The most expensive year in history?

There is no denying it, 2022 has turned into a very expensive year for Canadians. This is particularly true when we look at the cost of housing and the seemingly never-ending escalation of values that is responsible for driving the vast majority of wealth in Canada today.

Purely from a business standpoint, it has been amazing for multiple industries. Real Estate, Mortgage, Home Improvement, Developers, Government and more have reaped unheard of revenues from the home ownership marketplace. A section of our economy that accounts for an estimated 40+ % of our national GDP, the highest on earth of any nation - developed or not. The sheer amount of wealth being driven locally and globally by the Canadian housing market is estimated in the trillions of dollars. As the CEO of a Mortgage broker brand in Canada, the growth in the housing industry in Canada has not just afforded me a 30+ long career but has also allowed myself and others to realize the dream of creating our own businesses. Since the 1990's the growth in the mortgage brokerage industry has created careers for thousands of Canadians, expanded access to home ownership, and is the driving force behind product and technological innovation.

There is simply no denying that the mortgage brokerage industry in Canada has helped more Canadians achieve home ownership, has provided greater access to untapped wealth, and gives Canadians better options when seeking to achieve their financial and home ownership goals. The proof is in the nearly 70% rate of home ownership in Canada, among the highest in the world, and a staggering increase from just decades prior. This gives Canadians not only greater wealth, but housing stability and security - all good stuff that more and more people are immigrating to Canada as they see this as the Canadian Dream.

So why is it that today we have housing issues that range from affordability, lack of supply, to what can only be attributed to the highest rate of mortgage fraud on earth?

There are a lot of people that point their fingers at one cause or the other, but the reality is that many factors play into the current housing crisis faced by too many Canadians today.

First, we have to consider the rise of credit. In the 1980's credit started to become accessible to more people. Buy now, pay later, has largely driven consumer spending beyond the norm and being debt free was no longer a badge of honour, but a sign of financial weakness.

In the 1990's lenders were finding themselves tapped out on the unsecured credit side and were seeking an opportunity to deliver more credit facilities with better mitigated risks. The sure-fire way to secure your balance sheet, secure the debt against a real, immovable, asset - Property.

The scope of mortgage products began to change and by the 2000's people were able to access lines of credit secured against their homes. As lenders balance sheets become more stable, they started to introduce more product offerings and the government played a role with the issuance of more aggressive government backed guarantees to protect the lenders balance sheet against losses. The risk that was once held almost exclusively by mortgage lenders was now largely passed off to the taxpayer and lenders could more confidently take greater risk with lending policies.

As the marketplace started to balloon with ever increasing levels of immigration, the housing sector was unable to keep up with rising demand. With almost 30% in taxes and fees charged by the different levels of government, the sometimes decades long approval process for construction, and NIMBY'ism being more common, there simply is not enough housing stock and there doesn't appear to be enough political will to remedy the situation... yet.

Lack of supply, access to easy money, and low rates have driven a frenzy in the Canadian marketplace that has the rest of the world looking at us in wonder and disbelief. How is it that the second largest country on earth (land size), with a population of only 38 million people, can run out of housing? How is it possible that our real estate market is valued at higher than other nations whose populations are double ours, who have less land, etc.? It is a question that defies logic and yet we are not seeing the calamitous crash that people around the world have been predicting for the past 30 years. Demand is simply too high above supply, and I think government likes it that way.

There are other, significant, consequences for the reluctance of government and industry outside of the obvious rising costs of housing. Perhaps the most significant is the dramatic rise in mortgage fraud as a way for Canadians to obtain a mortgage where they would otherwise not qualify. This is most commonly known as Fraud for Housing, and the truth is that most lenders, regulators, and industry professionals turn a blind eye to such instances. The most commonly cited reason is the argument that with government policy, lender rules, and the costs of housing Canadians are left with less choice and that in turn pushes them to do things that they would otherwise not do.

There is a big part of me that hears that, and to some degree agrees with it. If an average, hard-working Canadian needs to resort to this activity, there is something seriously wrong with the system.

The thing is, when someone commits fraud, no matter how "soft", there are real world impacts that can present real world consequences. Let's look at an example to illustrate what we are talking about.

Let's say John and Jane Doe want to buy a home and they have a gross household income of $1000 per month (I am using this number for illustration purposes only) and have excellent credit. According to standard underwriting parameters this couple would qualify for a maximum monthly payment of $390.00 or 39% of their pre-deduction income. Now imagine if those same buyers really wanted House A, but in order to qualify they need to earn at least $1200 per month. That translates into $468.00 per month to cover the cost of the mortgage, so there are documents produced to facilitate the higher amount. Now let's factor in some reality.

The first thing to recognize is that John and Jane are now at 46.8% of their pre-deduction income to service the mortgage payments. When you factor in a reasonable tax rate of say 18% they are actually taking in $820.00 so the $468.00 is the equivalent to 57% of their disposable income. While the number is shocking, for the vast majority of people they will make the required sacrifices to meet that payment obligation. Canadians as a general rule will almost always pay their housing costs first.

Now imagine that John and Jane got their mortgage at really low-rate product. They have owned their home for the past 4 years and have not missed a payment. They have lots of equity built up in the house, and should they need too they can access that equity to meet their financial obligations. Their mortgage is coming up for renewal, and with rate increases the monthly payment has now risen to $510.00 per month. The majority of people will say that they should be able to manage it, they will need to make sacrifices in other areas, but they will keep making their payments, so it will be OK.

The reality is very different. At $510 per month, they are now paying 62% of disposable income to service the mortgage, leaving them with less that 40% of their income for things like food, clothing, etc. Suddenly a mortgage that Jack and jane did not qualify for in the first place is now an albatross around the neck of their financial future.

So long as Jack and Jane make their monthly payments, it is all flying well below the radar and is not considered an issue. That is until there is an emergency repair, assessment, family emergency, or even greater compression of disposable income due to inflation. While they may still make their minimum payments, other areas suffer and that has an impact on the economy. Less disposable income means less spending, less spending means less money flowing throughout the economy, and that can have a ripple effect that can, and historically does, eventually impact more people and the economy.

If Jane and Jack want to access the equity in their home as a stop gap, they need to requalify. If they did not qualify before, the only way to do so now is to double down on the Fraud for Housing that happened in the first place. The first time it was Fraud for Housing, but to do so again in order to access capital, it is now technically Fraud for Profit - not so soft.

Let's say that Jane and Jack are so financially stressed that they cannot meet the payment obligations, and the lender is forced to foreclose. What most people do NOT recognize is that lenders re-underwrite the mortgage, they examine the circumstance under which the original mortgage was approved. If there was fraud, no matter the source, all of a sudden Jack and Jane are in a very difficult situation. They worked really hard to save their down payment, they built up equity in the home that they bought, and even though the intention was simply to put a roof over their heads, they did it illegally. The rights that they once had are diminished, it is not about missed payments anymore, now it is about a crime. Losing their home, complete financial ruin, and the possibility of being charged criminally, no matter how remote, are real stressors that Jack and Jane Doe will need to deal with.

If the mortgage has been back insured and sold to an investor as a Mortgage-Backed Security, the implications spread to other financial tools and markets. The government of Canada insures the majority of these mortgages, and yet if there is fraud present on the file, there is no insurance. The lender that booked the mortgage is most often required to buy back the mortgage, at a premium and charged a penalty, and it puts their entire portfolio under a microscope.

Jack and Jane are one example, but with an estimated 1 in 5 mortgages being sourced as fraud for profit, and upwards of one in three applications containing fraud for housing, this is a real issue that Canada is facing. Yet no one is talking about it. Real Estate professionals, Mortgage industry players, Regulators, Law Enforcement and all other associated industry are either ignoring the problem or are simply choosing to sweep it under the rug. The CBC Marketplace story that exposed just a small sample of examples did not even get 2 days' worth of news and during the National Mortgage Conference in Vancouver just weeks ago, it hardly made even water cooler discussions.

So, what is the answer? Simply put, industry needs to do better and be better. The short sightedness of make money now and ignore the issues is reminiscent of the challenges that brought down the USA housing market and caused a global financial melt-down. The difference is that there is little to no desire to right the ship in Canada lest all that money stop flowing. Canadians will always pay their housing first is a mantra that many have relied on over the years and continue to rely on today. The problem is that in an economic climate that is driven by global factors as much as policy, and the sheer amount of debt that Canadians have accumulated over the past 2 decades, there simply is not enough money in the savings accounts of Canadians to protect households. Sure, we may have more millionaires than ever, but if that wealth is tied to an immovable asset that can only be accessed through the accumulation of debt, it is not really wealth is it?

In getting my thoughts together for this article I spent a lot of time reading, watching reports, videos and a myriad of other research avenues. I made a point of hearing the views and opinions of people who lean left, right, and right down the middle. I listened to housing activists, developers, realtors, lenders, and government regulators. Everyone, without exception, saw the same issues that I have outlined. One person asked me a question that is worth mentioning, it involved Home Trust.

Home Trust is a great lender that offers real solutions to Canadians and provides a unique and valuable service in the housing industry. A number of years ago this same company was the subject of international headlines for what is considered the largest fraud in the history of the housing industry in Canada. It was so massive that the resulting fall out saw hundreds of employees lose their jobs and career, and the most significant portion of the blame was placed at the feet of the lender. It is estimated that there were over 300 mortgage brokers involved in the fraud as the originators of the mortgages that were subsequently found to be fraudulent. The question I was asked: "Paul do we know what happened to the brokers who were found to be involved in the Home Trust Scandal?"

We do. The answer is nothing.

As of this article not one broker has ever been fined, suspended, or charged in the fraud. The vast majority of those brokers are all still in business, and many of them have been signed back up with Home Trust. Let that sink in for a moment. Not a single shred of consequence for the brokers who facilitated this fraud either through willful negligence through not doing their required due diligence, or by directly facilitating the fraud that occurred, and the same lender that was almost bankrupted by the fraud, is accepting new business from those same brokers.

Underwriters, administrators, risk managers, salespeople, executives - hundreds of people lost their jobs and are likely to never work in the industry again... yet the actual source of the fraudulent deals, the first bastion to prevent fraud as required by law, has had no consequences. The excuse given "We cannot prove definitively that they committed the fraud." Willful blindness to a problem is not a solution, the problem is still there, and is actually growing.

While Fraud for Housing may not be funding organized crime, there are people who are getting rich doing it. So long as those payments are being made, so long as rates are low, who really gets hurt you might ask. Well, no one so long as everything remains perfectly suited to allow payments to still be made, but then again we just spent the last 20 years in an environment of Governments keeping rates artificially low and massive quantitative easing that made money cheap. We have spent the last 20 years riding an economic high that has been driven by debt to the tune of nearly 200% of earnings. This is not sustainable.

The solution relies on all levels of government and more critically industry. So long as industry turns a blind eye and continues to earn massive profits from the activity, there is no impetus to enact any change. If there are no consequences to the behaviour, no drive to look for long term solutions that address housing affordability then the rates of fraud are only going to increase. Government knows this, but they are also under pressure from an industry that account for close to 1/2 of GDP - to act too harshly could have wide ranging negative impacts on the broader economy, so government leaves it alone.

There has to be a push from industry to combat fraud and that includes pressuring governments at all levels to do better. Improve development permitting processes, reduce the nearly 30% in fees and taxes collected from developers, build more housing stock, and start to address the root cause of fraud for housing. At the same time, industry needs to take a long hard look at how we want to fit into the future and how to create a better, more sustainable housing market for all Canadians. The current tolerance for fraud has to be curbed, people need to stand up and start being accountable not just for their own actions, but for protecting the future and livelihoods of ethical professionals.

If history has taught us anything it is that no industry, no profession, is infallible or irreplaceable - especially in the arena of service providers. It is time that we all remember that and lead the charge to protect our customers, our lenders, and our industry. If we don't then one day this will be a history lesson that no one wants to teach.

2022 may very well be the most expensive year in history when, and how badly, this all comes home to roost.

(This article is my opinion informed by my own research and conversations with industry professionals across Canada.)

#mortgage #mortgagefraud #hometrust #Canada #FraudForHousing #FraudForProfit #inflation #recession #economics #interestrates #rates #mortgagerates #WarrenBuffett #mortgagebrokers #mortgageagent

www.haystaxmortgage.ca