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March 22, 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

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