DEVELOPMENT OF CONTEMPORARY MORTGAGE LENDING

Early 20th Century

interest only repayment: residential mortgage financing involved long-term loans where interest was paid periodically throughout the life of the loan.

-Partial payments of principal seldom occurred; rather, the entire principal amount was repaid (or refinanced) at the end of the loan term.

Depression Years

-many borrowers were forced to live off their savings rather than pay off their mortgage when due.

-The market responded by turning to the use of repayment plans where periodic payment of both interest and principal occurred

- each payment was constant in amount and was comprised of interest due, plus a partial repayment of principal.

Post-World War II Period

-mortgage default insurance.

-To increase the supply of mortgage money, the federal government tried to encourage financial institutions to increase their participation in mortgage lending by reducing their risk of loss in the event of default.

-most common form: government insurance against default on residential mortgage loans granted under the National Housing Act.

-Borrowers paid insurance fees that went into a fund to compensate lenders if default occurred

Late 1960s to 1970s: Partially Amortized Mortgages

- interest rate risk: Mortgage lenders had no protection from being locked into long-term loans at rates below current market rates.

-the mortgage agreement needed to be altered to give both borrowers and lenders increased protection against interest rate fluctuations → partially amortized mortgage, which has periodic payments based on a long-term fully amortized loan but which matures on a short-term basis

-At maturity, the full amount of the outstanding balance must be repaid or refinanced at the market interest rate

-Rates on short-term loans (e.g., 1-3 years) are generally ¼ to ¾ of one percent less than rates on the standard 5-year term loan

1980s: Refinancing Concerns and Mortgage Supply Stability

-If interest rates drop, borrowers can receive interest savings, helping with affordability and spurring the residential market.

-Alternatively, in a period of rising rates, a borrower’s payments will increase, possibly doubling or more upon refinancing → serious affordability concerns

-many established owners defaulted on their mortgages, unable to make payments in the restrained 1980s on homes purchased in the optimistic late 1970s. → from 1979 to 1983, claims greatly exceeded revenue

-the federal government introduced an interest rate insurance program in 1984: Borrowers could pay an initial insurance fee to protect against having to make payments based on an interest rate that is more than a specified number of percentage points greater than the rate specified in the original mortgage.

- 1986, CMHC created a new financial instrument called NHA Mortgage-Backed Securities (MBS): provide a steady flow of mortgage funds into housing in Canada

- Changes to federal and provincial regulations in 1987 ended the traditional separation of banks, investment dealers, trust companies, and insurance companies → diversification of trust companies into broader areas

1990s and 2000s: Finance Industry Reorganization

-the availability of mortgage funds was high and interest rates were at all-time lows.

-Mortgage lenders became more aggressive in trying to attract and retain creditworthy customers, through mortgage rate discounts and innovative mortgage terms and options.

-Changes to the Bank Act in 1992 allowed banks to acquire trust companies.

-Internet → “virtual” banks

-Significant legal changes to mortgage financing in this period included the introduction of the 95% loan-to-value ratio and extending amortization periods up to 40 years → allowed buyers to qualify for higher loan amounts and purchase properties with smaller down payments

-nearly 20-year housing boom

- economic turbulence in the late 2000s led to the government curtailing these expansionary financing policies, both to protect against loan defaults and to lessen dependence on mortgage debt.

-Mortgage brokerage began to grow into a more mainstream aspect of the residential lending market during the 2000s.

2010 to 2020: Low Interest Rates and Government Measures

- historically low interest rates → real estate market upsurge.

- concern arose over the inevitable increase in mortgage rates: would these borrowers still be able to make the required loan payments once rates had increased?

-By the end of the 2010s, the federal and BC provincial governments responded to this risk with measures designed to cool the housing market and restrict the financing that fuels it.

- two small interest rate increases + stress test + new speculation taxes on vacant homes → slowdown in BC real estate markets

2020 to Present: Technological and Market Changes

- COVID-19 pandemic → mortgage rates were at historic lows while the federal government initiated restrictive underwriting measures; Lenders temporarily allowed deferrals of mortgage payments

-February of 2022, Russia’s invasion of Ukrain → exacerbating global inflation → Higher mortgage rates → short-term fixed rates provide borrowers the stability of a fixed rate, without committing to a high rate for the next five years or longer.

-in 2022, the housing supply is anticipated to increase as residential building increases in the country’s six major cities compared to 2020 and 2021, and cities shift towards densification

-development of energy efficient and environmentally-friendly building technologies, as well as an emphasis on sustainable building and living.

-CMHC Green Home program: gives a partial refund on mortgage loan insurance premiums to home owners who make use of energy-efficient and energy-saving technologies.