Monday, January 17, 2011

Mortgage rules: Now and Then with Jim Flaherty

Now:
CTV News has learned that Flaherty will unveil three new rules:

* Mortgage amortization periods will be reduced to 30 years from 35 years.
* The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from the current 90 per cent.
* The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

According to a government official, the rules are aimed "at encouraging responsible lending and borrowing and encouraging people to increase their home equity."
...
Canadian household debt is now at $1.4 trillion, while mortgage delay payments have increased by 50 per cent," Fife said.

"In fact, the International Monetary Fund says household debt is the number one risk to the Canadian economy."
Flaherty is issuing rules to encourage responsible lending and borrowing? Here's a look back to what Flaherty unleashed in 2006, as reported in this Globe investigation of 2008:
In the first half of this year, as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.

Just yesterday, Finance Minister Jim Flaherty repeated the mantra that the government acted early to get rid of risky mortgages. What he and Prime Minister Stephen Harper do not explain, however, is that the expansion of zero-down, 40-year mortgages began with measures contained in the first Conservative budget in May of 2006.

At the time, Mr. Flaherty announced that the government was opening up the market to more private insurers.

“These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership,” Mr. Flaherty said.
Here's the reference in the 2006 budget: "Fostering Competition in the Mortgage Insurance Market."

Flaherty and his government's role in contributing to the present need to dial back deserves some attention as we listen to him today, as he attempts to portray his government as exercising prudent oversight over these mortgage rules. That's not the whole story. They have a record going back five years on this issue now that has not been a history of prudent oversight.