Reigning in the Mortgage Industry
I’m pleased to see the federal government are taking action to modestly reign in the wilder excesses of the Canadian mortgage lending industry. They propose to insure only loans with a 5% downpayment and 35 year or less amortization period – compared to tnhe status quo which permits insurance of no down payment 40 year loans. My recollection is that the Bank of Canada pushed for this a couple of years ago, but were rebuffed. The tone of this statement is pretty complacent – no sub prime mess here! – which may yet prove to be wishful thinking.
One has to think that, beyond a certain point, increasing amortization periods and reducing down-payment requirements has just inflated housing prices without making housing much more accessible to buyers lacking accumulated financial wealth.
A problem is that everyone who already owns real estate has a stake in keeping prices high. I suspect that is partly why Finance is being so â€œmodestâ€ in reforming these elements of federal mortgage insurance.
Tom Palley has written an excellent column on this dynamic and other aspects of the problem. Although mortgage-interest deductibility is an American phenomenon, his point about the exemption from capital-gains tax also applies to Canada.
On the theme of â€œtomorrowâ€™s conventional wisdom, today,â€ itâ€™s worth noting that the Globeâ€™s July 11 editorial took essentially the same line as us on the new mortgage rules.
The July 11 Star noted that â€œOttawa backstops 90 per cent of private mortgage insurersâ€™ claims to make it possible for them to compete effectively with CMHC.â€ While I have no problem with private firms competing with CMHC, I fail to see why the federal government should go out of its way to ensure that they get a piece of the lucrative mortgage-insurance pie.
CMHC has been a highly profitable Crown corporation, raking in a couple billion dollars (revenues minus expenditures) in 2007. However, taxpayers would be even better served if CMHC had an even larger share of mortgage insurance. Also, the sub-prime crisis suggests that the mortgage business should be run more like a public utility and less like a free-wheeling private enterprise.
“Iâ€™m pleased to see the federal government are taking action to modestly reign in the wilder excesses of the Canadian mortgage lending industry.”
It’s funny to see this critique when it was the federal government – through the CMHC – that instituted such “free-wheeling” lending practices to begin with.
In 2006 CMHC introduced the 30, then the 35 year mortgage, then copied the private insurers on the 40 year mortgage. It also introduced its Flex 100 product in 2006, a 100% LTV product. This was after introducing their 95% Flex down product in 2004 in which the remaining 5% could be borrowed too.
Furthermore, through the NHA MBS program the CMHC is dramatically increasing the amount of mortgage credit in the system by providing a government guarantee on all securities issued. This only encourages more reckless lending.
This same scenario played out down South with Freddie Mac, Fannie Mae, Ginnie Mae, and the FHLBs.
But given that this is the Progressive Economics Forum, admitting that government could be responsible for excess lending would probably be taboo.
Andrew and I are making the same critique as you of CMHCâ€™s previous decisions to increase amortization periods and reduce down-payment requirements.
Just a small comment on the US mortgage industry.
Some enlightened economists have pointed out over the years that the strength of the capitalist system is its ability to evolve and adapt to an ever changing environment. I think we just witnessed within the heart of capitalism it’s failure to do just that.
Given the growing bi-modal distributional nature of wealth in the US, and the inability of consumption by the many to be maintained at a level that would allow for a healthy level of growth, i.e. with the destruction of “name your market regulating mechanism”: labour unions, public healthcare, old age security, unemployment benefits, social assistance etc.
So with the willy nilly notion of the neo-cons towards “non-interference in the markets, aka,the business world regulating the markets, (no such thing as a self-regulating market, somebody is telling demand and supply what the rules will be amidst the chaos)
the US embarked upon the dystopic version of capitalism.
Wages through the traditional mechanism, fell and so did the social transfers, that inequality in wealth distribution grew rampantly. The consumer culture and its fetishism, could only contain such an economy based upon prison building, private security and military spending for so long before it started flying apart at the seems. To aid in the prolonging this version of capitalism, credit markets the rules for sound credit management became the new route through it all. No longer was quality employment and high wages required to build a consumption base to satisfy the needs and wants of this consumer fetishism. Just proper ID, and an appearance at the local lending institution.
Of course this version of capitalism was literally living on borrowed time before the fences came apart at every nail.
As long as the designers were getting a slice of the rewards nobody seemed to be saying much, except of course those within the progressive community.
I felt it quite ironic that a senator from the US stated last week that what was needed was another bubble type investment mechanism to generate the paper wealth that we witnessed over the past few years. I wonder how history will write this one up. I wonder what history left out of the last time the capitalist system went off the rails like this.
More importantly I wonder how the regulatory regime will look in 20 years from now. It has been about 25 or so years that the official neo-liberals charted their course to get us here.