At 9:15 a.m. on Wednesday, October 17, 1962, Chief Justice Dana Porter called the Royal Commission on Banking and Finance to order in Ottawa, calling forward Central Mortgage and Housing Corporation president Stewart Bates to explain why Canada’s private banking system had vanished from the national housing market. Across the preceding ten months of 1962, every chartered bank in Canada combined had issued exactly two residential mortgages under the National Housing Act. An obsolete six percent lending ceiling in Section 91 of the Bank Act had collided with rising market interest rates, driving the country’s major financial institutions out of home lending and forcing the federal housing agency to take over hundreds of millions of dollars in direct mortgage underwriting.
The empty lending desks were the unintended consequence of a statutory contradiction that Parliament had ignored for years. When the federal government rewrote the National Housing Act in 1954, it deliberately invited the chartered banks into residential mortgage lending for the first time, hoping their vast branch networks would distribute mortgage capital into every corner of the country. For four years, the policy succeeded beyond expectations. Commercial banks flooded into the suburbs, writing tens of thousands of government-insured mortgages.
Then inflation took hold, bond yields climbed, and the official rate under the National Housing Act rose above six percent. At that exact threshold, the system locked up. Under Section 91 of the Bank Act, commercial banks were legally prohibited from lending money at an interest rate higher than six percent. Faced with a choice between breaking the law or absorbing financial losses on sub-market loans, the banks simply walked away from Canadian homebuyers.
Two Mortgages in Ten Months
Seated before the commission in Ottawa beside his executive director, chief economist, and legal counsel, Bates laid out the sudden disappearance of private mortgage capital with blunt clarity.
“In the 1954 Act the most significant change was the permission then given to the chartered banks to enter the mortgage lending under the insured section, and the chartered banks did enter,” Bates told the commissioners. But when interest rates climbed, the banks, “under the Bank Act, withdrew completely. Naturally, if they had remained in the market the whole volume of demand would have fallen on their shoulders. So, they were through, and there was practically no bank lending since 1960, I think. I think this year there have only been two bank loans made so far. So, the six percent limit on the banks, set up by the Bank Act, was obviously a major factor in this situation.”
Two mortgages across the entire Dominion of Canada was not an orderly retrenchment. It was an absolute institutional blackout. Life insurance companies and trust firms remained in the field, but they shifted their assets between conventional commercial loans and National Housing Act paper depending on where yields were highest.
To keep suburban construction from freezing, Central Mortgage and Housing Corporation had to transform itself from a backstop regulator into the primary mortgage banker for the Canadian middle class. Bates acknowledged that the federal agency had stepped directly into the void left by the private financial sector.
“In fact, in the last two or three years we, in C.M.H.C., have taken up almost exactly what the chartered banks had been doing from 1954 to 1958 in lending,” Bates testified.
The scale of state exposure was enormous. Under the 1954 statutory framework, homebuyers paid a two percent insurance fee directly into a federal Mortgage Insurance Fund, an extra cost of roughly $200 that was rolled directly into the principal of a 25-year mortgage. Bates reported that the insurance reserve held $93 million in assets, invested entirely in federal government bonds.
Against that $93 million reserve stood a potential federal liability of $4.5 billion in insured mortgages outstanding. Overall national defaults remained remarkably low, hovering around one-half of one percent, with the fund paying out $11 million in claims over its first eight years. But Bates acknowledged that concentrated local shocks could strike the federal ledger without warning.
When the uranium boom town of Elliot Lake collapsed after American export contracts dried up, the mass property defaults delivered what Bates described as “a big bite” to the insurance fund. In a country dotted with single-industry resource settlements, the federal government was underwriting the solvency of entire municipal housing markets.
The Five-Thousand-Dollar Rationing Line
Because private commercial banks had abandoned the market, Central Mortgage and Housing Corporation direct lending surged toward $350 million a year. But the federal treasury could not sustain unlimited underwriting without clashing with cabinet’s macroeconomic goals.
In 1960, as John Diefenbaker’s government attempted to clamp down on national inflation, the Department of Finance intervened. Cabinet informed the housing agency that it could not spend a penny more than $150 million on direct lending.
With demand far outstripping that arbitrary fiscal ceiling, the federal corporation had to invent an emergency bureaucratic rationing regime.
“In one period in the anti-inflationary drive, I think it was 1960, the government informed us we could not spend any more than $150 million, and we had to enter a rationing system that year,” Bates testified. “In other words, we said, ‘We will not lend even to a home-owner unless he has an income less than $5,000.’ This was an anti-inflationary measure for one year... we had been lending at the rate of $350 million and we were cut back to $150 million, that is a very substantial cut back.”
The policy split Canadian housebuilding along an artificial administrative seam. If a prospective homebuyer earned $4,900 a year, the federal government would finance their mortgage directly. If they earned $5,100, the state turned them away, even though the chartered banks across the street refused to accept their loan applications.
To stimulate volume at the lower end of the market when the rationing eased, Ottawa steadily stretched statutory borrowing limits. Parliament amended the National Housing Act to raise maximum loan ratios from 80 percent to 90 percent, and finally to 95 percent of appraised value.
When Commissioner W. Thomas Brown asked whether the government could expand homeownership even further, Bates offered a dry, revealing reply: “I don’t think you can widen the market very much more when you get up to 95 percent loans... There is not much left, there is 105, Mr. Chairman.”
A Dusted-Off Legal Opinion
When the hearing resumed at 2:30 p.m., the commission called David B. Mansur, the legendary executive who had served as the founding president of Central Mortgage and Housing Corporation from 1946 to 1954. Mansur was no longer a public servant; he was appearing as a private mortgage executive who had helped build Canada’s postwar housing apparatus from the ground up.
Mansur dropped any diplomatic pretense. He confirmed that the commercial banks were withholding capital, but he rejected the convenient excuse that the Bank Act’s six percent ceiling was the sole reason for their departure.
According to Mansur, the banks used the statutory interest ceiling as a convenient legal alibi to disguise a straightforward corporate preference: when money tightened, banks preferred to direct their capital toward high-yield corporate and commercial clients rather than long-term residential housing.
“The banks withdraw, for reasons, I believe, other than interest rates,” Mansur told the commission. “It was undoubtedly lack of funds that made them want to get out. As I understand the matter, the old legal opinion that was put forward by the bankers in 1954 was kind of dusted off and brought back into being.”
Mansur recounted the cynical backroom history of that legal opinion. In 1954, when Louis St. Laurent’s government first drafted the legislation to bring chartered banks into mortgage lending, the banks had balked, claiming that Section 91 of the Bank Act made it illegal for them to participate.
“The legal opinion was looked at by the law officers of the Crown and the law officers of the Crown said ‘nuts,’” Mansur recalled. “About two days later the first bank came in and made twenty loans, and then all the other banks rushed in at a tremendous rate, and somewhere in the shuffle the legal opinion got lost.”
The legal argument was forgotten as long as money was cheap and mortgage lending was lucrative. But as soon as monetary conditions tightened in 1959, the banks pulled the old brief out of their drawers.
“At this time the opinion happened to suit government, that this dusted off opinion should be applicable, which held that they could not operate under the Housing Act by reason of the Bank Act,” Mansur explained. “This happened to suit government at the time for the wrong reasons, and the banks just departed.”
When Commissioner James Douglas Gibson, himself a senior commercial banker from Toronto, pressed Mansur on whether the banks had faced an inescapable cash shortage, Mansur did not relent.
“Oh, I agree completely that the banks did the right thing for the wrong reasons,” Mansur stated. “I think they took the only steps that could be taken, but I would have been more satisfied in my mind, at least, if the real reasons had been given at the time rather than a dusted off 1954 opinion.”
An Unsustainable State Monopsony
For Mansur, the banks’ reliance on the legal opinion had produced a structural distortion in Canadian governance. By allowing the chartered banking network to walk away from residential finance, the federal government had turned Central Mortgage and Housing Corporation into an all-powerful direct lender, saddling the public treasury with retail loan operations across vast geographical territories where private capital refused to travel.
“I think it is a great tragedy that Central Mortgage and Housing has to look after all the outlying areas,” Mansur warned the commissioners. “I think we are building trouble for ourselves, and as soon as we get in a position where lending under the National Housing Act emanates from the private sector, the better for everybody.”
The hearing transcript documented an administrative system trapped between an obsolete usury cap and an overextended public insurer. Because chartered banks could not legally charge market rates, the state was forced to step in as a surrogate lender. But because the state could not fund every mortgage without worsening inflation, it was forced to ration shelter through arbitrary income ceilings.
The testimony gathered on October 17, 1962, dismantled the intellectual foundation of statutory interest ceilings. Two years later, when Chief Justice Dana Porter delivered the commission’s landmark 1964 final report, the commissioners recommended the complete abolition of the six percent ceiling under Section 91 of the Bank Act, urging Parliament to let interest rates find their natural competitive level.
Parliament finally enacted that recommendation in the comprehensive 1967 Bank Act revision. The statutory interest rate cap was eliminated, chartered banks flooded back into residential mortgage underwriting, and the modern Canadian mortgage market was born. But for nearly a decade, the Canadian mortgage market was governed not by open financial competition, but by an emergency federal rationing bureau that had to step in because private lenders relied on a contested statutory ceiling to withdraw from the market.
Uncovering why Canada’s commercial banks abandoned home mortgages in 1962 meant reading through the 199-page verbatim transcript of Volume 49 of the Porter Royal Commission, analyzing Stewart Bates’ sworn testimony on CMHC direct-lending quotas, and recovering the primary fiscal records of the federal mortgage rationing regime.
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Source Documents
Royal Commission on Banking and Finance. (1962, October 17). Hearings held at Ottawa: Volume 49 (Cat. No. Z1-1961/1-31E-PDF). Chairman: The Honourable Dana Harris Porter. Ottawa: J.J. Nethercut and R.J. Young.
Wow. Thanks Mike. Can you imagine being able to buy a home when your income was under $5.001 per year? I recall my parents bought their house in 1966 or 67 at a rate of 6% on, I think, a 25 year mortgage and their friends were all, how can you afford that rate? A few years later, the bank called and asked my mother to pay off the mortgage, which still had many years to run and she asked why she would pay off an $85/month mortgage. I also remember buying my own first house in Etobicoke for $66,000 in 1980 at 13% on a vendor takeback. She had bought it post-WWII for $7,500.