March 22nd, 2012

Flaherty Tells Banks: Do Your Jobs

Jim-Flaherty2Finance Minister, Jim Flaherty, says it’s “a bit odd” that banks are asking the government to tighten mortgage rules.

Banks ultimately control who they lend to and shouldn’t require babysitting, or so one would think.

In comments made today, Flaherty hinted that we might not see further mortgage regulations in the near future.

These were his quotes from earlier, some of which were semi-amusing and certainly refreshing from a common sense standpoint:

  • “I find it a bit off that some of the bank executives are taking the position that the Minister of Finance or the government somehow should tell them how to run their business,”

  • “We have bank executives in Canada saying, ’You know, really the rules on insured mortgages should be tightened up’. They must forget that they are actually the ones that issue the mortgages — it’s their market, it’s not my market.”
  • “They decide what they want to charge in interest rates. They’re the ones who make the profits out of this business, so I do find it a bit much when some of the bank executives turn to the government, the Minister of Finance and say, ‘You ought to change the rules and make it tighter’.”
  • “The new housing market produces a lot of jobs in Canada so there’s a balance that needs to be addressed. I’d like the market to correct itself, quite frankly, if it can.”
  • “With respect to tightening up the mortgage insurance market we’ve done it three times…and we watch, we monitor the market, and if we have to tighten it some more we will.”

craig-alexanderLast week, TD economist,

Craig Alexander, suggested one or more of the following rule changes:

  • A 7% minimum down payment
    (That’s 2% higher than today and completely reasonable. Alexander added: “Given the economic outlook for modest economic growth and the existence of the imbalances, heavy-handed policies – like raising the minimum down payment substantially to something like 10% – are not appropriate.”)
  • A reduction in the maximum amortization to 25 years (This too seems sensible if applied to higher-risk borrowers. It’s unnecessarily restrictive, however, if applied to well-qualified homeowners who may have legitimate reasons for maximizing cash flow.)
  • A minimum qualification rate of 5.50% on both insured and uninsured mortgages.
    (We saw the Office of the Superintendent of Financial Institutions (OSFI) propose something similar Monday, and wouldn’t be surprised to see a related guideline enforced later this year.)
  • Requiring Home Equity Line of Credit (HELOC) borrowers to be qualified with a 20-year amortization. (Again, OSFI is proposing something similar so you can bet that HELOC rule tightening is on the horizon.)

Another option that doesn’t get enough play is an increase in default insurance premiums. If the government really believes there’s a potential downturn ahead, it is logical to pad insurers’ reserves.

Alexander says any rule changes should be carefully measured. “It’s like you are driving on ice, you don’t slam on the brakes, you just tap the brakes to diminish the risk of a problem,” he told CTV.

But Derek Holt of Scotiabank warns, “One has to be careful about what one asks for. We’ve already tightened mortgage policy significantly and we are operating at heavily leveraged structural peaks in Canadian consumer spending and housing markets that are bound to slow as fatigue sets in.”

The government has tightened mortgage rules three times in the last three and a half years.

Sources:  Financial Post, CTV


Rob McLister, CMT

56 thoughts on “Flaherty Tells Banks: Do Your Jobs”

  1. Good job reporting this quickly Rob. Hopefully Mr. Flaherty can ease some of the scare tactics the banks are putting out there.

  2. Banks are talking out of both sides of their mouths. They want 25 year amortization but allow interest only revolving HELOCs. It doesn’t get any more inconsistent than that.

  3. I think this is a breath of fresh air. Its been change this, do that, scare this, fear that for months. The reality is that banks want mortgage changes because they want a legislated flat playing field, rather than actually looking at their own risk profile and possibly (god-forbid) lose market share. Losing the deals on the perifery of their risk profile should be a good thing. But shareholders of course only see market share loss, not risk profile improvement.
    I agree with F there have been enough and sufficient government meddling in the mortgage market, lets just see where this goes.

  4. THANK YOU! This news has made my day and a lot of my first time buyers!I actually now feel optimistic about the Spring market actually coming into fruition without deadlines to meet or the sky will fall.It has been very stressful and negative in the media these days and the tug a war between the brokers and the bankers and their scare tactics. Hopefully after March 29th they will be silenced for awhile and we can just do what we do best and serve our clients with the best mortgage plan to help them reach their goals.

  5. Spoke with an RBC executive after the relaunch of the BMO 2.99. They were pissed. That said, they had to match to retain. Flaherty should’ve slapped BMO and end of story. God help the young couple, 5 years from now, who just topped out at the maximum GDS/TDS with their current purchase. Imagine the impact of a 2% increase 5 years from now. Not worried about the old timers is Vancouver Shaughnessy who have owned their million dollar homes clear title for a zillion years. I have this thought that they can handle a slight market value adjustment, IF it comes.

  6. The politics of this are interesting. The Feds know there is a problem on the horizon but clearly they would prefer not mess with mortgage rules and risk having to take part of the blame when the bubble bursts.
    Perfect example of the “inside game” if the Conservatives change the rules and the market tanks the opposition blames them for destroying the Canadian housing market. So they just do nothing and when it happens anyway the Tories blame bank lending practises and no stink attaches to them.
    Smart move Mr. Flaherty!! In some ways this is a clear indication the feds have decided that the housing market is toast; they made 3 previous changes to cool the market and that didn’t work so now its time to set the stage to shift the blame when it does happens.

  7. VanBroker, you are so right; have someone else change the rules and field stays flat and the Big 5 blame the Feds if things go south. That’s the play the banks wanted. Looks like the Feds figured it out.

  8. Nothing to tout about folks as what I stated in the previous post looks more likely to unfold. If our banks don’t get back to private funding, we’ve got big problems.
    I am still puzzled by the lack of understanding amongst brokers/agents from every site I visit, hardly anyone knows or comments about the biggest industry that funds (or use to) the entire mortgage market, that is, the bond market. Does anyone here really believe the BoC can continue buying bonds to offset private capital outflows? This is 100% unsustainable.
    PS to 2Frank: You say I’m biased and taking sides, but I don’t see anyone here defending private pension funds whose returns are falling because the BoC continues a ZIRP policy. You think millions of peoples’ hard earned life savings are going to keep buying mortgages bonds for real negative returns? Good luck with that.
    Whoever believes the government can control the market is a complete fool.

  9. If I could just add that the reason the banks are asking the Department of Finance for help in tightening up the mortgage market is because no single bank can restrict their lending to an appropriate level without losing significant market share. If the Department of Finance were to introduce rules that apply to all mortgage issuers, it would level the playing field and have a much more profound effect at mitigating any potential housing price bubble than just one or two institutions going it alone.
    I love your point about increasing mortgage default insurance premiums. As a taxpayer, I’d also like to know what risk management practices are in place at CMHC to prevent itself from defaulting, not just relying on it’s $600 Billion backstop from the taxpayer.

  10. The Feds do not want to be “that guy” that busted the housing bubble. They have tried to tap the brakes 3 times but Jan 2012 year over year mortgage credit growth was higher than any one month in 2010.
    http://tinyurl.com/8xvfnq3
    Canada has an unemployment rate of 7.4%
    http://tinyurl.com/7uuuzpu
    and if they do anything drastic to the mortgage market, it would severely impact FIRE and Construction sector GDP
    http://tinyurl.com/7fgd22j
    and employment in these sectors
    http://tinyurl.com/7osw2b2
    So does the Government tighten mortgage rules a 4th time, slowing down mortgage access and possibly inhibiting or even reversing growth in housing related GDP and employment?
    Or will they do nothing, allow mortgage debt growth to continue at 6% to 8% year over year until the weight of household debt puts enough pressure to slow the market itself?

  11. I find it ludicrous that banks need regulation to save them from themselves.
    It’s like Boeing asking the government to regulate how many rivets it must use to bolt the wings on its aircraft. I think they can figure it out on their own! It’s not great for business when the wings fall off your products in mid flight.
    It’s also not good for business (or shareholders) when your borrowers default mid-term.
    The last thing Canadians need is the government regulating common sense in business. Banks can make intelligent lending decisions on their own, especially with OSFI watching their every move.

  12. This would all make sense *IF* there was no such thing as CMHC. The reality is, with the Government insuring the majority of the mortgages that are out there, it is up to them and them alone to make the policies.

  13. The problem is the shareholder.
    Imagine you are the CEO of the one bank who decides to exercise prudence.
    You tell your shareholders “Yes, we are making less profit than our competitors, and paying lower dividends. But we are smarter than them and forsee a problem in the future with their business practices”.
    Well, some shareholders will think “Wow, what a great bank. I don’t need to maximize my immediate profits, I’m going to trust them and stick around for the long term”.
    But most will think “I want more profit now! I’m going to buy the stock of the other guys”.
    This is the problem of capitalism. It overweights the value of short term profits, and undervalues the longer term considerations.

  14. I believe that appraiser is referring to the fact that the former Minister of National Revenue (for about 6 weeks)has been gleefully trumpeting victory all week, assured that he would finally be vindicated for his oh-so-stale predictions of a market crash / correction / melt (the target keeps moving),only to be rebuked by the comments of the Finance Minister; just as he was having his robes and chariot prepared for a gallant ride down the “I-told-you-so” highway.
    So perturbed is the honourable GT, that he has actually played the “moral hazard” card. Hilarious.

  15. On one singular point, where is this “bubble” you speak of??
    People are still paying for their homes, foreclosure rates are low, there are more bulls in the stock markets than bears.
    Rates are low, positive economic productivity is low, rates will increase in more prosperous times. In more prosperous times wages increase as demand in the workforce increases. As a generalization, those people who are near a 40% TDS now should have the capability to cope with increasing rates.

  16. “Moral hazard” usually refers to a situation where one party captures the upside benefits while “outsourcing” the downside risk to another party. Isn’t that a pretty good description of how CMHC-insured mortgages work in Canada?
    If not, how am I misunderstanding “moral hazard”?

  17. Flaherty isn’t going to do anything including not raising the CMHC cap. CMHC coverage growth is going to slow to less than 2% a year compared to about 6ish% in the big years.
    Think about that….

  18. Hey Je you gotta find a new bike to ride man. CMHC has been stress-tested up the ying-yang, if it ever gets in trouble, there will be alot more to worry about than you can imagine. The good news is it ain’t gonna happen.
    P.S. The concept of fractional reserve banking is really scary too. The world of finance can be so frightening.

  19. Seriously, where in Canada is there a housing bubble of extreme proportions besides Toronto and Vancouver?
    I live in Kelowna, 3 hours from Van in the interior of BC… one of the nicest places on earth. Skiing, Lakes, Wine and Golf, an absolute paradise.
    The real estate market has been completely flat here for the last 2 years, and the median residential house price has dropped from around 440k to just over 400k.
    Even with all the great interest rates and incentives to own a home… prices keep dropping and sales stay stagnant.
    What am I missing?

  20. I wonder if in time, the consumer will be dealing with the BOC, through one of the Big 5 franchises (Royal Bank, BMO, Scotia etc or maybe even a monoline) Would that would give the banks their level playing field?? Possible?? Curious for opinions but not a second opinion!!

  21. I would love to see all the numbers on this CRAZY REAL ESTATE BUBBLE OF DOOM if you eliminated the Vancouver and Toronto markets from the calculations.
    I’m sorry the rest of Canada, besides these two markets, is hardly on the cusp of the Apocalypse.
    Real back the craziness in VAN and TO and you’ll see a clearer picture of the true Canadian picture.

  22. Wow @reasonfirst, did you go to University?
    BC Boy asked a question that pertains to his real estate market.
    It appears that the Okanagan Valley has already started to auto-correct itself over the past couple years, probably with more to come.

  23. Politics are a funny thing. I always find it amusing when someone takes a shot at someone else in public. Flaherty tells the Banks to “Grow UP” in a way of sorts like they have control or something. Yet the Government controls CMHC lets not forget all the compliance and Bank regulations mixed with political attacks on credit card and banking fess combines with disclosure documents. Now all of a sudden he gives the Bank’s permission to do what they want like they could have all along? Very confusing, I wonder what all the backroom politics are eh? The truth is a hard animal to catch theses days !!

  24. Realist, you are largely correct, the property value correction is 100% local, each region will react differently. Several years ago the real estate values in Calgary dropped and just the opposite occured in several other cities. That being said Toronto and Vancouver are the two biggest property markets in Canada so the banks have to think about what happens in those markets.

  25. 100%?
    I find it hard to believe that real estate is either 100% local or 100% national…There may be opposing forces at work e.g low interest rates vs local lay-offs but at the end of the day it is a combination of both.

  26. where do you want the prices to go ?
    2-3 M ?
    get real, the value of the house should be = the land + the materials it takes to be built.
    so average house should be not more than 300 K

  27. Here is the reality check on CMHC: CMHC both prints money for the Canadian taxpayer and through the CMB market, ensures that all Canadians enjoy cheap and affordable mortgage financing. In the years 2001-2010 CMHC has turned over $14 Billion in profits to the Feds and has over $11 billion in reserves.
    In short, come back here and complain when CMHC burns through the $25 Billion and starts to cost the Canadian taxpayer one penny! I’ll bet you dollars to cents, that day will never come anytime soon, T.O./VCR. bubble or no bubble!
    Oh and one last point: Speaking for the majority that either does not have a CMHC mortgage or owns their house outright and contrary to your personal opinions, the government has no business making policies outside of CMHC’s governing mandate.

  28. I am interested to know what your definition of a property over-valuation bubble is verses a market correction? The Calgary property market has tripled in the last 15 years and yet since 2007, experienced what I would define as a “market correction”.

  29. Right. I bet you think the value of Apple should equal its book value. But why then is Apple trading at 6 times book value?
    Hmmmm. Maybe the sum of the company is worth more than the parts? Could the same be true for housing??
    Listen man, do you really need someone to explain this to you? I can’t speak for others, but I don’t think anyone has time to read for economic ignorance.

  30. It may be up to the government to make policy but it’s ultimately up to the lender, and the lender alone, to decide to whom it lends.

  31. I think you’ve misunderstood, Market Bull, and so you’re setting up straw-men to make a point.
    Lending institutions — not the CMHC — are the ones engaging in “moral hazard” behaviour through insured mortgages. They benefit from the upside (they make money on the mortgages that remain “good”) while externalizing the downside to another party (the CMHC, which covers their losses on the mortgages that go “bad”).

  32. Lenders have no incentive to make high risk loans, regardless of the insurance. The reason is simple. CMHC doesn’t cover all default costs.

  33. I se elots of confusion in you saying this : “all of a sudden he gives the Bank’s permission to do what they want”
    He doesn’t do such thing at all.
    He tells the bank to do a proper risk management BEFORE giving credit.
    But no, The Banks want to take no risk and give money to everyone who asks.
    So the Minister tells them to do their jobs properly, doesn’t tell them to do what they want.

  34. Banker, I am thinking 20% – 30% reversal in values in the GTA. While this is nowhere near the 50% drops in some USA markets this kind of value drop has a huge effect on mortgage brokers. We are transaction based as you know and there is a 12 to 18 month period during and immediately after the value retreat when transactions fall off a cliff. My business plan call for 60% fewer transactions in 2013.
    I am no expert on Calgary but is was told by collegues the drop there was 10% to 15% and now a recovery is underway. Even with a more measured correction like 10% many Calgary mortgage brokers reported a big transaction decrease at the time of the value correction.

  35. I tend to agree with Banker, CMHC can survive a reversal in property values, it has before and it will again. CMHC is a marvelous tool that has done nothing but help Canadian home buyers.

  36. Reason, you have a valid point but in the last 15 years it has been very localized. Different markets has moved at totally different paces; several markets reversed in value when others surged. Pretty local, but your right on one count, double interest rates in Canada and you will see a national reaction.

  37. Im not sure for the entire city of calgary, but I know the “single family” homes (~450k) have maintained seemingly maintained their values, maybe a 2% either way. The 800k+ homes lost value, so perhaps as a general rule the calgary market did lose 10%, but I am just an average ordinary everyday guy…!

  38. And remind me again about the percentage of loans that are going bad. CMHC has done nothing but make money for Canadians.
    The only “straw man” is the one doomers like you invent. If you did a little research on CMHC you may be able to think a little more clearly on the subject. I suggest the archives from this very same site.

  39. Flaherty did exactly what he should have done… he told the banks to stop meddling in government affairs – and the reality is that is exactly what they have been doing… ever since the conservatives took power.
    Which by the way is a 100% reversal of their behavior before they were in power when they as the opposition (Conservatives) 100% voted AGAINST the tighter bank regulations the Liberals brought in under Cretien. At the time the conservative party stated that the tighter regulations would seriously negatively impact the Canadian economy… funny that they now take credit for the “strong banking regulations we have”.
    By publishing articles such as several of the economists have done, they are using the media to try to point the finger at the government for the escalating debt levels in Canada. Fact of the matter is, exactly as the finance minister stated, the banks are the ones lending the money.
    The rise in debt in this country is ultimately at the feet of the banks and their underwriting policies. Here is a little tidbit for everyone to chew on…
    In the event of a foreclosure, CMHC determines if the file met the BANKS underwriting guidelines when it was approved. Government has NEVER tried to dictate the banks underwriting policy, all they have done, all they can do, is regulate CMHC guidelines.
    Just take a look at who pushed the government to allow 40 year amortization, etc in the first place. It was the banks that assured government that it was needed, and that there was low risk. They played the hero in the media before – “we opened up homeownership in Canada!”
    Now they are trying to divert the publics attention away from consumer credit. Focus on possible housing bubbles (which is NOT supported by real estate activity by the way… if consumers are willing to buy a house for $500,000 – then it is worth that money, if they aren’t… then it is not – no different than any other consumer item.)
    Consumer credit accounts for a full 1/3 of household debt… and that 1/3 accounts for payments whic total more than double the required payments on the mortgage debt. Think about it… 50K unsecured debt carries a minimum payment of $1500.00 – a $300,000 mortgage at 6.09%, amortized over 25 years is $1935.50…
    Think about it… would a rate increase to 6.09 from 2.99 really be that big a deal if consumers were not bogged down with unsecured credit?

  40. Regulators almost always regulate in knee-jerk fashion. They get all riled up by press headlines and anecdotal hints of risk and then rush in with new rules. I truly believe they are more interested in appearing to be on top of things and covering their backside than in protecting citizens. Their piles of new regulation does little more than leave responsible consumers with fewer choices, even though they are not the ones adding to systemic risk.
    Target the borrowers causing the problems. Leave options open for those of us who pay our bills on time every time.

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