Attempting to understand the new mortgage rules Image

Attempting to understand the new mortgage rules

By Sam R on Oct 18, 2016

As new mortgage rules take effect this week that make stress-testing mandatory for all insured mortgages, I’m left scratching my head.

The new rule requires a stress-test for all insured mortgages, i.e. it will affect any prospective buyer with less than 20% to put down. Applicants will now be assessed on their ability to repay the mortgage at a five-year standard rate of 4.64% for five years in spite of lenders’ frequently offering lower rates; prior to the new rule, such stress-testing wasn’t required of fixed-rate mortgages longer than five years.

First-time buyers will be the most profoundly affected; one Toronto-based broker told the CBC it would mean a reduction of 20% to 30% in the mortgage amounts buyers can get. The flurry of activity as prospective homeowners rushed to get pre-approval before the rule kicked in yesterday would suggest buyers aren’t too happy about it.

I understand why the measure has been taken — Canadians are shouldering unprecedented debt and house prices are taking much of the blame, although a spring 2016 report by the credit monitoring firm TransUnion said almost all forms of consumer debt helped push consumer debt up by 2.7% in the year prior, including credit cards, installment loans and car loans.

But I have two major problems with this latest government intervention. First, the housing market isn’t in any immediate jeopardy, and our mortgage rules are already sensible enough that they kept us well out of the kind of trouble in which the US found itself a decade ago with their underwater mortgage crisis, so what problem is it trying to solve? And second, what is the role of government in manipulating home prices?

New mortgage rules

Pundits who say the move is a preventive strike against a bursting housing bubble have yet to conclusively decide that there is a bubble. If there is, and the complaint is that average Canadians can’t afford to buy homes, why enact legislation that targets the very buyer the bubble is supposedly hurting — first-timers.

We aren’t in danger of the kind of mortgage crisis that decimated the US economy just less than a decade ago, because our lending practices are stronger. Not only were our lending practices more conservative, but the number of Canadian homeowners per capita was greater than in the US.

Clearly, we’re already doing something right. I’ll give some credit to legislators for a job well done, but that doesn’t mean I think there’s any place for government in fixing the price of commodities. And how are legislators qualified to decide what homes are worth anyway? That’s for the market to decide.

I bristle whenever the government gets too much into the business of private citizens. Yes, mortgage insurance gives them an interest, but our mortgage default rates are incredibly low, a mere 0.28% of the $1.4-trillion mortgage business, five times lower than in the US, according to the Canadian Bankers Association. Banks are arguing that even the costs of implementing a risk-sharing (as was recently suggested) plan aren’t worth the potential benefits to the insurers; CMHC and private mortgage insurers here are self-sustainable — policyholders cover their claims. Only in a financial crisis — which, as I’ve said, our mortgage rules are already designed to prevent — could taxpayers end up on the hook.

In a recent interview with BNN, O’Leary Financial Group chairman Kevin O’Leary brought up another couple of salient points. Canadian homebuyers aren’t children and they aren’t stupid, so why do we need government intervention to protect us from ourselves? Even when we do make mistakes, we can deal with the consequences — we don’t need the government to peremptorily bail us out. If, he notes, they’re in the business of manipulating home prices, why weren’t they buying up homes nearly two decades ago when prices were headed in the other direction?

He sees the whole move as politically motivated, but I’ll leave it you to decide that one.