Brick by brick, Kathy Tomlinson of The Globe and Mail is deconstructing the complex structure that has led to the dramatic increase in real estate prices in Metro Vancouver over the past several years. Readers may get the impression that we are observing a systemic failure of all the institutions involved — governments, regulators, real estate industry, banks, and even media — for being inattentive and slow to act. If they had been functioning properly they could have ensured a more stable and healthy real estate market. As for the banks, besides being unfair for Canadians and messing up the market by encouraging speculation by foreign buyers, could the banks’ risky behaviour put the Canadian industry at risk in the case of large defaults by foreign borrowers — while enjoying record profits themselves? (Note that she does not cover credit unions in this article.)
Ms. Tomlinson’s article in today’s paper looks at how Canadian banks have played a crucial role in creating the unhealthy market conditions. Below are some points from the article. Please visit the source for full text.
Canadian banks’ mortgage guidelines favour foreign home buyers
(by Kathy Tomlinson, The Globe and Mail, 14-Sep-2016)
- Canadian banks allow foreign clients with no credit history, including students, to qualify for uninsured mortgages without proving the sources of their income – a practice that exempts non-Canadians who have money in the bank from the scrutiny domestic borrowers face when buying a home or an investment property.
- Those exceptions to the regular rules are outlined in internal documents from Scotiabank and the Bank of Montreal reviewed by The Globe and Mail. Scotiabank’s guidelines specify that loans officers do not need to verify foreign clients’ sources of income if they make down payments of 50 per cent. At BMO, such clients need only 35 per cent down to qualify for mortgages up to $2-million. The criteria from both banks show income verification is also not required for new immigrants who have been in Canada less than five years if they put 35 per cent down. BMO’s guidelines also require clients, including “foreign students with a valid study permit,” to have the equivalent of one year’s mortgage payments on hand at the time the loan is issued.
- The exemptions appear to be designed to attract citizens of foreign countries and newcomers to Canada as clients by making it less onerous for them to obtain and build credit here.
- Canadian applicants must still prove their sources of income. Critics say that puts locals at an unfair disadvantage and inadvertently encourages real estate speculation by foreigners who have easier access to credit.
- The federal regulator chastised the banks in July for inadequate foreign income verification because they can be exposed to more risk if they do not ensure these clients have the means to pay their mortgages in the long term. The regulator also pointed out that banks can be vulnerable to money laundering if they do not verify that a customer’s money was obtained legitimately. The Globe discovered income verification in such cases is still not mandatory at both banks, two months after all lenders were warned to be more diligent. [CityHallWatch note: That’s July 2016. This has been going on for years. Why did government regulators not take action sooner? The relevant ministries and agencies should be held accountable.]
- The revelation stems from a Globe and Mail investigation that showed Vancouver real estate speculator Kenny Gu was able to buy and flip several single-family homes – while prices in the area skyrocketed – using credit from Canadian financial institutions. The case demonstrates how property ownership has become complex and shrouded in secrecy as a network of speculators – local and foreign – park money in Canadian real estate. Ownership and earnings are obscured in private contracts, while the players treat properties as commodities, not homes.
- … “It’s very lenient,” a loans officer from one of the major banks told The Globe. “The foreigners can just get a wire transfer to cover the year’s payments [to qualify] or even borrow money from a friend or a relative to put money in the account temporarily.”…
- In Vancouver, speculators exploited that, he said, to buy properties they had no intention of living in, hold on to them as demand increased and prices rose and then flip them for a profit.
- “I have seen many people doing this, many times. I have customers brag about it in my office – about how small money they put in and how much profit they got,” he said. “I can say it is a very big share of the mortgage market … it’s out of control.”
- … The federal regulator overseeing Canada’s banks sent The Globe a statement, stressing that banks must attempt to confirm income sources – for all mortgages. “Whether the borrower is foreign or domestic, OSFI expects that institutions will take reasonable steps to verify income,” said a statement from the Office of the Superintendent of Financial Institutions.
- In a strongly worded letter in July, OSFI told banks that rapid rises in the prices of houses in Vancouver and Toronto call for increased diligence because of the risk of defaults if and when “economic conditions deteriorate.” [CityHallWatch: This “effort” by the OSFI is years too late. Heads should roll.]
- The regulator made it clear it knows income verification is lacking for non-Canadian clients and it urged lenders to be more thorough. “Inadequate income verification can adversely affect the assessment of credit risk, anti-money laundering and counter terrorist-financing (AML/CTF) compliance,” it said. “Borrowers relying on income from sources outside of Canada pose a particular challenge … Income that cannot be verified by reliable well-documented sources should be treated cautiously.”
- The loans officer said … “I don’t think it is fair. And it pushed the market prices so much higher, because the people who are buying don’t really care if they can afford it – they just want to get the property and flip it.”
Unstoppable? Too late to intervene in Vancouver’s housing price escalation? New report: “Booms, Busts, and Normal Times in the Housing Market”
Article refers to a study entitled “Booms, Busts, and Normal Times in the Housing Market” (by Agnello, Castro, and Sousa). It looks at historical booms and busts, and suggests that in the absence of timely intervention, markets go out of control into a boom, and that late intervention is not very good at preventing a bust. CityHallWatch asks if proper intervention early on — in 2006 and beyond — could have ensured a healthier housing market and housing affordability.