Flaherty’s mortgage moves are the right ones, but will slam the brakes on
By Bruce A Stewart
Once upon a time, banks in Canada engaged in prudent mortgage lending.
You needed at least 20% down, and you had to have that in cash. You had to have a debt-to-income ratio of less than 36%.
You couldn’t get a mortgage with an amortization longer than 25 years, in return.
That, of course, was back in the old days, when the banks had to hold the mortgages on their own balance sheets.
Securitization — the selling off of mortgage portfolios as investment vehicles — changed that. Our banks in Canada may not have been able to be quite as aggressive about it as their American, Australian and European counterparts thanks to our banking regulations, but they were as aggressive as they could be.
So down payments went down, cash back became the norm, interest rates sank, and amortization periods went up. Every one of these steps “qualified” more people to get into the real estate game.
Always remember that, for a bank, debt is an asset — and a multiplier. Lowering the quality of their loan portfolios and selling them off tout de suite so that someone else gets stuck with the occasional bad debt was a natural consequence.
Add to that CMHC (Canada Mortgage and Housing Corporation) with its “insurance for all, the riskier the better” approach to insuring the “quality” of Canada’s version of liar loans, subprime mortgages, and the like and you get bubbling real estate markets.
Of course, the buck will stop with the taxpayer, just like it has everywhere else in the world. That’s why Federal Finance Minister Jim Flaherty has repeatedly tightened up the mortgage market, reining in CMHC, cutting amortization periods, trying to restore some sense to the lending so that there’s less to have to bail out when the time comes.
After all, the real problem in the Eurozone are a collection of zombie banks (bankrupt, but no one wants to admit it). When you hear about yet another cross-border bailout arrangement there, remember that almost all the money is going to banks to maintain the fiction that they’re solvent.
A similar story, of course, can be found south of the border. TARP (the Troubled Asset Relief Program), the failure of the American equivalents to CMHC, Fannie Mae and Freddie Mac, and multiple rounds of quantitative easing have all been to keep the fiction that JP Morgan Chase, Citibank, etc. are still viable businesses. You’d think after nearly five years of handouts they would be, but they’re still one hair-trigger from collapse.
As Flaherty’s moves crunch through the condo towers and instant suburbs of Canada, you can be sure the calls will go out to “help the poor homeowners”. Premiers in one province or another will scream for the cameras that “you’re killing our local economy”.
Don’t pay attention to them. These moves should have been made around 2003-04, but better late than never.
Keeping our powder dry by not pouring Canadian money into Eurobailout funds and other global “plans” to reflate the debt engines is one necessary policy. We’re going to be far too busy bailing out our own boats, in Ottawa and in most of the provinces.
Getting our internal market back on a sound footing is the other half of the equation. Flaherty may just have saved us from ourselves this week.