Flaherty Talks Another Bank into Higher Rates

Rate-FloorOn Friday, Manulife Bank posted its lowest rate ever on a 5-year fixed mortgage, 2.89%. It lasted for four days.

When our big brothers at the Department of Finance (DoF) caught wind of it, they dialed up Manulife and swayed the bank into raising its rate back to 3.09%.

“We don’t want a race to the bottom on mortgage rates by our financial institutions…,” said Finance Minister Jim Flaherty, as quoted by Bloomberg. “I had one of my staff call (Manulife) and indicate my displeasure.”

manulife-bankManulife responded today by saying:

“After consulting with the Department of Finance, Manulife Bank has withdrawn the (2.89%) promotional campaign and reverted to our previous posted rate.”

So now we have Manulife, the 10th largest bank by assets, being told by bureaucrats how to price its mortgages. Two weeks ago, BMO got the same call.

Where does this end? The DoF seems set on breaking the knees of home prices, one way or another. With it so intent on regulating real estate transactions, will the next round of headlines read: “Ottawa Legislates Price Ceilings on the Sale of New Homes?” (Yes, this is an exaggeration…I think.)

The Political Reaction

Thomas-MulcairIn an interview with Canadian Press, NDP Leader Tom Mulcair called Flaherty’s actions “Banana Republic behaviour,” saying the minister has no right to interfere with a free marketplace (somewhat ironic commentary from the NDP, but that’s another matter).

“… Since when do you use political weight to push back
on financial institutions responding to a market parameter that’s totally
legal?” he charged.

Liberal interim leader Bob Rae expressed similar sentiments, calling the minister’s actions “ridiculous.”

“Either we have a market or we don’t,” Rae said. “The banks have
huge profits. The idea that they shouldn’t be able to give a break to
consumers is ridiculous and the idea that the Minister of Finance would
basically be trying to create some kind of a cartel among the banks and
the financial institutions as to what they can offer consumers by way of
interest rates is I think completely inappropriate, completely
wrong…”

The DoF is now asking banks to use their rates as tools to regulate the housing market. That’s not their role. Banks, as private sector entities, have an obligation to legally maximize profit. It’s their job to set rates as high or as low as may be required to achieve that goal. Banks have every right to compete as hard for mortgages as the myriad of other lenders currently advertising 2.89% or less.

One might argue that banks benefit from selling government-backed insured mortgages, and that they should therefore defer to the Finance Minister’s wishes. But all lenders sell insured mortgages. Why single out just the banks by compelling them (and only them) to advertise artificially high rates?

Moreover, what if rates continue lower and stay low for years? Or what if home prices dive after the spring market? In these cases, governmental rate tampering would prove pointless, with the sole effect of taking money from borrowers’ wallets (through higher interest) and transferring it to bank coffers.

Prudence Misdefined

Jim-Flaherty-DOF

Each time banks advertise sub-3% five-year fixed mortgages, Flaherty exhorts that lenders be “prudent.”

But lowering rates (to match one’s competitors and reflect market-wide improvements in funding costs) is not “imprudent.” Lending to borrowers who don’t qualify for a mortgage is imprudent. There’s a difference.

Some suggest that when big banks advertise low rates, it fuels excess home demand. But few people see 3.09% and say “I can’t afford a house” and then see 2.99% and say “Hey, I can afford a house.”

A one-tenth of a percentage point rate reduction lets someone qualify for less than a 1% higher purchase price (based on standard debt ratio calculations). That is far from bubble-inducing.

Behind the Hype

When banks advertise rates that are already widely available, they’re not triggering a “race to the bottom” as the minister suggests. Rates are driven lower by market forces—which currently include shrinking mortgage volumes, narrowing spreads and falling funding costs. Micro-pricing adjustments by individual banks, however large those banks may be, barely impact market demand—and only in the short-term.

If anything, it is Flaherty’s own public crusade against rate promotions that is raising the profile of low rates. It’s sparking more consumer mortgage interest than any bank advertising could.

Indeed, if it weren’t for all the media attention Flaherty has caused, sub-3% rates would just blow over. But instead, a small number of buyers may now actually rush to get a mortgage “before the government bans 2.89%,” as one of our worried readers expressed today.

Patience…

Housing-balanceMr. Flaherty doesn’t want spiralling home prices to lead to a real estate collapse. And that’s completely understandable. But a few tenths of a percent off rates will not trump market fundamentals in determining where home prices go from here.

At this stage, the real estate market needs time to digest all of the mortgage restrictions from 2012 and find its own equilibrium. And we’re already seeing signs of that with inventories building for the last three quarters and sales down sharply.

If the market doesn’t self-correct, the DoF, in its quest to moderate home prices, has the ability to tighten lending regs further. At least in that case, market-wide regulation would apply to all mortgage providers equally, and not just handicap the banks.

As I wrote in the Globe & Mail yesterday (story link), consumers are the losers here. If a bank customer pays one-tenth of a percentage point more as a result of Flaherty’s actions, that’s $1,200 more interest over five years on a $250,000 mortgage.

So far, the other bank on Flaherty’s radar, BMO, hasn’t caved to the pressure and is still advertising a 2.99% five-year rate. It’s refreshing to know that some bankers are brave enough to give consumers a fair shake and do what they’re paid to do: sell mortgages.


Rob McLister, CMT

  1. Excellent piece Rob. You have a really brilliant insight here too, about Jim’s unintended consequences:
    “If anything, it is Flaherty’s own public crusade against rate promotions that is raising the profile of low rates. It’s sparking more consumer mortgage interest than any bank advertising could. ”
    I bet Flaherty just read that Globe article and found out there that Manulife is advertising 2.89 even though their CEO talked down about low rates a year ago, and felt compelled to intervene.
    But I really think Manulife “wussed out” here by caving in and immediately complying with Flaherty’s wishes.
    What about those who are not good negotiators and pay the posted rate? They will now end up paying more than they would have without Flaherty’s interference.
    I had a lot of respect for Flaherty, but let’s hope the Prime Minister installs someone less concerned with micro-management of the housing market after this week’s budget.

  2. Brilliant article. Absolutely mind boggling the Flaherty thinks wagging his finger at the banks is going to have any effect. Truly unbelievable that someone in that position could be so naive.
    I suspect this is more to cover their behinds than for any real effect.

  3. What better way to alienate voters than to take money from their pockets and give it to banks. Nice work Jimbo!

  4. One might argue that banks benefit from selling government-backed insured mortgages, and that they should therefore defer to the Finance Minister’s wishes. But all lenders sell insured mortgages. Why single out just the banks by compelling them (and only them) to advertise artificially high rates?
    ________________
    Isn’t he just singling out the lenders that throw “promotional rates” out in the marketplace? I’ve only heard of BMO and Manulife getting this treatment.
    Overall, if they just took CMHC out of the equation, there would be no reason for the banks/lenders to even listen to this phone call the next time a Minister of Finance tries to play rate-setter. But, since everyone needs CMHC, they kind of have to play by whatever guidelines the government decides to create (as stupid and arbitrary as they may seem).

  5. I am usually a huge defender of Jim Flaherty, and I think most of what he does is on track and the right thing to do, mostly to protect us, even if it’s just from ourselves. But I have to say, I highly disagree with this. Sending warnings and messages through the media is one thing, the man is allowed to have an opinion and speak it whenever he wants. But to actually call up the company and tell them to stop offering those rates, well, it doesn’t seem very democratic, does it?

  6. Thanks for the concise analysis, Rob. I’d like to suggest you take it one step further, and translate the $1,200 into the before tax amount of $2,400 (based on the marginal tax rate at the income required to qualify for a $250 thousand mortgage) or two weeks more labour to say for their house. Likely we paid $1200 – in the Minister’s salary – for the phone call to BMO and Manulife.
    The fact that the Minister felt it necessary to intervene in the free market is appalling; the fact that he was able to create sufficient trepidation in Manulife – once Canada’s largest company and a large multinational company with operations around the globe – is directly related to the change last year that moved the Office of the Superintendent for Financial Institutes under the Ministry of Finance (policy) from the Treasury Board (enforcement). I warned people that the Minister was not above using this combined power to enforce his policies, and now we’re seeing the results of that short sightedness.
    Widely hailed at the time as a good move, clearly this combination of powers can and will be abused. It will further inhibit the market and stall the economic recovery we will vitally need next year.
    Because they aren’t done yet!

  7. Just another perfect example of his cluster fudge decision making process! How many times does he want to screw Canadians? This guy is an absolute incompetent fool!
    The gong show has just started!

  8. yea where were the government boys when rates were at 15 per cent back in the day…i dont recall any chest thumping back then.

  9. Can’t wait to see what Flaherty has in store for the monolines.
    Keeping a low profile is really important now guys.

  10. Jimbo’s legacy: let lenders offer 30, 35,and then 40 year amortizations, along with 0% down and (very)Flex down payments. All insured by our very own CMHC. Financial crisis hits, so ‘encourage’ Canadians to spend on their houses by offer a 13% tax credit for up to $10,000 spent. Oh, and it doesn’t matter if you borrow or spend from savings – don’t worry, be happy! – JUST SPEND!!
    Forrest Gump’s mother: “Stupid is as stupid does.” Very well said, Mrs. Gump!

  11. WHATEVER HAPPENED TO FREE MARKETS?
    Let the system decide how low mortgage rates should go. Even with a government guarantee, mortgage rates do have a floor. Lender will not issue mortgage funds at a loss over time.

  12. I have a question – although Manulife was more or less forced to stop advertising the 2.89% does that mean that they can’t offer it to you once you’ve sat down in the office?

  13. Everyone is up in arms with Jim’s finger wagging – wake up people – the banks place all the risk on CMHC -and we the taxpayers are on the hook. Let the banks take 100% of the risk of providing loans and Jim will be a non-issue. Expect my taxes to cover foolish lending is just insane

  14. Your taxes are not covering anything and its not credible to suggest CMHC need’s bailing out. In fact, as it currently stands, should the government ever decide to one day break it up and sell, the challenge will be finding a buyer with deep enough pockets to pay a fair price for such a valuable crown owned asset.

  15. I don’t see any mention of it anywhere, but TD had their 2.89% rate on their web site for a day or two before it disappeared.
    They probably got a call from Jim as well.

  16. This was another very insightful and balanced article. Rob takes the time to point out the importance of trying to acheive a soft landing on property values which most commentators only gloss over.
    As someone who advertises a 2.77% full featured 5 – year mortgage every day I can say definitively the public wants low rates but a ton of those people looking for low rates are simply renewing the exisitng mortgages. It seems inconceivable that a government minister would intervene to force the public into higher rates on mortgage renewals but since the minister’s policies are a blunt instument that is what he ended up with: higher rates on renewal.

  17. I don’t understand why does DoF interferes with free market dynamics deciding the so called floor of mortgage rates and not when rates were going up or deciding ceiling as well. It is just hurting consurmer and benefiting big banks with already deep pockets with a combined 7.2 billion profit for year 2012 (6 big banks) and continous YOY growth from lending operations.

  18. I think Jim Flaherty better upgrade his cel phone plan to unlimited calling because he has 100’s more lender calls to make. Any lender not offering below 3% on a 5yr fixed, is not even competing in today’s mortgage market.
    Can’t wait for your budget tomorrow Jim. What next, $2/L gas because oil companies are not making enough profit?

  19. 1.I agree this is highly innapropriate but let’s not kid ourselves that this is intervention in a “free market”. As long as the feds have control of the CMHC levers and uses them, the market is not free.
    2. For F to go this far he must be very frightened of what he has created.

  20. The taxpayers are functioning as a re-insurer. Important given CMHC’s low capital requirements. Make CMHC buy that backing in the marketplace, and then you can say the taxpayers aren’t contributing anything.

  21. The Prime minister is not the one you should hope to “correct” his minister behavior. He’s likely well aware of it before it happened.

  22. You are too easily dismissive of the price pressure brought by interest rates. Universally, houses are being sold based on monthly cost, period. That means 1200$ shifted off the mortgage total will come off the purchase price, on average. It has to. Conversely, the opposite is true.
    Flaherty is just deciding who gets the difference.

  23. I’m in agreement that Flaherty has overstepped his bounds here, but please….let’s not get started with the “free markets” nonsense. The Canadian mortgage market is anything but free. Where else can the risk profile be inverted such that a 95% LTV mortgage becomes less risky than a 75% LTV mortgage?
    CMHC backstopping a large portion of the market ensures that high risk borrowers do NOT pay “market rates”. By definition, that’s not a free market.

  24. My goodness people need to revisit the definition of a “free market”. The Canadian mortgage market is anything but free. See my comment above

  25. Hi Ben,
    You’re right that the rate market is not truly “free.” I think most folks who advocate free market pricing do so while acknowledging that reasonable regulatory bounds are necessary. It’s more a question of the degree of market freedom that is appropriate for lenders who operate legally and responsibly.

  26. I agree entirely with Flaherty. It is so easy to parrot some convinient nonsense about the “Free market”, but when the housing bubble bursts and the financial system collapses, who will be on the hook for the Bank’s bad investment decisions? Who will fund the bailout?
    I am all for the free market, but there is no free market as long as the CMHC and tax payers are shouldering the risks for banks. If we want a true free market, we must get rid of the CMHC first.
    So let the Banks shoulder 100% of the risk, as they do their profits, and then they can set mortgage rates at whatever they may wish.
    Until then, as long as tax-payer funds are potentially on the hook for decisions that banks make, the Government must continue to pay attention to what they do, because the Banks have proven, over and over again, that their short-term interest trumps the overall health of the larger financial system.

  27. I like this comment.
    While not a shotgun approach, government hasn’t exactly decided to use a sniper rifle.
    At the same time, people who got the 2.89 are saving how much over 5 years? Maybe $1000.00 ($200 per year)?
    There are many other ways to save $200 each year.

  28. I completely disagree with you.
    He may call to tighten lending criteria, but controlling the rates is hurting hard working canadians that qualify for that rate.
    It directly makes people pay more to the banks, which have billions in profit every year.

  29. “when the housing bubble bursts”
    “when the financial system collapses”
    “Bank’s bad investment decisions”
    “Who will fund the bailout?”
    You have zero credibility when you allow for no other possibility but a mortgage meltdown.
    Go to Doomers.com or Greaterfool.com if you want to find people sympathetic to your misinformation.

  30. No one is saying that the government shouldn’t “pay attention” to banks. They are saying that politicians have no business forcing QUALIFIED home owners to pad bank profits and pay more for their mortgage.

  31. What do you know about CMHC’s capital requirements? I’m betting very little.
    Why don’t you humour us with your breadth of knowledge. Pick a reasonable worst case default rate and break down the math for everyone. How much is CMHC’s exposure in dollars given your hypothetical default rate. Then compare those net losses, after recovery, to CMHC’s capital buffer.
    Until you can do these projections with accuracy, take your blind theories and fear campaigns elsewhere.

  32. I am thinking about other scenario: What if another bank was behind this call? What if this is only about market shares and nothing else.

  33. We are in strange times when a 5-yr GIC pays 2.85% and a 5-yr fixed mortgage is the same.
    The GIC will be painful if you lock in for 5 years, and the mortgage will be painful if you don’t.

  34. Mulcair’s comment is not ironic in the least.
    There is a big difference between the government intervening in the markets through actions sanctioned by parliament, versus the Minister taking inconsistent and arbitrary action at his own behest through non-public, unaccountable means.

  35. Right, because the NDP never meddles with big business. If the NDP ever had a federal minister you can be sure they’d be interfering with every free marketplace they could.

  36. I think what people are saying is that while the Canadian mortgage market is heavily regulated, all lenders who meet the requirements to lend (ie: approved lenders) are able to play on a level playing field – they all have access to the same government guarantee programs.
    What is so puzzling to me is that a conservative government would intervene as much as they have over the past 8 years. These actions are something that you would expect from a socialist government and a managed economy, not one based on conservative values. There are no ‘free markets’ in financial services anywhere in the world considering all of the central bank interventions, quantitative easing etc.. but shouldn’t a conservative government should be as far removed from it as possible to maintain their values as a political party?

  37. You fail to grasp the point here.
    All governments intervene in the market – right, left, center, doesn’t matter. They all do. That’s not the problem. That’s their right, if they so choose.
    But there is a difference between intervening in the market in a legitimate way, as per the powers vested in the government, and doing so in an illegitimate way, as per Flaherty’s one-off phone calls.
    Did Flaherty phone TD? RBC also had a 2.99% on offer a while back. What treatment did they get? If they got none, why?
    How about National Bank when their mobile mortgage brokers were throwing out 1.99% three-year terms eight or nine months ago – did Flahery phone them too? If not, why?
    Intervening in the market in this manner is unprofessional. It is not accountable, not transparent, not consistent. It is open to influence, personal whim, and ego.
    If Flaherty thinks five-year terms below 3% pose a hazard to Canadians, the market, and the economy, he has plenty of tools in his chest to make that happen.
    If something illegal is going on, they should prosecute. If something needs additional oversight and more stringent rules, they should regulate. If they want something to be illegal, they should pass a law.

  38. Nice straw-man deflection Ben. After all, what would a real estate discussion be without the insufferable bleatings from real estate perma-bears about the “evil” CMHC.
    As for free market semantics, please enlighten us with your definition, before scolding the great unwashed masses about their apparent collective ignorance of the topic.
    Civilization and a truly free market can’t coexist.
    Even those bastions of free market capitalism, the NYSE and NASDAQ can’t function without myriad rules, regulations and laws. So-called free-trade agreements require thousands of pages of rules. In a truly free market there would be no import / export duties or tarriffs, there would be no milk marketing board or even taxation for that matter.
    So please spare us the false sanctimony and try to stay on topic.

  39. Low profile fellas.
    You’re frustrated now? Imagine how you’ll feel when CMB allocations are cut back to $15 billion, and MBS is curtailed.
    Grown adults like yourselves should understand who is the hammer and who is the nail here.
    Flaherty has already sent your CAAMP leader packing. Get the message?

  40. People should look the other way when politicians overstep their authority, for fear they might do something else irrational? Great principles there mate.
    PS. I hear Flaherty may be on the way out this year, and not too soon.

  41. the Tories need to get rid of him as soon as possible…what in heck was he thinking of when he made that statement….were all his people sleeping?

  42. The use of a non sequitur is a typically weak response when logic fails.
    Define “free market” and give us an example. Good luck.

  43. So many comments here from ppl affected negatively by the latest round of mortgage rules.
    It is obvious that the ppl posting here want easier mortgage approvals to compensate for reduced volumes.
    What everyone except Summa seems to have forgotten is the point of all this tightening is to lower housing prices, reduce household debt loads, and to protect taxpayers from institutions that hand out too many mortgages to ppl that will be shocked if rates do rise to “normal” levels.
    The posts on this page seem to be focused on things such as price fixing and taking away freedom from the market. This is missing the point.
    Psychologically, getting a rate lock for under 3% is a stimulus that will attract a herd of people that would probably reconsider their choice if interest rates did hit 5% again. Of course these are made up numbers but nobody mentioned this, just that they want more ppl to get lower prices on mortgages.
    1. tighten lending rules
    2. control mortgage rates because if unchecked they will drop and proportionally inflate the housing prices
    3. watch the prices fall once sellers accept the new economic environment
    4. Goal: deflated bubble
    Go ahead and tear up what I am saying, but this is logical. Accusing Flahrety of trying to make banks richer, and raging about reduced mortgage approvals, is completely missing the point. The other comments on this page are so biased in one direction that it makes them very hard to read, even by someone with a lot of free time like myself.

  44. You’re the pot calling the kettle bias.
    You only wish this were about “the latest round of mortgage rules.”
    It’s not pal.
    It’s about one man having the audacity to think his opinion (which Canadians are resolutely against) is more important than the rights of private business. Banks have the RIGHT to operate without undue government interference regardless of your definition of free market.
    You say:
    >> “institutions that hand out too many mortgages to people that will be shocked if rates do rise to “normal” levels.”
    I ask you, how do you define “shocked?”
    How many people are you talking about being shocked exactly? 1%? 2%?
    How many shocked people will stop paying their mortgage?
    Without defining these things and backing up your numbers, you’re claims are groundless.
    You say:
    >> “Psychologically, getting a rate lock for under 3% is a stimulus”
    Did you say the same thing about 4.99% and 3.99%??
    How many people will be “stimulated” by 2.99% exactly?
    You’re saying that 3.04% is not a stimulus but 5 basis points less is? Do you realize how stupid that sounds?
    By the way, will the market ever adjust to this new rate level? Will there be stimulus for as long as 2.99% exists? How long will the stimulus last?
    Let me answer that one for you. We’ve had 2.99% for a year and a half already. The market has already adjusted pal.
    You say the people here are missing the point. I think it’s you that are in the dark. You back up nothing you claim with facts and you support state business practices that belong in countries like China or Cuba.
    Bill

  45. Bill you seem to be very confused.
    “You’re saying that 3.04% is not a stimulus but 5 basis points less is? Do you realize how stupid that sounds?”
    Nowhere did I say this, and futher,
    “Without defining these things and backing up your numbers, you’re claims are groundless.”
    It is impossible to give the numbers you are demanding and you are well aware of this. That is a weak, and rudely worded attempt to dismantle my points.
    After rereading what you typed, I cannot find any point or contribution in your post. I will summarize and reassert my argument, dropping rates tempt buyers. Tempted buyers raise housing prices which Flaherty is trying to control downwards. It is a very simple principle and I dont need to be lay it out any clearer for you Bill and I do not need to.
    In response to Canadian, I own 2 homes and I am reading this site to learn more about how to find a way to purchase my 3rd and save some $$. My arguments here are not out of my personal interests. I am the devil’s advocate here because all the other posts except 1 were flaming Flaherty and not mentioning his logic.

  46. Pick your battles Observer.
    Be tactical, not emotional.
    When you tell Flaherty what you want, you’re actually telling him how best to affect your business.

  47. Bill,
    You’d probably make 10x what you do now in China. The competition is fiercer though…the dirty type of fierce.

  48. I hear both sides of the argument.
    However, when all is said and doneI’m still probably buying the home I’m looking at, whether the rate is 3.09 or 2.89

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