More on mortgage rules and the nanny state

Across our chain today, I take a contrarian view as to the worth of new mortgage rules announced by the federal government on Monday. An excerpt:

Consider 25-year-old Sheila. She might prefer the low monthly payments that come with a long-term mortgage while she pays off her student loan. She’d have picked a 40-year amortization now thinking that, when she’s 30 with her student debt retired (and probably earning more), she could refinance her mortgage, taking a 15-year amortization period. For Sheila, that would be prudent use of her cash flow — and she’d still be mortgage-free on her 45th birthday.

But no longer: Ottawa has decided Sheila and her bank, working in each other’s interests, cannot be trusted to make good decisions.

By all means, governments should ensure our banks follow sound lending practices.

And our federal government should do all it can to create more Sheilas who are prudent and wise with their finances. But Ottawa should also ensure Sheila will have the full range of choices before her to secure her own long-term prosperity.

This week, the government did neither.

Some other thoughts that I couldn't squeeze in to the column:

• In refusing to continue to provide CMHC-backing to home equity lines of credit (HELOCs), Finance Minister Jim Flaherty argues that Canadians taxpayers should not have to bear the risks for what should be a private sector arrangement between a lender and a borrower. Fair enough. But then, isn't that an argument to shut down the CMHC altogether? And, in any event, as Flaherty himself conceded, there are no indications that CMHC's guarantees were actually costing the Canadian taxpayer anything. (In fact, some have argued that the federal government makes a tidy sum through CMHC's insurance activities). In any event, I think it's doubtful to assume that if a consumer cannot get a HELOC without the CMHC's backing that that consumer will simply not borrow. In fact, that consumer will now likely seek a loan at higher rates or, likely worse, end up putting more on a credit card.
• In lowering the amount a consumer can borrow against a home — from 90 per cent of its assessed value to 85 per cent – Flaherty argued that this was an appropriate measure “to promote saving through home ownership.” Promoting savings, seems to me, to be an excellent policy objective. But there is one fabulous, widely-endorsed, way for the federal government to goose savings rates: Cut income taxes and raise consumption taxes.
• Both Flaherty and the Bank of Canada have indicated in the last several months that they are worried about problems down the road because of rising levels of household debt when measured against disposable income. The most recent measure was an all-time high for Canada. For every dollar of disposable income, Canadians now owed $1.48. On its own, this statistic might be cause for concern. But surely another important ratio in measuring the ability of Canadian households to service and manage their debts is the ratio of debts to assets. And, as BMO Capital Markets deputy chief economist Doug Porter has noted, “While debt has risen to record heights, so too have financial assets, due to a rebound in equities and an underlying rise in savings. Taking these factors into account, as well as the recovery in Canadian full-time employment, leads to the conclusion that household finances are not nearly as weakened as the dire headlines would suggest.”
• Canada's bank watchdog, the Office of the Superintendent of Financial Institutions, has already instructed lending institutions to do more testing of the risks that consumer debt poses to a consumer's balance sheet when that consumer seeks new credit. Good idea.

Finally, let me share with you an e-mail message I received from a reader who has been a mortgage broker for 20 years.

Bravo-

Finally an article on the government mortgage rules changes that addresses what they have really done to everyone for the sake of a few. The government is always window-dressing and this is more of it.

You hit the nail on the head with your example of someone with a student loan.There are countless others.The fact is that 90% financing has been the godsend for many clients who have found themselves in a financial situation that refinancing could solve at a much lower rate and much lower payment. These don't necessarily have to be distress situations either. They can be part of a financial plan to manage their debt in a much more efficient fashion and pay it out sooner.

There was no evidence that the crop of borrowers who participated in the no money down 40 year amortization mortgages were about to default! In fact the qualification parameters of this group of borrowers was much higher due to the risk involved but the government decided they just might start defaulting so we better cancel that program.

Ask the government for statistical situation related default statistics that tie into any program and they can't provide it.They are just doing it “just in case”

If anybody in government had the faintest idea of risk-lending parameters they could have addressed qualification standards for particular lending programs instead of taking the easy way out ,but that might have involved some thought and conscious input.

So why reduce the refinance limit to 85%? To protect our equity,of course!

The same holds true with 30 year amortizations.They are protecting the Canadian public from themselves and helping them pay off their mortgage sooner! All throughout my 20 years I have never met a client who intended to pay their mortgage out over 30, 35 or 40 years.They did intend to use the amortization as a financial planning tool as you outlined and now that option has been compromised again not to mention the qualification parameters of the first time home buyer group!

So who benefits? Do you think credit card companies and the banks who extend limits on credit cards at will and who extend lines of credit with the sweep of a pen will like the fact that this higher interest rate debt has less chance to be paid out and consolidated? Why do we never see legislation to deal with the systemic financial rape of the public. Mortgages are clearly not the problem but maybe there might be a banker whispering in the government's ear about the financial armaggeddon about to befall us. Must be tough to whisper while you salivate.