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Canadian Banks Squirmy: Want new lending guidelines from Government

By Mark Kerzner
PRESIDENT
TMG The Mortgage Group

In an email from the President of TMG The Mortgage Group Mark Kerzner, he discussed the current lending atmosphere in Canada and the risks associated with what has been happening with lending guidelines and low interest rates.

In a message to the TMG network on January 5, 2010, Mark suggested proposed changes to the down payment requirements and reducing the maximum amortization limits should not be considered and that the markets would eventually return to normal levels. My reasons were fairly simple:

• If interest rates are raised, it means that we are in (or projecting) a recovery: That more people are working and that real income is on the rise. We know that when this occurs, arrears are strongly correlated and will likely not continue to rise.

• These changes may adversely affect mortgage brokers more than other channels. Broker market share has grown significantly over the past decade. The primary reason is that we are becoming the channel of choice for first time homebuyers. Since mortgage brokers are those best positioned to provide consumers with a plan and education on strategies to both take advantage of current market conditions (rates) and to protect them in the event of market changes between now and the time the mortgage comes up for renewal. It is the customer who may suffer if broker market share is eroded.

• The 35 year amortization can be argued to be a safety net of sorts in the event of cash flow issues in the future. Clients who take an extended amortization and make accelerated payments create room to then extend back to the original amortization (less time gone by) should they need to reduce their payments in the future (though you must confirm this policy with the lenders you deal with directly). In some provinces it has been argued that the introduction of the HST itself may be causing the market to overheat as consumers seek to get in before they have to absorb higher costs. Similar comments exist about the market in general “buying forward” to take advantage of these current great rates. If this is true then the market will naturally slow on its own and does not need outside intervention.

Coincidentally, after this early January message it seemed as though the media and the Government backed off from its position. Just this week it has begun to heat up again with a slightly different slant. From the media it appears as though the BANKS are lobbying for these changes: “Senior bankers have privately urged government officials to increase the minimum down payment on homes from 5 per cent, or shorten the maximum time over which borrowers can spread out their payments, which is currently 35 years.” (G&M February 11, 2010).

Ironically, the very same article goes on to say “But Ottawa does not believe that there is a housing bubble at the moment and, having done some analysis to determine the impact that higher down payments and shorter amortizations would have, the Finance Minister believes that such moves would take too much heat out of the market and damage the economic recovery, according to sources.”

I can certainly appreciate that the banks would like to control their risk. The part I was struggling with is why they are asking the Government to regulate this perceived risk and not simply taking action on their own by changing their credit risk policies. I think there are two main answers to this question (but perhaps there are many more). First, I do believe that the banks are concerned with potentially inflated housing prices. This could impact their existing portfolios to a much greater extent than managing the risks alone on net new customers. Secondly, is market-share. The banks may perceive they would be at risk of losing share if all were not held to common standards.

We also know that many banks do qualify the ARM clients at either the 3 or 5 year fixed rates. This should help mitigate potential risk of rising interest rates. If we are heading in a direction of tougher qualifying standards I would encourage ones that qualify ARM clients on higher fixed rates rather than restricting product features such as increasing down payment requirements and reducing maximum amortizations.

Regardless of whether the banks or the Government impose stricter guidelines it can not be argued that Canadian mortgage consumers must seek out the advise of professional mortgage experts to guide them.