding, development and construction of social housing to meet the growing needs of Canada’s most vulnerable population.
We believe that if the federal government takes action in these key areas, the banking industry will be able to make a greater contribution to addressing housing affordability.
Thank you very much. We look forward to your questions.
The Chair: Thanks very much for that overview. Just to set the stage here — and I know you mentioned some of the stats we have seen from RBC — if you can confirm these numbers that we are getting from other sources as well.
An estimated 3.4 million Canadians will renegotiate their mortgages over the next 18 months, and almost all will end up paying higher rates for all of the obvious reasons. Does that seem like a number you would agree with?
Mr. Ciappara: Yes, that sounds about right.
The Chair: Okay. So roughly two out of three Canadians?
Mr. Ciappara: Yes.
The Chair: We’ll begin our questioning. I’ll ask everybody to keep their introductions and preambles very brief. We want to get around the room, and our time is limited.
Senator C. Deacon: Thank you, witnesses, for being here.
I’m sure as most economists, you believe in increased competition as being a really important way to make our economy more resilient and productive.
I would like to ask Mr. Meyer about mortgage markets. I’m a really big believer that we have to increase competition in our mortgage markets through providing more digital technologies and more access to all financial institutions, provincially regulated credit unions as well as federally regulated financial institutions, or FRFIs. This is to ensure that we are getting the most competition in terms of the regulated products that are being offered and also the easiest ways to compare between products for individuals. That requires those individuals to have access to their financial information to be able to share with other institutions through open banking regimes and other means.
Are you seeing barriers within your organization in terms of enabling that to occur? Is there agreement or support from your organization to see consumers securely getting better access to their data under a federally regulated open banking regime so that they could actually have an easier job of comparing the best rates for them in their community and the home they are buying?
That question is for Mr. Meyer, being the markets person, or whichever.
Mr. Ciappara: I’ll begin and then Mr. Meyer can help me out.
In terms of competition in the mortgage market space, according to the CMHC, there are about 250 insured lenders that can provide insured mortgages. This includes banks. There are about 40 banks that can provide insured mortgages. Beyond that, there are credit unions or caisses populaires. With caisses populaires, Desjardins is the largest mortgage lender in Quebec. Credit unions are some of the largest mortgage lenders in Western Canada. We have mortgage finance companies, provincially owned financial institutions such as ATB Financial. Then you move beyond the insured space. There are mortgage investment corporations, private lenders — there is a tremendous amount of competition within the mortgage space.
In terms of utilizing technology for the purposes of mortgage lending, I alluded to income verification with the CRA. That can be a technology-based solution to reduce mortgage fraud and thus help with mortgage costs. If we have consent from the taxpayer, we can ask CRA for the income number to put into the mortgage application to improve the process in terms of obtaining a mortgage, to reduce costs and to reduce fraud.
Aaron Meyer, Advisor, Household Finance and Mortgage Markets, Canadian Bankers Association: Thank you for the question, senator. Specifically on open banking, I think the industry has been working with the federal government on input into a federal government consultation on that subject. I believe that report will be published in the near future, and the industry is eager to see the results of that report.
Senator C. Deacon: My question is really about consumers having access to their data, not their financial institution controlling their data, so that they can use that to potentially negotiate a better mortgage situation and do so easily rather than going from institution to institution to do a comparison across institutions using the same information which their bank currently controls.
Mr. Ciappara: I will just reiterate what Mr. Meyer has said. I think what you are alluding to is open banking. We’re supportive of getting the report out, seeing what the report says. We’ve been engaged on that entire process the entire time. We provided our feedback to the government, but the report is with the minister, and we eagerly await that report.
I will say mortgage borrowers are among the most educated. There is a lot of information out there on the internet. Surveys have shown that mortgage borrowers come well-educated, even before they come to their financial institutions to request a mortgage. There is probably no greater financial product than mortgages where customers are educated on this. They educate themselves as well.
Senator C. Deacon: Thank you. My question relates to them having the right to use their data from their financial institution. That’s specifically my question.
Mr. Ciappara: Yes, absolutely.
Senator C. Deacon: Absolutely. Thank you.
Senator Galvez: We have heard from the Bank of Canada and from OSFI. You also said that we need to construct new housing. At the same time, a large population of Canada lives beside the rivers, the Great Lakes and other bodies of water. And we have climate change there. I am reading a lot on the way banks calculate climate risk. Climate risk is disruptive, unpredictable and it is permanent.
The models that banks seem to be using are models dated from the 1990s, which are models that look at data from upstream, but with climate change, we have to look into the future.
Our Canadian banks, which type of models are they using?
Mr. Ciappara: That’s a very good question. We’re actually meeting with CMHC. Some of my colleagues back in Toronto are meeting today with CMHC to talk about models, stress testing and data. Right now, there is an insufficient amount of data. I deal with data at the CBA, and whatever you put in is whatever you put out. Garbage in, garbage out. So you need quality data.
We’re working with the CMHC to ensure that we get quality data to put into our models. It’s something that we’re working on right now.
You had Superintendent Routledge here last week. He was talking about B15 and how it was recently implemented.
We’re working through that right now to understand — now that we have the regulator’s expectations, we’re trying to put that into practice right now, and we need good data in order to do that.
Senator Galvez: Wouldn’t you agree that in the absence of this data and the emergency and urgency of doing something and having an idea — because the results from the old models underestimate the risk — wouldn’t be to choose a micro-prudential, macro-prudential approach to the issue of climate risk?
Mr. Ciappara: I understand my colleagues from the CBA will appear in front of the committee on climate risk — on Bill S-243 specifically — in a couple of weeks.
In terms of broader questions around climate risk, those questions would be better posed to them. I’m prepared to speak about mortgage and housing markets.
The Chair: We’ll do that and keep our focus today on our report.
[Translation]
Senator Bellemare: Welcome, and thank you for being with us today.
We received a brief from Questrade Financial Group, who made some recommendations for our housing crisis report. One of these recommendations is to set up a permanent round table to examine Canada’s mortgage ecosystem.
My question covers multiple aspects.
Mr. Ciappara, you spoke of the need to coordinate the efforts of all players. Do you agree with the creation of a permanent round table on the mortgage ecosystem? It would be a round table where discussions would centre on issues related to labour shortages and the housing crisis, and on ways to provide housing for newcomers, whether they’re temporary residents, like students or workers, or permanent residents.
If you agree with such a recommendation, would you make it your own? Would you add this recommendation? Indeed, there is talk of a broader round table that would bring together all the players.
Who should take the lead in inviting and starting this ongoing conversation about housing in Canada?
[English]
Mr. Ciappara: Thank you, senator. That’s a great question. In fact, we made a recommendation in the House of Commons’ pre-budget consultations around exactly that, the need for a permanent discussion forum with the federal government, provincial governments, municipal governments, First Nations and stakeholder groups such as the construction sector and other interested stakeholder groups such as the CBA.
This discussion forum would be around housing affordability rather than mortgages specifically. As I suggested in my opening remarks, the primary problem is just getting more housing supply on stream. It’s not a mortgage problem, per se. It’s a housing supply problem, which requires more stakeholders than just lenders. We need individuals who are responsible for immigration, infrastructure and financing to be a part of that forum.
In terms of who should start it up, senator, it should be government-led, probably the federal government. They put in place the National Housing Strategy several years ago, so it fits quite nicely into that.
[Translation]
Senator Bellemare: Thank you very much.
Don’t you think that policy regarding high interest rates, and therefore mortgage fees, still has a role to play in housing affordability?
You say it’s not necessary to include the mortgage side in a round table mandate. However, don’t you think high interest rates are linked to the housing crisis and affordability?
[English]
Mr. Ciappara: We had a housing supply problem before high interest rates, and we had a housing supply problem during low interest rates. High interest rates have exacerbated it, but it was there before. Interest rates are an element of that, mortgages are an element of that, but I think the real problem is around the lack of housing supply.
I go back to what the CMHC said. Right now, we have 17 million housing units. We need to get that up to about 22 million, 23 million housing units.
Our steady-state build is about 250,000 housing units a year. We need to build much more than that to get to that 3.5 million by 2030 that CMHC recommends.
[Translation]
Senator Bellemare: Thank you.
Senator Gignac: Welcome, witnesses.
We recently learned that 20% of the mortgages held by three major Canadian chartered banks have negative amortization.
On October 20, the Office of the Superintendent of Financial Institutions released new capital guidelines. These set out capital requirements for mortgage lenders and insurers that better reflect the risks associated with rising mortgage balances.
These changes will require financial institutions to hold more capital to repay mortgages whose payments do not cover the full interest portion.
Could this mean that it will be harder to access credit? What impact will this obligation to hold more capital have on financial institutions? Could this measure lead to restrictions on access to credit?
[English]
Mr. Ciappara: Thank you, senator.
Essentially, with the changes you are alluding to, OSFI has made it more expensive for banks to have mortgages that are negative amortizing. Those are typically variable rate, fixed-payment mortgages. No doubt that it will be more expensive, which could impact the volume and the cost of those mortgages. In a competitive marketplace, like the one I described earlier, all financial institutions, not just banks, will have to weigh that.
Senator Gignac: Just on this conversation on the variable rate, fixed-payment mortgages. When I was younger, that product did not exist. It was a variable loan with variable rate or fixed rate, and that’s it. So that product suddenly comes to the market.
Since some people will have difficulty, particularly first-time buyers, I know the Financial Consumer Agency had a look at that.
So what is the position of Canadian Banking Association for people who go with that product — being the disclosure, the risks or the customer being fully aware two or three years ago when they go with that product — what it could mean if the interest rate goes up by 3% or 4%? How will be the Canadian Bankers Association be flexible and accommodating so that people are not forced to sell their houses?
Mr. Ciappara: Yes, absolutely. There is a lot to unpack there. I’ll try to do that.
First, on the variable rate, fixed-payment product, those products have been around for quite some time, long before the increase in interest rates and the global financial crisis of 2007-08. So they have been around for quite some time.
Frankly, the product differentiation is a product of competition in the marketplace. You have different financial institutions providing different products.
But to the point around helping those consumers that will have to deal with rising interest rates at renewal, my members and banks are proactively reaching out to those individuals to help them out, so they are not waiting until renewal to hear from them. They are proactively reaching out to them and providing them with options in terms of a plan that they can implement to manage the increase in payment. That plan can include a lump-sum payment, increased mortgage payments or going into a fixed-rate mortgage. Those are all on the table.
So banks are very flexible in terms of helping their customers, and they are doing so proactively. No bank wants to own a house, so they would do everything in their power to help their customers out to deal with increases in payments.
In terms of disclosure and education, our members speak to and disclose to members and educate them on the different options for them before they take out a mortgage. Disclosure is critical, and informing them is critical.
I will repeat something I said earlier: Mortgage borrowers come to the conversation really well-prepared. There is a lot of information in the marketplace. So we’re able to have that conversation at a higher level than, say, maybe 10 years ago when information wasn’t as readily available.
I hope I have addressed your question, senator. Please let me know if I have missed anything.
Senator Gignac: I have worked for banks for many years as a chief economist, and I agree that the last option for banks is to have the keys from the clients. It’s not good for the banks or clients. I completely share that sentiment. Nonetheless, I have some concerns regarding that product for the first-time home buyer. Do you see an increase in delinquency rates or default payments with people who have chosen that product in the last few months?
Mr. Ciappara: We track mortgage delinquencies at the CBA. Right now, more than 98% of individuals are current on their mortgage. It’s an extraordinary rate, particularly when you compare us to the performance of the United States, both during the global financial crisis and even now. I was looking at numbers recently, and I think the U.S. has about 10 times the delinquency rate that Canada does. It’s quite extraordinary in terms of the performance of Canadian banks and borrowers.
To your question, our research finds that unemployment is the key driver of mortgage delinquency rates, so as long as the unemployment rate is relatively low and labour markets stay strong, Canadians will continue to manage mortgage payments.
The Chair: On some of the relief measures you were talking about, if you are going to offer a client the ability to move from a variable to a fixed, are you removing penalties?
Mr. Ciappara: I think that’s part of the conversation, yes.
The Chair: The other thing that a lot of people have expressed some concern about is lengthening amortization periods, which is a mug’s game, to put it that way. If you are stretching it out to 30, 40, 50 or 60 years, you will never own your home anyway. Home ownership will have a very different meaning. Are you putting some caps on that in terms of your discussions?
Mr. Ciappara: I think you are alluding to the variable rate, fixed-rate product where if you go over, say, the trigger rate, amortizations will be extended for the remainder of the term of that mortgage. But then at renewal, they go back to the original amortization. That’s just a transient amortization —
The Chair: A financing mechanism?
Mr. Ciappara: Yes. That’s temporary.
In terms of extended amortizations, that’s part of the tool kit for individuals who have really paid down their mortgage and contributed to their principal. That is part of the tool kit, but it’s one of many tools in that tool kit.
Senator Marshall: Thank you for the comments on the variable-rate mortgages, but talk about fixed-rate mortgages. We have seen several reports that have said that next year, if rates stay high, there is going to be a segment of mortgage holders who are going to be hit hard. The next year is going to be harder, and then the year after, 2026, is going to be harder again.
Desjardins released a report on it, and I know RBC Capital did too. You must have the same data that shows that there could be trouble looming in the future. What are you doing with that? I’m interested in the options you are giving people.
More specifically, I have also read in the media that banks have started to increase their allowances for doubtful accounts, but it doesn’t say whether it’s for mortgage holders, business or whatever. So is it being increased because of the mortgage holders? Just bridge all that information together for us.
Mr. Ciappara: Okay, I’ll try to do that.
I’ll take the last question first because it’s the one I remember. Around allowances, mortgages are probably the largest asset class on a bank’s balance sheet, so I wouldn’t be surprised if a fairly large proportion of those credit allowances are for mortgages. I can’t give you exact numbers —
Senator Marshall: That’s what I’m interested in.
Mr. Ciappara: Okay.
Senator Marshall: Are exact numbers available? It’s the numbers that tell the story.
Mr. Ciappara: I would have to go back and see. I don’t have the —
Senator Marshall: If you can provide follow-up information, that would be good. Please keep going; sorry for interrupting.
Mr. Ciappara: Your question was around fixed-rate mortgages and at renewal. I’ll say a couple things about that.
When individuals take out a mortgage, whether it’s a variable-rate mortgage or fixed-rate mortgage, banks are required to apply the stress test, also known as the MQR, the mortgage qualifying rate, so they tested them at higher interest rates. I suspect that the interest rates are higher than what they were tested at, but at least there’s a buffer there, so that’s one positive thing.
In addition to that, as I mentioned earlier, banks are proactively reaching out to their customers before renewal to see if they need any assistance, and there are a number of tools in that tool kit, whether that’s lump sum payments, increased payments, moving to a fixed payment for variable-rate mortgages or extending the amortization. There are a number of tools that they can use.
What was your third question?
Senator Marshall: I’m interested in whether you can quantify the impact it will have on your mortgage holders, assuming that the rates don’t go down? Everybody is talking about the rates going down, and I’m not convinced that will happen. Have you measured what impact it will have on your mortgage holders next year, the year after and the year after that? I’m interested in the numbers because the numbers tell the story. Have you quantified that?
Mr. Ciappara: I myself have not quantified that, but I’m sure we have bank analysts who look at that. One thing about being a bank is you have individuals looking at your financials all the time.
Senator Marshall: That’s what I’m interested in.
Mr. Ciappara: Whether it’s providers of debt, deposits, capital, you have regulators looking at that. I don’t have the exact numbers in front of me.
Senator Marshall: If you have something that you can provide to us, that would be helpful. I’m interested in the fixed-rate mortgages, thank you.
The Chair: We’re preparing our notes right now, and we have a very limited period of time, so if you can do that quickly that would be really helpful.
Senator Marshall: That would be appreciated. Second round, please.
The Chair: Thank you, Senator Marshall.
[Translation]
Senator Miville-Dechêne: I’m going to follow up on a question you touched on earlier.
In the largest banks, many loans extend over a 30-year period. According to Jean Sasseville, a lecturer in actuarial science at UQAM, the federal government should introduce rules to simplify the extension of the amortization period. Obviously, an extension would reduce mortgage payment arrears, especially for first-time buyers.
Is this an option you feel is necessary at this point, considering that there are mortgages that last 40 or 50 years in Europe?
[English]
Mr. Ciappara: Like I said, in terms of those extended amortizations, as a result of variable rate, fixed-payment mortgages, interest rates on those mortgages are reaching the trigger rate. For a period of time, up until the end of the term and until renewal, the amortization periods will be longer, but then they go back to the original amortization period. That happens automatically.
In terms of extending amortizations as a tool, it’s important to remember that there are a number of individuals who have paid down their mortgage, contributed to the principal, but because of the interest rate increases might need a little bit more flexibility. That is a tool that banks already have and are already applying, depending on the circumstance that the individual is in, particularly if they’ve already paid down their principal on their mortgage.
Senator Miville-Dechêne: So it’s a case-by-case situation.
Mr. Ciappara: Absolutely.
Senator Miville-Dechêne: Do you have any idea at this moment, considering the economic situation, if it’s done often or not? Is there a percentage of customers extending their amortization?
Mr. Ciappara: We don’t track that at the CBA. I’m sure members do, but we don’t track that. It’s a tool among many that banks have, but I don’t have percentages for you.
[Translation]
Senator Miville-Dechêne: All right. Thank you.
[English]
The Chair: We may try and get that from some of your members because the concern that has been expressed to me is they didn’t want that tool to be stretched out to too long or too high a number because there is no home ownership in the face of that.
Senator Ringuette: First of all, it’s good news that you’re telling us that 98% of Canadian homeowners are meeting their mortgage payments. That is good news because we’ve been hearing some horror stories that are probably only part of that 2%.
I’ll throw you a wrench here. Notwithstanding the supply issue of housing, you’re part of the capital way of thinking regarding housing. You have to abide by OSFI rules, and then you have to deal with CMHC in regards to insurance and so on.
For the last century, perhaps, we’ve been looking at housing too restrictively. We need housing during our entire lifetime. We try to find an individual house away from our family from around the age of 20 up to 80, given the life expectancy of Canadians. If you purchase housing, you are able to acquire an asset and will have capital for the duration of your life. Otherwise, you are paying for housing, possibly not much of a price difference, to a numbered corporation.
The Chair: Senator Ringuette, you’ve used half your time here, so can we get to a question?
Senator Ringuette: Yes, I will, Madam Chair. Thank you. How much outside-of-the-box thinking about the housing issue and housing payments, whether it’s a mortgage or a rental, have you done? How much study have you done in regard to this issue; and if you have not done so, could you do so?
Mr. Ciappara: Thank you very much, senator. We work within the parameters that Parliament sets for us. They set out the public policies and have set out a system that relies on mortgages as a source of funding. It relies on capital as a source of building housing supply, and so that’s the paradigm that we work in, right?
Senator Ringuette: Yes.
Mr. Ciappara: I think it’s incumbent on the parliament and committees such as this, if they want a different paradigm, to figure out what that paradigm is.
Senator Ringuette: Yes, at least look at it.
Mr. Ciappara: Yes, but we work within the public policy construct that Parliament provides to us.
Senator Ringuette: Second round, I guess, Madam Chair.
Senator Petten: I’d like to talk to you about supply and demand, the current crises in the lack of housing supply. Some of it is we’re behind, and some is due to the immigration policy that you mentioned. When we fill that supply, developers have empty units, people have houses built with basement apartments — we’ve done all of the things — and now people can’t repay their loans. Do you have measures in place to deal with a correction? Do you plan for that now?
Because I’m just thinking, as we’re here in this committee, we’ll be talking about this, maybe, in a couple of years in a different position.
Mr. Ciappara: That might suggest that we’ve built three and a half million units and filled the housing supply gap, so we might be in a good place if that happens, right? That would suggest that we may have overcorrected for the solution. Frankly, I don’t think we’re in that place right now.
To your question about whether our members manage for downside risks, absolutely. That’s what banks do. I mean, that’s their bread and butter in terms of risk management. They manage, account for and stress test for all sorts of risks: higher interest rates, lower interest rates, increase in unemployment, decrease in unemployment — all sorts of things. They plan for all sorts of scenarios. So the short answer is yes, they do.
The Chair: I have a question on the projections you’ve raised. Do you think there’s hope? Given all the things that you’ve suggested — labour shortages, interest rates, immigration, all the pressures — there’s this goal of X new homes by 2030. Is there any chance of getting there?
Mr. Ciappara: If governments can get together and manage and coordinate — I mean, there’s a possibility. I’m optimistic by trade, so I’m hopeful. However, we need to see some action, right?
The Chair: We’ll go to our second round now.
Senator C. Deacon: Thank you, witnesses.
I want to keep building on Senator Gignac’s questioning about the fixed payment, variable-rate mortgages. According to many sources, they were 80% of the mortgages issued during the 2020 to 2022 period, and it’s a new product. The Superintendent of Financial Institutions indicated that he doesn’t have control over products. He has control over how to make banks make sure they’re properly financed.
You say that consumers come really well-informed. That almost says it’s their job to understand. I think the question is whether or not they really truly understood what they were getting themselves into. I think OSFI and the Bank of Canada asked the banks to spend some time working through some of those challenges because you know what the problems are going to be. You can tell right now when their mortgage is coming due and what is going to happen to their rate. You know that now and well in advance, so you don’t have to wait for that to happen. I’m hoping that is happening at the financial institutions.
The other thing is, again, around competition. Back in 2008 when interest rates were 3.5% to 5%, the spread between the bank rate and the prime rate was 170 basis points. Now it’s a spread of 220 basis points. That rose because interest rates dropped so much. But the lack of competition has caused the banks to have another 50 basis points between what they borrow the money for and their prime rate — let alone what they end up lending to people — than was the case 15 years ago.
That indicates to me very factually that the competitive pressure isn’t there. The Governor of the Bank of Canada has said that competition is what really helps on the downward side of inflation. It helps to put pressure on prices to make sure people are reducing prices because they have a competitive pressure to do so. The competitive pressure on the banks to reduce their prime rates to where they were relative to the bank rate 15 years ago isn’t there.
So I go back to open banking — a report being issued or being implemented. We’ve got to get more pressure to make sure consumers are being properly treated, properly informed and are getting the most competitive rate.
The Chair: We’re just going to get a response to that.
Senator C. Deacon: I would like your thoughts on why that expanded bank rate to prime rate spread continues.
Mr. Ciappara: On the point about consumers coming prepared, I’m certainly not suggesting that the banks are abdicating their responsibility to educate them. All I’m saying is that we’re finding that with the advent of the internet, customers are coming well-prepared. Therefore, we can have a higher level of conversation between the banks and the customers. We’re probably able to have a more sophisticated conversation as a result of the information on the internet.
In terms of the competition in the mortgage market, like I said, there are 250 authorized mortgage lenders within this country, and only 40 of them are our members. So our members compete against each other, and they compete against caisses populaires, credit unions, provincially owned financial institutions and mortgage finance corporations, or MFCs. There’s a tremendous amount of competition.
Senator C. Deacon: Why is that spread not reducing?
Mr. Ciappara: I think you’re talking about the prime rate, and the prime rate is attached to the Bank of Canada. When the Bank of Canada raises its bank rate, prime rates will go up, and when the Bank of Canada lowers —
Senator C. Deacon: Banks choose their prime rate.
Mr. Ciappara: It goes up and down as the Bank of Canada raises and lowers rates.
Senator C. Deacon: But it’s up. Relatively speaking, it’s half a per cent higher than it was in 2008.
Mr. Ciappara: I’d have to go back and look at that. I’m not certain of that.
Senator C. Deacon: Thank you.
[Translation]
Senator Bellemare: I have a question about cooperative housing.
Is it fair to say that banks are investing more in housing cooperatives? Right now, Mouvement Desjardins and the caisses populaires are doing it, but why shouldn’t the banks do it too?
[English]
Mr. Ciappara: About a decade ago, the federal government put in place legislation to allow credit unions to operate across the country. I think you’re suggesting that credit unions and caisses populaires are co-op financial institutions. Under current legislation, you can have a credit union operate right across the country rather than what existed before, which was that they were operating within one province. Federal credit unions are even our members, so they’re part of the solution.
In terms of lending to co-ops, co-ops are typically part of an affordable housing solution, and we’re part of that process as well. There are solutions that the CMHC, provides, like the Mortgage Loan Insurance, or MLI, Select program, that allow banks to provide concessionary and favourable rates, terms and conditions with the help of CMHC.
Co-ops are part of the solution. They’re not the silver bullet. There are a lot of different variables when it comes to building homes in this country. However, co-ops are definitely part of the solution.
Senator Bellemare: And banks could —
Mr. Ciappara: Yes.
Senator Galvez: With respect to housing, the banking mortgage service is intrinsically related to the home insurance service — more so in Canada because compared to other jurisdictions, we are overinsured here in Canada.
Given that the insurance industry is living a very strong crisis — as we can see in the United States. You know, they are leaving some states — and we are seeing some of this in some hot places in Canada, my question is this: Do you negotiate deals, agreements or discuss with the insurance sector? What is the outcome of that exchange, if it’s happening?
Mr. Ciappara: We pay attention to what the insurance sector is doing with respect to their insurance products because many of our borrowers have insurance products, right? So we need to pay attention to what those terms and conditions are and what the coverage is. Therefore, we certainly pay attention. I think the insurance industry in this country has done very good work in terms of the climate risk area. They insure homes in these cases.
Senator Galvez: Let me just give you one example. In Quebec today, if your house is flooded, you claim your insurance and you restore the same thing in the same place, even though you are in the flood plain. How do you react to that?
Mr. Ciappara: That’s probably a question best left for the insurance industry and CMHC rather than ourselves. We pay attention to what the insurance industry is doing. I think they’re thinking about these things. However, I’m not sure if any action has been taken. At least, I’m not familiar with it.
Senator Galvez: Thank you.
Senator Marshall: I want to go back to Senator Deacon’s question about that half-a-percentage spread.
A couple of years ago — I think it was the budget before last — the government in its budget levied three additional taxes on financial institutions, including banks. You’re in the business to make money and make a profit. I would think those tax increases would be passed on — at least some of it would be passed on to the consumer.
Is that half-a-percentage spread in some way related to all of these additional taxes that have been imposed by the federal government? Those taxes are fairly significant. We’re talking about billions of dollars. Can you just relate those two?
That wasn’t my follow-up question, but it sparked it. Thank you, Senator Deacon. Is it related to those increased taxes?
Mr. Ciappara: First, I would have to look at the premise of the question to see whether that 50-basis point spread that the senator is speaking about is correct. In terms of the taxes particularly — you’re referring to the large financial institution tax and the Canada Recovery Dividend, or CRD — it ultimately reduces the amount of capital that banks have on their balance sheet, so it reduces the volume and the ability of banks to provide capital to their customers for mortgage lending and other types of lending. It certainly doesn’t help on the volume side and likely on the price side.
Senator Marshall: Were you consulted about those tax increases? Those tax increases have always been a sore point with me. Not that I want to have a lot of sympathy for the banks, but it seemed unfair to the banks. Is that something that you were consulted on or you just saw it when the budget was released?
Mr. Ciappara: Not before they were announced, no.
Senator Marshall: I will ask a very pointed question. There are pages and pages of housing programs that are put in place by the federal government, but it seems that the problem with housing is that the government puts in a solution to a problem and then it just creates another problem, then they put in another solution, so you’re getting Band-Aid on Band-Aid on Band-Aid.
Is there any merit in going back and looking at all those programs because there is no evaluation done of the programs, and I don’t even think the government — or us — have a good handle on what the outcomes of all those programs are. It is probably a question for the minister, but I would be interested in hearing if you have any views on it.
Mr. Ciappara: It probably is a question for the minister and maybe even the Auditor General. I believe they did a review of some of these programs a year or two ago, but, generally, the objective is a good objective, and that’s increasing housing supply into this country.
We were very supportive, as I said in my opening remarks, of the increase in the CMB program, and that’s an example where the government reviewed the CMB program and probably saw it necessary to increase it. There was a review function in there that led to the federal government increasing the annual limit to CMBs from $40 billion to $60 billion, with most of that going to multi-unit rental properties. So we view that as a good thing.
There’s an opportunity to improve something like that. Earlier this year, Finance Canada put out a consultation on whether the CMB program should be wound down, and that’s led to some uncertainty when it comes to the CMB program.
Now, we were supportive of the increase, but there’s still some uncertainty around it. The government has not been clear around what their plans are for the future with the CMB. We need to remove the uncertainty on that and see the government make a stronger commitment to the CMB program. When you talk about review, you could review the CMB program, and in order to make it better, just remove any uncertainty when it comes to the CMB program.
The Chair: That’s good advice. We’re going to put that question to the minister when he joins us.
Senator Ringuette: I want to go back to my question, combined with the question from Senator Bellemare, her first question, in regards to this housing council that would include yourselves, OSFI, CMHC and different levels of government and so forth to see how we can think outside of the box for the future generations of Canadians.
I truly believe that even though recently the housing prices have gone down, we’re still faced with the situation that people have to have housing. Either they pay housing to someone else’s building up of capital or, on a longer term, they’re able to pay their own housing and gain capital. At the end of the day, more Canadians having more assets is going to be tremendously favourable for the Canadian economy.
Maybe Senator Bellemare’s suggestion is the place to start, and you could also get that ball rolling, that new frame of mind in regards to this issue?
Mr. Ciappara: I’ve often said that banks are a reflection of the economy that they serve, and part of the economy that they serve and the spokespeople for the economy that they serve is the Parliament of Canada. So it’s really up to the Parliament of Canada. What you’re referring to is maybe the financialization of housing. If that paradigm needs to change, that direction needs to come from the Bank of Canada rather than individual stakeholders.
Senator Ringuette: Okay. You could voice that in many people’s ears, this situation and this proposal, though?
Mr. Ciappara: Again, we need to see direction from the Parliament of Canada. They often put out consultations, and we often respond to them, but it would be helpful for us to have a clear sense in terms of the background, what led them to this consultation and specific questions. Right now, it’s hard for me to provide a response in the abstract. We need a bit more information around that.
Senator Ringuette: By talking to one of your representatives a few years ago, I know that you have extensive financial research capability at the Canadian Bankers Association. Could you start research on that to see the financial implication?
Mr. Ciappara: I think what you’re referring to, if I understand it correctly, is helping borrowers and homeowners out with respect to making homes affordable and part of their financial plan. Right now, homes are the largest part of an individual’s net worth, so it’s part of that right now.
Unless I know what the particular proposal is and the background on that, it’s hard for me to illuminate on that.
Senator Ringuette: I will sit down with you later.
The Chair: Thank you.
Senator Gignac: I want to go back to that topic of variable rate, fixed-payment mortgages. Last week, the OSFI chief mentioned here publicly that this product was dangerous, and employees at the banks — most of them — have recommended during the pandemic their clients go with variable rates because it was 1% lower than fixed, and no central banks saw interest rates going up, inflation and so on, and you could have a fixed payment.
There are some fees when you want to renegotiate. You will be screwed because you have signed for a 25-year amortization. No way you are able to have a jump in the payment. So, usually, you have fees to change the contract. Is your association ready to recommend to your members to have a moratorium on the fees? Clients have no ability to change banks because the B-20 rule applies and they will not be eligible with another bank.
The Bank of Canada provided a lot of liquidity to the banks during the pandemic. The Government of Canada has done its best to avoid a depression. So I think you have some responsibility on your members to accommodate your clients, at least not charge any fees.
You can provide a written answer, if you want.
Some Hon. Senators: Hear, hear.
Mr. Ciappara: Thank you. First about variable rate, fixed-payment mortgages, I think you saw a number of borrowers go into variable-rate mortgages because the economic incentives were there. Because of the structure of the MQR, an individual would qualify more for a variable-rate mortgage than a fixed-rate mortgage. That’s the structure of the minimum qualifying rate, or MQR, which is reviewed once a year by OSFI. Our recommendation, we believe the MQR is something we are supportive of and something that works, but there is an opportunity to improve it. That improvement is a —
Senator Gignac: I will interrupt you. It was on the incentive of the banks and their employees to suggest variable-rate mortgages to customers, otherwise they would not qualify. Quite frankly, I think the burden is more on the banks than on OSFI. Do you understand what I mean? It was the banks that influenced choosing variable-rate mortgages, otherwise customers would not qualify for the loan. That’s basically what you mentioned.
Mr. Ciappara: There was an incentive for individuals to take out variable-rate mortgages, senator. Like I said, when providing their customers with mortgages, bank employees educate them and provide the proper disclosures. They sit down and talk about the costs and benefits. There is information on their websites about the various mortgage products, so they are able to have that discussion. Ultimately, it’s the decision of the borrower to decide which product they want.
Historically, variable-rate mortgages have been quite beneficial for individuals. In fact, they typically came out ahead. They were able to pay more of their principal off rather than less as a result of variable-rate mortgages.
What I’m saying is during the pandemic, the application of the MQR favoured variable-rate mortgages versus fixed-rate mortgages. That’s because of the structure of the MQR, not because of anything that the banks were doing. All I’m saying is that if you want to improve the MQR, have the review happen more regularly than annually. That delta between the fixed rate and the variable rate products for mortgages was around for quite some time.
Senator Gignac: Let me interrupt you. Is it true or not that the B-20 rule applies? People have no negotiation power with the banks if they want to change conditions because the B-20 rule applies if you change banks.
Is it true that the B-20 rule applies to the first-time home buyer who wants to change conditions but has no significant bargaining power with the bank? The other bank will refuse. They will not qualify with the current interest rate.
Are you ready to recommend to your members to have a moratorium for at least the next two years regarding fees related to extending amortization to accommodate your clients?
Mr. Ciappara: Actually, for insured mortgages — the mortgages that first-time home buyers typically use because of the low loan-to-value, or LTV, and low down payment required — there is no requirement to apply an MQR when switching mortgages.
Senator Gignac: But it’s a maximum 25 years for insured mortgages, as you know. The CMHC does not allow more than a 25-year amortization on an insured mortgage. Currently, two thirds of variable rate, fixed-payment mortgages are more than a 30-year amortization. If they will be forced to go back to 25 years, forget it. They will have to give their keys back.
Mr. Ciappara: Like I said, banks are proactively reaching out to their customers and helping their borrowers out, and there are lots of ways they do that.
Senator Gignac: My question is about fees. Are you ready to recommend to the banks to charge no fees to accommodate their clients? If they are put back to their original, they will not be able to meet their obligations. If they change conditions, they usually have fees associated with that as well.
Mr. Ciappara: Like I said, banks withstand and are aligned with Financial Consumer Agency of Canada requirements, so they provide disclosure around fees, and they are very transparent in terms of what those fees are. In terms of moving into a fixed-rate mortgage, typically there are no fees attached to that.
The Chair: Let’s try the question this way. You are the Canadian Bankers Association. Do you ever give your members advice and say, “It might be a good idea to have a moratorium for the next two years and reduce fees,” or are you a product of what they tell you their collective position is?
Mr. Ciappara: As an organization, we do not tell our members what to do. In fact, the Competition Bureau prevents us from getting together and talking about fees or negotiating around fees. We’re simply not in the position to do that. We can’t. It’s against competition rules.
The Chair: I want to ask another point, then, which might also be a conflict of interest in the whole industry.
You have said that mortgages are obviously the largest share on your asset sheet and most of your member organizations. We have taken and heard a lot of testimony over the last couple of weeks from people saying, look, we need to change the mindset; we need to encourage, particularly the younger generation, to think about rental because homeownership is going to be elusive for an awful a lot of people for the near and perhaps longer term.
What does that do to your organization when you are thinking about this and you have one group of people saying, look, we have to break down the idea that everybody is going to have a single-family home and a white picket fence versus accommodation and housing affordability, which may come in very different shapes and sizes?
Mr. Ciappara: In my opening remarks, I talked about how banks were on both sides of the housing affordability equation, both housing supply and housing demand.
I think what you are alluding to, senator, on the housing demand side, if individuals are renting more, there will be less demand for residential mortgages. On the housing supply side, banks will provide financing on the housing supply to build more rental units.
I go back to the Canada Mortgage Bonds program, which enables banks and other financial institutions to leverage the government’s balance sheet to provide financing for multi-unit rental properties. We’re willing participants in the financing equation for housing supply, particularly rentals, as well as residential.
The Chair: So there’s no disincentive for you in that sense. Right. Okay.
I think we have concluded our testimony today. Thank you very much. Again, my apologies about how things got changed around because of our work in the Senate yesterday.
Alex Ciappara, Vice President and Head Economist with the Canadian Bankers Association and Aaron Meyer, Advisor of Household Finance and Mortgage Markets, thank you both.
For our second panel today, we have the pleasure of welcoming virtually Michael Hatch, Vice President, Government Relations, Canadian Credit Union Association. Again, our thanks to you for readjusting schedules to be here. Yesterday, before our meeting was cancelled, we were also to hear from Launi Skinner, CEO of First West Credit Union. She was not able to appear, so she’ll be submitting her paper for our consideration, and again, our apologies. Mr. Hatch, welcome. Please go ahead with your opening comments.
Michael Hatch, Vice President, Government Relations, Canadian Credit Union Association: Thank you so much, Madam Chair and senators. Thank you for the invite to speak today.
Canada’s credit unions and caisse populaires manage approximately $564 billion worth of assets and serve close to 11 million Canadians. With over 2,100 locations, we are the only financial institution with the physical presence in nearly 400 communities across the country. Credit unions and regional centres employ more than 30,000 Canadians and provide full-service banking and financial services to millions of Canadians while being fully Canadian owned.
As we all know, affordable housing is a major issue in Canada due to a growing population, increased demand, persistent inflation, supply challenges and increasing rent and mortgage costs. This has led to a nationwide crisis in affordable housing. According to CMHC, we need about 3.5 million additional housing units between now and 2030 to restore affordability to the marketplace. It’s important that everyone works together to address this major national issue.
Credit unions across Canada are taking significant steps to ensure their members have access to affordable housing and financial stability, especially during these challenging economic times. We offer competitive rates on variable and fixed mortgages, repayment flexibility and innovative strategies to make it easier for residents to become homeowners. By so doing, we are playing a crucial role in creating pathways to homeownership for Canadians who aspire to enter the housing market.
Furthermore, we’re collaborating with Indigenous communities to build environmentally sustainable homes that are budget-friendly. We also partner with organizations like the Co-operative Housing Federation of Canada and CMHC as well as other non-profits to make housing more accessible.
Credit unions have also introduced innovative programs like rent-to-own, family and friends mortgages, affordable housing, guaranteed investment certificates and others to provide affordable housing options for Canadians. A few concrete examples across the country: Vancity credit union has supported the need for affordable rental and owner-occupied housing in British Columbia. They have done so through the Vancity Affordable Housing Accelerator Program & Fund, a program designed to support the development of affordable housing projects across the province. Since that fund’s launch in 2011, it’s been able to allocate over $30 million towards affordable housing development in B.C.
In Manitoba, Assiniboine Credit Union’s Community Financial Centre collaborated with Kinew Housing, one of their members, which is a non-profit corporation led by Indigenous people. They aim to provide affordable housing for Indigenous residents of the city. They recognized the challenges institutions face in accessing capital to provide subsidized housing for residents. Therefore, their partnership with Kinew Housing has enabled them to offer subsidized housing to over 400 low-income Indigenous families in their community, which has helped the families live comfortably and work towards achieving financial stability in order to eventually purchase their own home.
FirstOntario Credit Union partnered with Bethlehem Housing and Support Services and Pen Terra Group Limited to develop affordable housing in the St. Catharines-Niagara community. Thanks to this partnership, more than 120 families in that part of the province have secured a safe and affordable place to call home.
More generally, one of the most important roles that we can play as credit unions in helping to ease the severity of the housing crisis is providing some of the only competition that exists to the large banks for mortgages and other financing.
As federal policy-makers, senators on this committee have a key role to play to ensure a regulatory and legislative environment that fosters the competition that the Canadian financial services sector so desperately needs. Far too often, policy coming out of Ottawa towards our sector takes into account the needs, scale and structure of the large banks, which are obviously a key pillar of our financial services sector, as we all know, but not the only players. This has led to very negative impacts on the credit union sector over the years.
By working towards a federal legislative regime that allows credit unions to grow and thrive, we can do more than our part to help ease the current housing crisis in the years to come.
I’ll wrap up my opening statement. I look forward to questions from the committee. Thank you, Madam Chair.
The Chair: Thank you very much, Mr. Hatch. It’s a good and different perspective. It’s why we invited you here.
Could we just start with a few comparatives on the number? We know Canadians are very diligent about paying their mortgages. We just heard from the CBA that 98% of mortgages are in good shape, but we also have other data that says two out of three mortgage holders may well be underwater in the next couple of years if interest rates continue to rise. What are the numbers like in the credit union system versus the banking system?
Mr. Hatch: I’m not sure where that two out of three number came from. That strikes me as rather high. The credit unions are in constant contact with their own members, i.e., their customers, the people and firms to whom they lend money. I don’t have the exact numbers right now, senator, but we do enjoy the lowest default rate across the entire mortgage sector in Canada. Arrears are well under 1%, so 99 plus per cent in good standing compared to the large banks, who also have a very low rate of mortgage arrears, of course. We have always enjoyed a higher repayment rate and a lower level of arrears and default in the credit union sector. That is due to many factors: the closeness of our members to their members; the fact that they are community-based; the local knowledge and the specific knowledge of their members that often comes with that. It’s something that differentiates us in the marketplace and also allows us to enjoy a lower default rate on mortgage lending than other institutions.
The Chair: Thank you. I’m not sure if you were listening earlier, but you can expect some questions maybe from Senator Gignac on relief measures and how the credit union is approaching that issue.
Senator C. Deacon: Thank you for being with us, Mr. Hatch. We just heard that we already are in a perfect state of competition in the banking sector from the Canadian Bankers Association. I will ask the same question I asked them.
As we move into a digital era and consumers would like to have greater control, and in virtually every other G7 country and developed nation, they have control over their data and ability to port their data from one organization to another and choose who uses it for what reasons.
In that changing world, do you see currently the credit unions in Canada being in a position — where there is a fair level of competition — that you are able to compete? Right now, your customers can’t port their data, and so your ability to offer different products is somewhat limited. Please provide me some insight into your perspective on competition in the banking sector right now.
Mr. Hatch: Thank you, senator. With respect to my counterparts at the Canadian Bankers Association, we work together on a lot of issues and projects. I wouldn’t say that we’re in a state of perfect competition in financial services in Canada. Obviously, the large, financially regulated institutions are hugely important pillars of our economy. They are not going anywhere, and they do a great job servicing and providing services to millions and millions of Canadian consumers.
But that’s not the same as saying that we have a robust level of competition for financial services in Canada. There are hundreds of institutions, but the reality is that the market is dominated by a relatively small number of those hundreds of institutions.
As credit unions, depending on what type of lending or what type of business line you are talking about, we represent anywhere from 15 to 20% of the market in Canada, which is significant. Obviously, we wish it was higher.
As I mentioned in my opening remarks, we are provincially regulated, but as federal policy-makers that all you senators, of course, are, my request of you today and in the future is to continue to take into account provincially regulated credit unions when you are designing policy at the federal level because even though a lot of federal policy doesn’t necessarily apply directly to all credit unions — though much of it does — eventually, a lot of that policy trickles down through the provinces and impacts us directly or indirectly.
Competition should be the principle that underscores all policy that comes out of Ottawa so that ultimately we can play our part in solving not just the housing crisis but the cost-of-living and affordability crisis that exists in the country as well.
Senator C. Deacon: As we move towards a more data-driven economy, what concerns do you see being top of mind to make sure that credit unions get a fair kick at the can to compete and are not excluded as in many cases they are now?
Mr. Hatch: Yes, that’s a great question, senator. It just requires a little bit more awareness at the federal level of the reality of the sector, of the unique needs of credit unions versus federally regulated or shareholder-owned, profit-driven financial institutions and to tailor policy to cooperatively owned financial institutions.
One relatively recent example that we saw that was the opposite of that out of Ottawa was early in the pandemic — many years ago now, early in 2020 — when the federal government rolled out the Canada Emergency Business Account, or CEBA, small business loan program. Of course, it was a hugely important pillar of the federal government’s early COVID response, and ended up being extremely successful and helped thousands of businesses get through the worst days of the pandemic. Originally that was only rolled out through the large federally regulated banks. So if you were a business that wanted to access that free money and you were a credit union member, you would go to your credit union and early on they would say, well, sorry, this free money is only available at RBC across the street, which, of course, as you can appreciate, was a huge problem for us at the time.
Ultimately, the federal government solved that and provided CEBA through all financial institutions. But it was a recent high-profile example of this myopia that exists in Ottawa sometimes with regard to the financial sector being five institutions only. It’s just not the case.
Senator C. Deacon: It’s an important data point, not just an example. Thank you.
The Chair: Thank you for that. As someone who grew up in Saskatchewan, we actually used the credit union. Banks were the outliers, not the credit unions, but it’s a really valuable point you make.
[Translation]
Senator Bellemare: Welcome to the committee, Mr. Hatch.
I have a certain fondness for housing cooperatives. Having visited a few in Canada and the Scandinavian countries, I find them an extraordinary formula for families and the elderly.
I have two questions for you. First, why doesn’t Canada spontaneously think of cooperatives to house people? I have children, I have friends, and no one ever thinks of a housing cooperative to find a place to live, whereas elsewhere it’s often more instinctive or spontaneous to do so.
You mentioned that there were legislative barriers around this formula. Could you clearly identify what the federal and provincial legislative barriers are, if you know them, to give us a better understanding?
Also, how could we make this formula more attractive than private ownership? Of course, the latter is an asset and an opportunity for financial leverage; that’s understandable. Why doesn’t it seem as attractive to the young and old as it does elsewhere?
[English]
Mr. Hatch: Thank you so much, senator.
I can’t speak for my colleagues at the Co-operative Housing Federation, but I would urge senators to invite that group, I know them well. Cooperative housing, of course, is a key component of the housing ecosystem in Canada, though perhaps not as popular as its advocates would like to see. Even in our world, cooperative financial institutions, there is a wide range of realities across Canada. The chair mentioned Saskatchewan, of course, where the cooperative history and spirit — if I can put it in such terms — has deeper roots in the Prairies than in other parts of the country, it has more history. It’s more a part of the culture to bank with cooperatively owned financial institutions. In Saskatchewan, for instance, we have close to 50% market share whereas not that far away in Ontario, it’s more like 10 or 12%. My first observation would be that there is a wide variety of cultures, histories and realities in different parts of Canada with regard to the presence of cooperatively owned structures.
Your specific question on the legislative barriers that exist, I would urge and invite the senators — and I would be happy to share it with the committee once it is complete in a couple of weeks — we’re making a detailed submission to the federal government — to the Department of Finance — as part of their recently launched consultation on the five yearly review of the federal Bank Act, which, as senators will know, sunsets every five years, although it’s been more like every seven years for the last couple of rounds. We had a lengthy list of specific, detailed policy recommendations around things like governance requirements for federal credit unions, merger regulations, the challenges associated with federal-provincial credit unions merging or partnering with provincially regulated credit unions. There is a whole list.
We’re a couple of weeks out from the deadline on that process. We’d be happy to share with the committee that document once it is finished. That will give you a much more detailed idea of some of the specific policies that we’re urging Finance Canada and the government to address in this round of the Bank Act review. I look forward to that conversation progressing as we get into 2024.
The Chair: That would be most helpful. We’ll be looking at this issue, I’m sure, over time, so we’ll include that then.
[Translation]
Senator Miville-Dechêne: Mr. Hatch, I will also ask my question in French, but you can answer it in English, of course.
I’m trying to understand the different proportions that financial cooperatives allot to social or cooperative housing as opposed to the business you do in mortgages for individual residences.
You talk about a different mission. How does this mission manifest itself in terms of business volume for traditional mortgages like those from banks, for social housing and for housing cooperatives?
I’m looking for general figures, of course.
[English]
Mr. Hatch: Thank you, senator. I don’t have specific data on that question. I would be happy to get back to the committee to see if it’s possible to obtain that at the provincial or national level. I just don’t have the breakdown in terms of individual credit unions’ share of their book on mortgage versus social housing or other areas.
What I will say is that collectively credit unions are the biggest financier of small business across Canada. We partner very closely with organizations like the Canadian Federation of Independent Business, who senators will be familiar with, representing tens of thousands of small businesses across Canada. We are very active in that space and we represent collectively the most important financier of small business across Canada. Again, that’s part of the reason why the CEBA example I mentioned earlier was so glaring and, frankly, existential for us a few years ago.
I also mentioned there are regional differences across the country in terms of our market share, very strong in the Prairies, also in B.C. Of course in Quebec, Desjardins is the number one financial institution in that province. There are differences across the country as there are so often in Canada with regards to what the market looks like.
[Translation]
Senator Miville-Dechêne: I’m going to ask you a more specific question in the same vein as my colleague Senator Gignac.
I imagine you charge fees when renewing mortgages. What would you be willing to do to relieve the holders of these loans and for consumers who, at the moment, are in dire straights?
Could you drop these fees — or perhaps have minimal fees? I confess I’m asking this question without knowing exactly where financial cooperatives stand on the issue of mortgage renewal fees.
[English]
Mr. Hatch: Credit unions have been very proactive in working with their members who may be facing distress, who may be facing repayment difficulties, who, in many cases, of course, are facing higher interest rates — like we all are — over the past couple years as renewals come up. They’re working proactively with their members to find the right product for them at renewal, to work with them to make sure they’re able to handle the new rate of interest.
It’s in no credit union’s interest — if I can use that word — to see their members in financial distress. Again, I’ll point to the lowest mortgage default rate across the entire sector, which we continue to enjoy.
With regard to fees, my answer is going to be similar to my predecessor with the Canadian Bankers Association. We’re prohibited by law from getting together and discussing fees with our members due to the Competition Act, and it’s not our role —
Senator Miville-Dechêne: We’re talking about the absence of fees now.
The Chair: He can’t discuss it.
Senator Miville-Dechêne: Chair, the question is eliminating fees. It’s not a question of competition.
Mr. Hatch: Again, it’s not our role to get into the operations and to tell our members what to do in terms of how they interact with their members in regard to fees or anything else.
Senator Galvez: Thank you very much, Mr. Hatch, for being here. Recently, I was in Basel for a green banking forum where they said that Canadian banks function as an oligopoly. When I heard here that there is the perfect situation of competition, I had my doubts.
I know that you’re very active on social impact investments and circular economy projects. That’s very interesting. I wonder if you’re also financing tiny houses. That’s what I saw in Ireland when we had exactly the same problem in Canada: too much immigration, inflation. That was a solution. That’s one question.
My second question is: You said that there are some ways that we at the federal level don’t think about your operations, and then we have a negative impact on your operation and your service. Could you please give us a specific example of this situation? Thank you.
Mr. Hatch: Thank you, senator. To answer your first question first, I’ve heard of tiny houses. To be honest, senator, I’m not sure that there’s a huge market for them in Canada. I can’t speak for 200 financial institutions at once in terms of the specific projects that all of my members are financing. I imagine that somewhere out there, there’s a project that you speak of that’s been financed by a credit union, but I just don’t know, to be candid.
As to your second question, a specific example, I used the CEBA example earlier. That was a very glaring one. Not too long before that, another process out of OSFI a couple of years ago that was an existential fight for us — which ultimately we were successful in winning — senators will recall the fight over banking terminology where OSFI decided one day that it would be great to prohibit credit unions from using the word “bank,” “banker,” “banking,” any versions thereof in any of their communications or marketing material, which, again, was an existential issue for us, which we managed to convince the government not to implement. Now credit unions are able to use that language.
That, frankly, had people shaking and scratching their heads in the sector as to why the federal regulator would come out and do that and effectively pull the rug out from underneath the feet of the sector when we’re out there just trying to survive and provide services to our members and competition to the large banks.
Those are two very high-profile, large examples that come to mind. There are a lot of others.
If you’re a federally regulated credit union, of which there’s only a small number, you have to, by virtue of federal statute, send out a paper version of your financial statements every single year to every single one of your members. In some cases, that’s hundreds of thousands of pieces of mail being sent out to Canadians in the old-fashioned paper mail format, and 99.9% of the time, they just end up getting binned. It represents a cost in the millions of dollars for institutions to send these things out when, of course, the preferred method for most people today to receive communications from their financial institution — or anyone else — is electronically, which is a lot easier, less expensive and less environmentally impactful. That’s another example that comes to mind. It’s an old one that’s been on the books forever and that we haven’t been able to solve, but there are a lot of others.
Senator Galvez: Thank you.
The Chair: Many of us remember the discussion over the use of the word “banking.” It provided some very interesting testimony here at the committee. Thank you for your organizational participation in that. It was most important.
Senator Marshall: Thank you, Mr. Hatch. There were a couple of comments that you made that I was interested in. You said that arrears in the unions are well under 1%, and you said that they have the lowest mortgage default rate.
We just had the Canadian Bankers Association in, and I asked them what was happening with their allowance for doubtful accounts because if the rates stay up, next year and the year after, you’ll have more and more homeowners feeling the stress of those increased rates.
What is the allowance showing? Credit unions must have audited financial statements. What exactly is your allowance showing?
The media reports that the banks are increasing their allowance for doubtful accounts, and the Canadian Bankers Association here this morning said part of that is attributable to the outlook for mortgages. Are you seeing a similar thing with the credit unions? I know you’re in good shape now, but I’m interested three or four years down the road.
Mr. Hatch: Thank you, senator. It will vary from institution to institution and, perhaps, province to province. There is certainly a possibility that that default rate will tick up slightly in the next few years. Of course, people are facing higher interest rates, but having to pay more on your monthly mortgage is not necessarily the same as going into arrears or defaulting on the loan. The default rate is going to continue to be very low. It could tick up, to be sure, in the years to come, and credit unions are setting aside a little bit more capital in anticipation of that, but they’re still going to remain very low.
Senator Marshall: Is there any way of getting those numbers? The Canadian Bankers Association made it sound as if they have access to that number. I’d be very interested in seeing what that number is and comparing it. Your arrears are under 1%, and you have the lowest mortgage default rate. But I’d like to see what the outlook is. There’s a train coming if the rates stay up, and I’m interested in trying to get a handle on what that train is going to be.
Mr. Hatch: I appreciate that, senator. We don’t collect that kind of data. There is some data that we do collect from our members. I could see if that would be possible and get back to the committee, but I don’t have it in front of me at this moment.
Senator Marshall: I’d be interested in that, if you can get that information. Thank you very much.
Senator Gignac: Welcome, Mr. Hatch. My colleagues and the chair will probably find that you have a much easier ride with me than the previous witnesses, but I know your business model since I started my career at Desjardins Group. So I’ll ask more on the members and the profits.
You are provincially regulated, so my question is: As of October 20, there has been an increase in the capital requirement for institutions that have some more capital for mortgages with payments that do not cover the interest, so basically more the topic of variable rate, fixed income. Does your province follow OSFI in terms of regulations on that part? Does that apply to you or not?
Mr. Hatch: Thank you, senator. There’s no one answer to that question. Often times provincial regulators will follow the lead of OSFI, but not necessarily automatically. We have seen over the years quite often that rules on capital or other things that come out of OSFI are not necessarily copied and pasted word for word by provincial regulators. Provincial regulators are, of course, sovereign entities. They regulate our members as they see fit and as is appropriate for their respective jurisdictions, whether it’s Alberta or Nova Scotia or Newfoundland or wherever the case may be. There are a variety of approaches across the country, which is one of the great things about Canada. We don’t have one national economy. We have a series of provincial or regional economies in this country, and it’s good to have the flexibility of regulations that are more targeted than those that come down from the national level.
Senator Gignac: Just curious if you know the percentage of your mortgages with a negative amortization. The three big banks have disclosed publicly that it’s now about 20% of their mortgages with negative amortization. Do you have such a number? Is it much smaller than that? Are you comfortable disclosing that?
Mr. Hatch: I don’t have that data, senator. No, I’m sorry; I don’t know.
Senator Gignac: Is it possible to send a return answer on this one, please?
Mr. Hatch: Possibly. I’m making notes. I’ll add that to my list of things I can look into after the fact and get back to the committee. But we don’t have the same data collection function in our organization as perhaps the Canadian Bankers Association has with their members, but we can go back and check.
Senator Gignac: My last question will be different from the 5,000-foot view, if you will. CMHC’s insured mortgages’ maximum amortization is 25 years. In France, it’s 40, 50 years; Japan, 60 years; Scandinavian countries, I see 70 years. Of course, it’s better to pay sooner than have a long amortization, but do you recommend in the current situation to have CMHC extend the duration, to increase it to more than 25 years? That rule has applied for the last 10 years. Are you ready to support a recommendation like that, to increase the amortization?
Mr. Hatch: No, we’re not ready to support such a recommendation. That doesn’t mean we’re against it, senator. It’s an issue that we’re aware of, and we know various groups in the housing finance sector have been advocating for a return to longer amortization periods. It’s not something that we have weighed in on as a sector.
Generally speaking, we do not like to saddle our members with debts that they can’t repay, obviously, and also debts that last decades longer than perhaps they have to.
There is a wide variety of views and approaches across the sector on that, and it’s not something that we as an organization have officially weighed in on because we have other more pressing policy priorities we’re advocating for with the federal government on the Bank Act review and other processes.
Senator C. Deacon: Thank you again for your testimony, Mr. Hatch.
Building off the need for diverse providers in the banking system to help future homeowners and existing homeowners access different methods of evaluating their credit worthiness and the types of products that might better suit them, and as we move into a digital era, where do you see one of the challenges facing credit unions as we move towards digitization? The size and scale of many of the credit unions may require them to work together to provide these advanced services and evaluate credit differently so someone can qualify for a mortgage at a credit union where they might not in a bank where their credit may be evaluated only using their credit score. A lot of opportunity is coming by using data more creatively, but this will also require investments at smaller credit unions.
Certainly in Atlantic Canada, we’ve seen credit unions getting together through League Data, and I think 45 or so credit unions are working together so they can really advance their systems. Do you see this as an important model as we move forward and that the federal government should be looking at to ensure this is enabled across the country for the benefit of communities being served by credit unions that are not being served by banks and other products? Thank you.
Mr. Hatch: The short answer is yes. You brought up a lot in that question. Technology investment is key for all players in the financial sector. Scale is important for that, and we do have a relatively long tail of relatively small members in the credit union sector in Canada. However, consolidation has been a fact of life in our sector for longer than I’ve been around, for decades. There used to be a couple thousand credit unions in Canada. If you go back 40 or 50 years, there were several thousand. Now we’re down to fewer than 200, and that’s not because all of those institutions have necessarily disappeared, but during that time the asset base of the sector has, of course, grown year after year after year to well over half a trillion dollars now but within fewer and fewer institutions because consolidation has been a fact of life.
You mentioned Atlantic Canada. They have a slightly — I shouldn’t say “they,” I should say “we” as a Newfoundlander, but Atlantic Canada has a slightly different model. There are over 40 credit unions in the Atlantic region, and they do share a lot of technology investments through the institution you mentioned and through the common core banking platform in Atlantic Canada, so there’s quite a bit of cooperation taking place in that region with regards to the scale required for technology investments and things of that nature. However, the reality of the market today is that those technology investments will continue to be necessary, and they will be more and more expensive.
The other reality driving consolidation is the regulatory reality. It’s a one-way ratchet in financial services. The regulations only ever go up, and that drives consolidation because at a certain point if you’re an institution of a relatively small size you won’t be able to keep up with these requirements. Those are the two broad themes driving consolidation, and we expect that to continue in the years to come.
Senator C. Deacon: Thank you.
The Chair: That final point is one we hear echoed that people can’t even afford the regulation. Mr. Michael Hatch, Vice President, Government Relations of the Canadian Credit Union Association, we appreciate your perspective and view. I know your colleague Ms. Skinner, the CEO from First West Credit Union, could not be with us today, and will be sending her paper in. That was due to our scheduling changes, and not anything to do with her. We appreciate your flexibility and your contribution to the debate today.
Thank you to all the senators, thank you to Mr. Hatch and that is our meeting for the day. Thank you.
(The committee adjourned.)