What we can learn from the crash

Monday, 8 March 2010
In February, industry experts from the broker, lender, insurer and technology realms gathered at the Business Television Network (BCN.tv) studios for what was called "After the Storm," a series of discussion panels that were broadcast to groups across Canada. CMP was with the Toronto group during this interactive CAAMP event that allowed participants to e-mail questions and thoughts to the various experts.
While the topics covered were varied, one common thread that could be taken away from it was that Canada fared better than the U.S. during the financial downturn with the help of a little planning and a lot of luck. Moving forward, the Canadian mortgage professional industry needs to pay attention to regulation, education and maintaining close lender relationships if it wants to continue to be a model for the rest of the world.
Apples to orangesWhen comparing the U.S. and Canadian markets, all experts agreed that the Canadian system was different enough to escape the same hardships our neighbours south of the border face. But it's also important to look at what was so different between the two countries, and whether it is enough to keep Canada on the high road into the New Year.For starters, one major difference between the two systems was the way Canadian lenders operate.
"The way we find our mortgages, by and large, most of it is on the balance books so it's underwritten rigorously," said MCAP's Ron Swift. "In the U.S. it just kept getting moved on and no one had any skin in the game. In Canada when you lend it's your own money."
While this had a large part to do with why we avoided a U.S. scale meltdown, it also had to do with timing.
"Were we lucky? Let's not kid ourselves," said Swift. "We were headed towards the edge of the cliff, and we were able to see the U.S. go over it and stop before we got there."
For Peter Vukanovich, president and COO of Genworth Financial, it was less of a difference between Canada being lucky or smart, but just being different, primarily when it comes to insuring loans.
"In the U.S., the lender and the underwriter have the pen, and insurance is only handled when the claim comes in," he said, adding bluntly that it's as simple as "garbage in, garbage out. You just need to act like you are lending your own money."
Keeping a close eye on regulationCurrently broker share in the U.S., said Vukanovich, has gone from being around 20 to 25 per cent around 18 months ago, to around 12 to 15 per cent today.
Throughout the day, most experts blamed this on over-regulation in the U.S. in reaction to the recession (which right or wrong, brokers shouldered a lot of blame for) and fortunately Canada has not followed its example - at least not yet.
"The pendulum will swing to over-regulation," warned Peter Aceto, president and CEO at ING Direct, adding that it's "something [Canadians] need to watch for."
Swift agreed, saying that while the Canadian system is not "over-regulated now, [Federal Finance Minister] Flaherty has mentioned that the government might have to step in and do something. We have to be careful about that and be sure not to over-react to a local phenomenon."
The mention of a local phenomenon was in reference to a comment made by Jason Smith, president and CEO at Solidifi, who said that technologically speaking, Canada is treated like it is just one giant market, when, in fact, it is made up of several regional markets, each with their own strengths and weaknesses.
While he said that technology needs to adapt so as not to treat every market the same, the media and government also have to be careful when talking about bubble scenarios.
"There is one national interest rate and its low," he said, "but in terms of a bubble, it is a regional issue."
As such, it should be treated like one.
As an interesting side note, Gerrard Schmidt, president and COO of Davis + Henderson, offered that "super brokers are actually better positioned to take the increased cost of regulation," even though, he added, the big banks' mobile sales forces are growing faster than the mortgage market in Canada overall.
"Super brokers need to think about how they will compete," he said.
Education is keyCurrently on Genworth Financial's website there is a homebuyer survey that asks some very basic questions, such as: True or false, by reducing your mortgage amortization period you will save interest costs over the life of the mortgage; and, which payment frequency pays down your mortgage the fastest, monthly, semi-monthly or bi-weekly accelerated? On average, homeowners answer five of the 10 questions correctly, said Vukanovich.
"If the U.S. has taught us anything, it's that people are going into this without knowing anything. Education is key, and the mortgage professional and the consumer were just not in sync. The more consumers know the better."
Unfortunately, test results like these point to the fact that consumers are very much still in the dark about their mortgages, and the onus falls on those who deal with the consumers most.
"Those who are sitting in front of the consumer, it's their responsibility to educate the consumer," said Swift. "People just want the cheapest monthly cost, but it's one thing to be able to afford homes at historic low rates, it's another when rates go up. Mortgage professionals have to educate consumers to make the right decisions."
Aside from educating the consumer, the consensus was that slowing down and making sure all the proper information is obtained is a crucial step in keeping the Canadian mortgage market ahead of the curve.
"I'm hearing a lot about the Canadianization of the mortgage world - U.S., Mexico, Europe andAsia," concluded Vukanovich.
Now it's up to us to be sure we are setting the right example.