Broker debate over Flaherty's legacy

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Brokers are of two minds following Finance Minister Jim Flaherty’s announcement Tuesday that he is stepping down; some commend his initiatives while others are happy to see him go.

“I’m ecstatic about it … I hope his successor will serve the people of Canada and not the big banks,” Nicholas Hamblin of Ideal Mortgage told MortgageBrokerNews.ca. “Mr. Flaherty has been floating a red herring for several years about the debt levels in Canada and he attacks the most affordable, most commonsensical, best secured instrument in the banking portfolio (mortgages) while he leaves the banks to give unsecured lines of credit and loans and high interest credit cards.”

The Minister resigned Tuesday, stating the decision was made with his family.

Flaherty was unpopular during his tenure among brokers for instituting policies that slowed the market and made it harder for many clients – especially first-time and self-employed buyers – to attain a mortgage.

Meanwhile, some view his restrictions – which include limiting the price of homes eligible for CMHC insurance and shortening the amortization period to 25 years – as necessary measures to reign in a market that could have spiraled out of control.

“Flaherty had tightened the mortgage rules several times and in my opinion (it was) a prudent approach … to ensure that Canada (would) not follow the footstep of the American style financial crisis in 2008,” Angela Wong-Liao of Invis The Money Lady said. “But obviously the tightened mortgage rules affected my mortgage business directly and indirectly.”

Wong-Liao, however, believes enough has been done and hopes his successor, Joe Oliver, doesn’t take any further action.

Still, not everyone believes his measures were completely necessary.

“I don’t believe there was a risk of (a housing crash similar to the one in the United States),” Hamblin said. “The banks here were highly regulated in the first place and the banking system is completely different; the banks in the US were giving out mortgage for a handshake … that was not happening in Canada.”
 
 
  • Paolo Di Petta | dipettamortgage.com on 2014-03-20 11:28:19 AM

    I think the misconception here is that the tightening of rules was done to hurt Canadians and help the banks, when infact, it was just the oppposite - it was to save Canadians from their appetite for unsustainable debtloads and to stop the banks from cashing in on that appetite.

    I don't agree with a lot that Flaherty did, but the tightening was done in a way that had the least damaging effect on the overall economy.

  • Leon Tucciarone on 2014-03-20 11:39:55 AM

    Only one thing is certain - Government intervention in areas of economic policy not traditionally intended for governments always lead to complex after effects. Some good (only initially), but mostly bad (as shown throughout historical data time and time again).
    Time will tell, won't it? We can speculate and comment all we want. I think he's set himself up nicely for some great opportunities in the private sector. Left at the right time for himself and what the next guy will find in the bag of goodies left behind will be known in the next 12 months. Either way, Canadians do and will pay the price ultimately,....

  • Paolo Di Petta | dipettamortgage.com on 2014-03-20 11:57:16 AM

    @Leon - good points, but many people who claim to be against government intervention in economic policy (especially after the B20) are also the same people who support the CMHC.

    Like it or not, the CMHC is also a government intervention.

    I generally don't support government intervention (including the CMHC). But the reality is, that it's there and impossible to completely eliminate.

    Also, I don't think this is any worse than what Carney left for Poloz. All the big boys made a mess and left it for someone else to clean up.

    This is an industry-wide issue. I talked about this in my blog in june of 2013 http://mrt.gs/MtgOvrBrd

  • Ginette Picotte on 2014-03-20 12:45:10 PM

    In my opinion this Government has no clue the impact these changes has on the overall economy and Canadians. I believe the responsibility of the Government is to improve the standard of living of all of us not just the WEATHLY. I can give you many examples where my clients had to pay more money due to Mr. Flaherty`s regulations. In my book of values its unfair and cruel on the part of the Government. eg. When a client separate and want to purchase share they need to pay full premiums, pay for an appraisal, if they moved this mortgage would be portable and no appraisal required. The rules should change on unsecured lending. They should not take away the dream of home ownership and all its benefits it has on the overall economy.

  • Paolo Di Petta | dipettamortgage.com on 2014-03-20 1:00:22 PM

    @Ginette

    One could argue that the CMHC made your clients pay more money. By lowering down payment requirements, buyers have access to more money, driving up the price of real estate. A temporary benefir for long term pain. Thoughts?

    Also, re: home ownership and it's benefits to the economy - home ownership shouldn't be the sole economic driver, but it is in many parts of this country (Alberta being the notable exception).

    About 50% of the Canadian GDP is from Banking/Finance/Construction/Real Estate, about quarter from resources, and the remainder from everything else (including service industry and manufacturing).

    Clearly that's not sustainable long term. We need more than just Real Estate to keep our economy going. Again, the government intervened by making debt cheap and easy until now - short term benefit for long term pain. We exchanged economic diversity (especially in the manufacturing sector), for a housing ponzi scheme to get us through the Global Economic Downturn.

    I (and many others) been saying for years how this is going to come back and bite us, but no one listened. It's just a matter of time before we all see how it's going to pan out.

    All that being said, I think the above is a pretty good indication that we have to be "all or nothing" when it comes to government intervention, because the net result trends toward the short sighted and negative.

  • Deborah on 2014-03-20 1:12:47 PM

    I agree with this article. Sure there were some measures that were good (losing the 40 yr am), but some, (why take away the 30 yr am?) not necessary.
    I was always a little confused why mortgage lending needed to be tightened when the average person could have 3 or 4 credit cards with limits far exceeding their annual income, and were able to qualify for a vehicle payment that was as high as a mortgage payment, yet they had to slow down home ownership? Everyone has to live somewhere, and enslaving people in debt that they can never pay off while limiting the ability to purchase a home doesn't seem quite right.
    I know the obvious response will be that it is the individuals responsibility not to get caught up in that debt trap, but in our world of wants over needs, the majority don't seem to be able to manage that concept, and when the availability is at the finger tips, sometimes temptation is too much.
    Funny the lower the interest rate the harder to qualify, yet a credit card with 19% interest is doled out with a signature.

  • Paolo Di Petta | dipettamortgage.com on 2014-03-20 1:51:20 PM

    @Deborah

    The whole "but they have other debt" argument is a different point entirely. all because they're paying out 19% on their credit card, doesn't mean the banks should be giving them government-backed mortgages too. Access to debt is too easy ALL AROUND.

    That being said. unsecured debt is just that, unsecured. That's why the rates are much higher - there's a high default risk.

  • John Van Driel on 2014-03-21 11:30:12 AM

    But why take away access to 3% money to pay off 18% money?? Even get the consumer to CANCEL some of these cards. Wouldn't that work??

  • Paul Therien - CENTUM on 2014-03-21 2:10:28 PM

    As I read this article and some of the comments I think that too many mortgage brokers forget the mortgage climate from a decade ago. Back in the time when anything over 75% LTV was required to be insured, the maximum amortization was 25 years, and the absolute maximum (with no exceptions) - GDS/TDS was 32/40. Back in the day when there was no such thing as Low Doc or No Doc lending.

    When I started in this industry over 20 years ago, you needed to have 10% down to buy a home. When my parents bought their first home… they had to have 20% down. When my grandfather bought his first home - there was no such thing as a mortgage! After the war, the government launched the NHA which eventually spawned CMHC.

    I say all this because I think that brokers need to understand that the “changes” made – although tougher than pre 2008 and post 2002 – are still more lenient than they were 15 years ago. I also think that we as brokers have an opportunity with these changes to better serve our clientele and help them navigate the process of obtaining a mortgage. We have an opportunity to create smart homeowners – people who fully understand the complexity of what owning a home really means instead of just grabbing at the lowest payment.

    Interest rates today are low – very low – but they are not going to stay low forever. If a consumer purchases a home with only 5% down, and maxes themselves out on the payment based on today’s rate of interest, they are not going to be well equipped to deal with a rate increase, loss of income, or other major economic hurdles they encounter. In fact, most of them won’t have the funds to adequately deal with a major repair in their homes.

    In the end, it is a brokers job to counsel the client to make the best and wisest financial decision pertaining to home ownership. If this does not happen, and the client finds themselves unable to meet the demands of owning that home, it is not the realtor or the bank that will bear the blame – it will be the broker who told the customer not to worry, they can afford it. You only have to look at what happened to the broker industries in other countries, particularly in the United States, where brokers shouldered a lot of the blame for the housing collapse.

    This is an opportunity to help Canadians and to build a much more sustainable industry. I know some very good brokers that have realized this and have adjusted their business models – and they are all doing very well and growing their business.

  • Deborah on 2014-03-21 3:02:33 PM

    My comments have nothing to do with whether or not insured mortgages are good or bad. I think high ratio mortgages are awesome and they have helped a lot of people get a home that otherwise wouldn't have been able to afford it. I'm simply stating that it's the gov't and banks that rolled all this out, and then take it all back when the going gets rough, but you don't see them taking away the cash cow, high interest credit cards. That was the only point I was making.
    They are making it harder for people to buy a home, a very secure debt, yet at the same time handing out high interest, high limit credit cards, unsecured debt at the same time.
    I am a mortgage broker, I love my job, but it has gotten more difficult to get the deals done, and refinancing has all but disappeared. Yet the banks and retailers are still handing out the credit cards and they aren't held to the debt service ratio guidelines that mortgage lending is. beacon over 625? great here's a $10,000 credit card at 19% interest, oh by the way, don't use it because if it gets up close to the
    limit, you simply won't be able to pay it off monthly and then you are caught up in the high interest debt. If they really cared, they would verify income, and give a limit that can be payed off each month and didn't allow people to get into that much debt, but then they wouldn't be making all the interest that they make. They say don't do it but they actually love it!!

  • John Van Driel on 2014-03-21 3:25:32 PM

    Deborah is totally correct!!

  • Paolo Di Petta | dipettamortgage.com on 2014-03-21 8:07:52 PM

    Great Post Paul!

    @Deborah - Again, you're missing the point. Unsecured debt is unsecured. It's riskier. That's why they charge more.

    It's not up to the creditors to tell people how much debt they should take on - everyone should take personal responsibility for what they borrow.

    And the CMHC is relevant in this discussion. The fact is we should have never had 40 year-amortization, taxpayer-backed (CMHC) mortgages. This easy access to credit contributed to bloat in home prices, You can read more about it here: http://mrt.gs/MitchB20

    Not to mention, until recently, many Canadians have been using their home as an ATM. They were running up debt, and then transfering it out to a refinance (at a lower interest rate). John's first comment illustrates this perfectly.

    The problem here isn't that high-interest credit was too available. It's that too much credit was available, period, and that no one seemed to care about spending wisely and paying it all back.

    When the B20 came into place, things started to catch up to everyone. Infact, it should have been done even earlier, before people were even able to accumulate that much debt.

    The fact is, pre-B20, policies kept being relaxed to stimulate the economy, and to make the payback of debt easier. The problem is, the easier you make debt to pay back, the less incentive there is to do it. Canadian borrowed more than ever.

    What do you suggest? That they extended amortizations further? CMHC insured, cash back mortgages to 105% LTV?

    Yes, your job has gotten harder. But maybe it's time to consider that it maybe that's exactly how hard it should have been in the first place.

  • Deborah on 2014-03-21 10:29:32 PM

    Thanks for the advice Paolo, I'm not missing the point at all, I'm looking at it from a different perspective.
    I didn't say we should bring back 40yr ams or 0% down, those were crazy times...but we as mortgage brokers didn't make those rules...the Gov't made them and the banks were all over it. And yes people were using houses like ATM's but the Gov't and banks were allowing it.
    Why grow a conscience and get all holier than thou on the secured low interest lending now, when they bare no responsibilities to lending out the high interest unsecured debt. JUST SAYING!! that's all!
    As a mortgage broker working through those times, are you saying you never did a single deal under those circumstances? If it was available and clients wanted it, if you didn't do it, someone else would. :)

  • Paul Therien - CENTUM on 2014-03-24 1:38:11 PM

    The government changed the mortgage rules on INSURED products… conventional lending (non insured) guidelines remain at the discretion of the lender. HOWEVER, because most lenders will bulk insure the vast majority of their conventional portfolio to reduce the risk associated with that portfolio, it means that the rules also apply to those conventional mortgages as well. Should a lender choose not to insure their conventional portfolio, or should (like in the past) the government no longer offer insurance on these products, lenders could potentially expand the lending criteria.

    It is unlikely however that any lender would – why? It is all about delinquency. In unsecured lending the rate of interest is set to offset the risk and cost of managing the lending programs. With delinquency rates that can often sit as high as 30%, lenders price the product accordingly. The higher the risk for the product, the higher the rate. Credit cards are incredibly high risk as they have the highest rate of delinquency, therefore they have a high rate of interest. That being said, a consumer with good credit and a strong history of managing credit effectively can negotiate a lower rate of interest – My Visa is at a very reasonable rate of 8%. I have a 23 years history with my bank of managing my credit wisely, and am rewarded – but I had to ask for the reduced rate. Just as it is my responsibility as a consumer to search the best rate for a mortgage, the same applies to other forms of credit. It is also my responsibility to ensure that I do not spend myself into a situation where I cannot manage my fiscal house any longer.

    The government can be involved in the housing market because of the National Housing Act, and because of CMHC being a crown corporation. OH and of course let’s not forget that they also provide a government guarantee for 90% of Genworth and Canada Guarantee issued insurance.

    If we want government to start to get involved in the unsecured credit game… then we need to ask ourselves a simple question… are we as tax payers prepared to accept the government offering lenders insurance against the risk of these products the same as they do for mortgage products? I for one would NOT be saying yes to that given the high rate of delinquency and write offs that would end up be placed at the feet of tax payers. At what point do we, as a society, take accountability for our own actions and stop shifting responsibility for our decision to others? I am after all my own person, and I choose to spend the way I do – no one puts a gun to my head and makes me buy that $5.00 cup of coffee…

  • Paolo Di Petta | dipettamortgage.com on 2014-03-24 5:17:46 PM

    Another great post, Paul. Comparing mortgages to unsecured credit is comparing apples and oranges, and misses the point completely.

  • John Van Driel on 2014-03-24 5:23:37 PM

    Just for clarification - I don't think anyone is arguing WHY rates are high on credit cards, etc., only that they ARE and we used to be able to help homeowners pay OUT 18% credit with 3% money - and even have them CANCEL the cards.

    That we cannot do any more!

  • Paolo Di Petta | dipettamortgage.com on 2014-03-24 5:36:58 PM

    John - that presumes that people were actually cancelling their cards. I've seen many a time where they pay off the credit cards, run them up again, and then refinance again the next year or two.

    When there's no consequence for poor choices, it's pretty common to see people repeat the same mistakes. We've reached the end of the line for the refi-train. I hope people are ready to disembark.

  • Deborah on 2014-03-24 6:13:12 PM

    thanks John. Paolo and Paul just seem to want to talk about what they know. (We all know the same) I never wanted to compare anything and I understand they are different tools, used for different purposes but when you have to look at the whole picture, it seems that tightening mortgage money for responsible people who want to become home owners on one hand and issuing them a credit card by the other hand doesn't make sense. (for anyone except the credit card issuer.)

  • Deborah on 2014-03-24 6:13:57 PM

    thanks John. Paolo and Paul just seem to want to talk about what they know. (We all know the same) I never wanted to compare anything and I understand they are different tools, used for different purposes but when you have to look at the whole picture, it seems that tightening mortgage money for responsible people who want to become home owners on one hand and issuing them a credit card by the other hand doesn't make sense. (for anyone except the credit card issuer.)

  • Paolo Di Petta | dipettamortgage.com on 2014-03-24 6:21:44 PM

    I think Paul had the patience and eloquence to describe it in a way that I wouldn't - but again - the credit card issuers are taking a much bigger risk on a relatively smaller amount. That's why rates are higher and one of the reasons the government can't tighten the screws too much - credit card issuers would lose money and walk away from our market. End of story.

    Besides, they're very different products for very different uses - You can't realistically purchase a home with a credit card, so it's a bit of a moot point. (if you can, you don't need to, and if you need to, you can't) Treating them as if there's even a comparison is a little misleading (or at best, misinformed)

  • J Brolin on 2014-03-24 11:35:20 PM

    I like your comment Deborah. Right on the money and sounds like a re hash of dozens of articles I have read. No original thoughts? Easy to state the obvious points and historical facts. Points were made about the industry a decade or more ago. But those same individuals have not put into context what the cost of living vs incomes were. A home was worth much less 2 decades ago when we only had 25 year AMM's etc.,...

  • Kevin on 2014-03-25 1:04:07 AM

    @J Brolin and Deborah

    The argument you are making is that the government should not be tightening mortgage rules because it hurts consumers, or that they should start policing unsecured credit.

    I think you are both missing the point which is that the government does not interfere with unsecured lending because it is not part of their scope of purview.

    Further, the strength of the market argues against the thought that the re-tightening of the rules is causing damage. There continues to be strong real estate numbers, and in many areas significant growth over the last couple of years.

    It sounds to me like you are more upset that you are losing business than anything else.

    The comments made, particularly by Paul from Centum, are educated comments by a very strong and visible leader in our industry. You might do well to actually pay attention to what he is saying... which in his original point was that this is an opportunity to be better advisors to our customers.

  • Kevin on 2014-03-25 1:04:43 AM

    @J Brolin and Deborah

    The argument you are making is that the government should not be tightening mortgage rules because it hurts consumers, or that they should start policing unsecured credit.

    I think you are both missing the point which is that the government does not interfere with unsecured lending because it is not part of their scope of purview.

    Further, the strength of the market argues against the thought that the re-tightening of the rules is causing damage. There continues to be strong real estate numbers, and in many areas significant growth over the last couple of years.

    It sounds to me like you are more upset that you are losing business than anything else.

    The comments made, particularly by Paul from Centum, are educated comments by a very strong and visible leader in our industry. You might do well to actually pay attention to what he is saying... which in his original point was that this is an opportunity to be better advisors to our customers.

  • M. Robertson on 2014-03-25 1:06:16 AM

    Here Here Kevin!!

  • J Brolin on 2014-03-25 2:16:18 AM

    That is not at all what I am saying. Nor what Deborah is saying. This is why I don't post often times to these things. I would have to write such a long thread and post other stories written to spell it all out for you and I just don't have the time, because contrary to what you continue to ASSume (yet another incorrect conclusion) I AM actually busy! It's the blind leading the blind. Time will tell. Kirk out.

  • M. Robertson on 2014-03-25 3:03:32 AM

    J Brolin,

    No one is assuming anything, the previous posts are saying that the government needs to do something about unsecured credit and leave mortgages alone. no one said you were not busy, what is being said is that there is a misconception as to the reason why the government can regulate mortgages and not unsecured credit.

    as for the blind leading the blind... historical information is always what drives business planning and how you base projections, build your goals etc.

    the fact of the matter is that what Paul is saying is 100% correct, and if you are so busy than you would know that these changes are driving more consumers to mortgage brokers for advice, which is a good thing.

    as for your resorting to insults... really... very unprofessional.

  • M. Robertson on 2014-03-25 3:14:35 AM

    I also want to point out to both J Brolin and Deborah one key point... the consumer has CHOICE. They can choose not to accept the credit card, they can choose not to spend like it is free money, they can choose to be fiscally responsible.

    if a person buys a car and is irresponsible in how they operate that vehicle... who's fault is it? The car manufacturer? The government? no it is the person that was behind the wheel.

    The same applies to credit utilization.

    Yes, there are some circumstances where a customer may need a mortgage to refinance to do a debt consolidation. But you also need to remember... a mortgage was and always has been intended to be a vehicle through which a consumer has the ability to own a home. It was not intended to be a money machine.

    lamenting and complaining about the rule changes is unlikely to change them given that the banks supported the changes.

    is housing less affordable? Yes it is, but then the spending spree that was incited by the lax rules is a major cause of that. Better to make the changes now to prevent further excessive escalation and allow income levels to catch up than to continue to justify excessive spending through the ability to add it to the mortgage and low rates.

  • J Brolin on 2014-03-25 3:15:45 AM

    Sorry to tell you but if you haven't read the recent Federal Budget, the Government HAS targeted credit cards, so it is "within their scope or purview". I never said to leave mortgages alone in my comments. Nor did I outright disagree with anyone's comments.
    And the derog was a joke, You never heard the one about don't assume? it makes an ASS out of u and me....lighten up.

  • J Brolin on 2014-03-25 3:30:47 AM

    That's what everyone said about ReagENOMICS, When Ronald Reagan was president his economic policy was revered. His government intervention where it didn't belong historically, was welcomed by most people.....but now decades later, many blame a lot of his policy then for the economic woes of the USA today.
    Broker Industry will continue to grow and position for benefit regardless of what happens. My point is simply that there is more grey here than black and white. It is all politics. The Canadian Consumer is the one holding the bag in the end regardless because the Real Estate market in the Toronto area will crash. It is inevitable. It always has and always will after boom times. Some of the changes that were taken away, like longer AMM's perhaps, may eventually come back in new and improved cautionary formats, and the cycles will continue.
    AND, the Mortgage Broker industry will continue to grow and position for benefit.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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