TD Bank is reportedly selling billions of dollars of mortgages due to a regulatory asset cap tied to anti-money laundering violations, raising questions about whether the circumstance is unique or reflective of a broader trend.
What will determine whether
This situation underscores that while some pending bank rules — once expected to drive mortgage sales, like the Basel III endgame — have stalled under the current leadership in Washington, other regulatory pressures remain.
"There will be a lot of deregulation, a lot of rollback of existing regulation, but money laundering and sanctions, tariff compliance, and cybersecurity don't expect any difference," said Chris Wolfe, managing director of North American banks at Fitch Ratings.
The current regulatory landscape for AML
Both Canadian and U.S. regulators have been cracking down and coordinating on enforcement of AML issues, so the TD Bank incident will likely intensify the scrutiny on both sides of the border, and in particular for those who do business in both countries, Wolfe said.
The regulatory actions at TD involved profits from the sale of deadly illegal drug-trade substance fentanyl
"I think the regulators will take a step back and look across their regulated entities to make sure that there are no problems elsewhere," said Wolfe
It's unclear whether this scrutiny will cause more AML findings at banks, and even if it does, whether U.S. regulators will choose to respond by imposing an asset cap has varied.
Historically, there have been multiple instances when regulators have imposed an asset cap due to AML issues but in some cases they haven't, which may be determined by the severity of the concerns.
B of A was recently able to rectify compliance issues by agreeing to take corrective actions alone, according to
While TD's asset cap suggests Canadian banks that do business in the U.S. could receive the most scrutiny with two regulators looking at them, the other ones that exist may not have as much a potential to have issues or sell a large mortgage book, Wolfe said.
Prospects for mortgage sales if asset caps are imposed
In the event more banks face asset caps due to AML actions, older jumbo mortgages are likely candidates to sell given they offer relatively less attractive returns than loans originated at more recently at higher market rates, a difference that contributed to
But a lot depends on what an individual institution has on its books, prioritizes and would find most advantageous to sell given whatever market conditions are at hand at the time it faces regulatory pressure to stay within a cap.
Institutions will consider how advantageous pricing for the loans sold would be too. Such loans would likely be sold at a discount but could have some value for certain buyers, said Melissa Cohn, regional vice president at William Raveis Mortgage.
Jumbo mortgages above the limits for government-related loan programs and typically taken out by customers with higher net worths can be particularly attractive as a vehicle for selling other financial products. Such new loans have been particularly scarce recently.
A potential variable in a jumbo market with challenges
Mortgages generally have been a challenge to originate given the relative rise in rates since the pandemic-era housing boom and jumbos have shrunk to a particularly small piece of the pie, according to Archana Pradhan, an economist at CoreLogic.
When rates were below 3% during the lowest point of the boom, jumbos had a market share as high as 42%, according to
As rates climbed in subsequent years at a time when the combination of higher market financing costs and home values strained budgets and many borrowers already had inexpensive financing from the pandemic era, jumbo share shrunk significantly to single digit percentages.
"When the interest rates are low, people are more willing to take out the large loans because they can manage the monthly payments," Pradhan said.
Lenders do sometimes find it more advantageous to purchase loans instead of originating in tough markets.
"It's cheaper to buy," said Cohn.
While the recent TD sale was relatively large, Cohn said in an interview earlier this week the appetite for jumbo origination at banks has been status quo.
That could be in part because some lenders have been originating based on expanded criteria like debt-service coverage ratios or profit-and-loss statements and the return profile on their loans doesn't make for a comparable trade off with seasoned, low-rate jumbos.
"Buying a full-doc 30-year fixed, that's one thing; but if you can originate DSCR, bank statement or P&L-based loans where you know the rates are 50 or 100 basis points or more higher than the conventional rate, they love originating those all day long," Cohn said.
What might be a game changer would be a much larger trend domestically that's not necessarily confined to Canadian institutions and involves a particularly large player.
"If there were enough of these sales, that could change the dynamics of the market," Cohn said.
