Flaherty pulling wrong lever, says former TD economist

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A former TD Chief Economist and Department of Finance analyst is perplexed by Jim Flaherty’s obsession over mortgage rates, and sees a rate of 2.95 as being in step with bond yields.
 
“It actually perplexes me, the actions by the finance minister,” Don Drummond said in an interview with CTV News, just ahead of Thursday’s budget announcement. “If the finance minister is worried, there are all kinds of direct levers he has, that he has exploited recently.”
 
The levers Drummond speaks of includes tightening of the mortgage rules that were put in place last year by Jim Flaherty, requiring a larger down payment and reducing the maximum amortization for insured mortgages. 
 
Not on that list, suggests Drummond, is the kind of direct intervention Flaherty’s engaged in this week, asking Manulife to reverse its decision to lower rates from 3.09 per cent to 2.89.
 
“I get the concern of the housing bubble; I get the concern of the debt,” Drummond said. “But 2.95 per cent doesn’t seem particularly low, especially when you consider that the banks back up their mortgages with bonds,” he said. “You take a five-year mortgage that is backed up by a five-year bond that pays 1.7 per cent. A typical mortgage is 2.99 – that is a nifty mark up.”
 
Flaherty had spoken out in early March when BMO posted a 2.99 per cent rate on a 5-year fixed mortgage, expressing fears that a rate war would be ignited for the spring season. At the time, he personally contacted BMO to express his displeasure with the rate. The institution nonetheless kept that offer in place.
 
Drummond’s interview comes on the cusp of the federal budget to be presented today, a budget that Flaherty has hinted will aim to balance the budget by 2015, eliminating the $26 billion deficit in three years. So far Flaherty has stated that he is pleased with how the housing market has cooled off and how personal debt has been reduced.
 
In the intervening months, organizations such as CAAMP have campaigned vigorously to have restrictions on first-time buyers lifted, with CAAMP CEO Jim Murphy meeting personally with the finance minister just recently to ask for a return of 30-year amortizations and increases to the first-time homebuyer’s tax credit.
 
  • Paolo Di Petta | dipettamortgage.com on 2013-03-21 10:08:09 AM

    While I agree, that there's not that much of a difference between 2.89 and 3.09, and that I'm generally, I'm against government intervention, I don't think it was the wrong move, even if it were only symbolic and to drum up some awareness.

    The fact is, the banks have one duty: to provide the maximum return to their investors. They have no concern for the long term health of the economy, they're just worried about their quarter-to-quarter numbers, keeping their jobs, and earning their bonuses. There is no concern for how these low rates have artificially inflated home prices, and how they've pushed us to a record high 165% debt to income ratio.

    It's no surprise bank reports are calling for a "correction" or a "flat market" - their books are heavily weighted in mortgages. They couldn't afford a "crash" or a "downturn".

    Obviously, it varies across the country, but there's going to be a lot of difficulty in some parts of the country. All Flaherty is trying to do is tell people to not get too comfortable racking up cheap debt.

  • jvice/ Milestonesfinanical.ca on 2013-03-21 11:30:06 AM

    Maybe Jim Flaherty needs to address the real problem, have the banks offering lines of credits to cusotmers who shouldn't if customsers have over exteneded and have no option to refi maybe the extending line of credit before that should have been better qualfing clients needs for the credit.
    When banks offer 5K even maybe 10K to customers at 19.9%. Maybe Flaherty should have a second look at tighting those lines up.
    Dont get me wrong we need to keep money moving however there should be better measures on the high interest lines.

  • JSydneyH on 2013-03-22 6:04:28 AM

    I'm still at a loss on this entire situation. For years we've been advised that rates will return to historical norms. Yet no one has been able to offer even one reason as to why this is necessary. What if this is the new norm? What if low interest rates due to global pressures and integration is the new norm? The world today is very different - financially - then the world of even five years ago, so there is no 'historical norm' that relate to today's rates.

    I'm not a pollyanna wearing rose colored glasses. I just see a different outcome. Low interest rates and extended amortizations achieved the goal of stimulating the economy without government intervention; low interest rates will continue to encourage borrowing but (and this is a big but) businesses are not taking advantage of them.

    Until they do - we are stuck in this limbo.

  • Barbara Buote on 2013-03-25 9:08:50 AM

    Paulo, you have contradicted yourself once again. You state that you are against intervention but you still support and understand what Flaherty is saying.

    Quite frankly, Flaherty hasn't got a clue what he is saying.

    Firstly, low rates can provide many clients with an opportunity to pay down their mortgages must faster by paying extra on the principal on a frequent basis. This is one of our duties as brokers to point out the strategies available to clients to accomplish this goal and actually it prepares them for more "real" rates come renewal time by having a lower balance.
    This is the same methodology that I personally employed during the days of the low variable at prime minus .75%.

    Your comment back to me may be but few people will do this. I can tell you from my experience that in fact, many do take advantage of this strategy when it has been clearly outlined to them.

    These rule changes have not improved consumers positions by limiting their ability to refinance beyond 80% but has pushed them into the hands of greedy private lenders at exhorbitant rates and fees that they will probably never get out of.

    Secondly, our young people need an opportunity to partake in home ownership while rates are low (they can protect themselves with a 10 year @ 3.69%) to assist them in avoiding today's high cost of renting
    ($1,300-$3,000 in major centres). If they wait
    longer their window of opportunity diminishes. Further, the economy slows down even more.l

    The radical changes should come, as all of us have said over the last couple of years, in the sphere of credit card and line of credit debt. There seems to be no control on rates and availability. These are the profit makers (and gougers) of our society. Flaherty knows he can never throw his weight around in this arena and stick his nose into their business as it is not the regulated industry that mortgages are.

    By the way, I have learned that Manulife is not the only institution that received a call. FISCO called certain other privately held companies that are mortgage providers and tried to influence them as well.

    This is not democracy. This is autocracy.
    Shame!

  • Joan E. on 2013-03-25 1:52:12 PM

    You know… too many mortgage brokers are hypocrites - you all sit here and talk about what is best for the consumer, but the fact is all you care about is your commissions. You cannot honestly tell me that in every single case it is in the best interest of the consumer to refinance for a lower rate, or flip their mortgage, or change the lender. I sit here and read your comments about how it is unfair that you do not get paid for renewals, how the refinance rules are a burden on consumers, etc etc. What not one of you has the courage to say is that you are really concerned about how much commission you make. You don’t do this for your health, you do it to earn money – you are not fooling anyone. But instead keep sugar coating it in “concern for the consumer” and hope that no one sees through it.

  • Paolo Di Petta | dipettamortgage.com on 2013-03-25 7:20:50 PM

    @Barbara

    I'm not contradicting myself at all. I said that I'm generally against it, but this may be one of the few occasions where it's warranted.

    Your point about "low rates providing an opportunity for faster repayment" are quite honestly, moot, since debt to income has only increased in this low rate environment. The fact is, people are taking out more debt than ever because "it's cheap and can be paid later". Or do you have some other reason for the 165% debt to income ratio?

    You point about rents is also moot, because whereas salaries and rents have increased at a fairly consistent rate, whereas property values have skyrocketed out of control (and out of reach for most people), again, driven by low rates artificially increasing competition.

    @Joan
    It's unfortunate that you're painting everyone with the same brush. Believe it or not, I do care about my client's long term well being because I'm looking to build a relationship with them. I'm not trying to get one-off deals, and that does mean that sometimes I provide them with advice that will end up with me losing a bit in the short term, in hopes of recouping it from them when they come back because they trust me. What's good for my client is good for me. We're not competing with eachother, we're cooperating.

  • Paolo Di Petta | dipettamortgage.com on 2013-03-25 7:20:52 PM

    @Barbara

    I'm not contradicting myself at all. I said that I'm generally against it, but this may be one of the few occasions where it's warranted.

    Your point about "low rates providing an opportunity for faster repayment" are quite honestly, moot, since debt to income has only increased in this low rate environment. The fact is, people are taking out more debt than ever because "it's cheap and can be paid later". Or do you have some other reason for the 165% debt to income ratio?

    You point about rents is also moot, because whereas salaries and rents have increased at a fairly consistent rate, whereas property values have skyrocketed out of control (and out of reach for most people), again, driven by low rates artificially increasing competition.

    @Joan
    It's unfortunate that you're painting everyone with the same brush. Believe it or not, I do care about my client's long term well being because I'm looking to build a relationship with them. I'm not trying to get one-off deals, and that does mean that sometimes I provide them with advice that will end up with me losing a bit in the short term, in hopes of recouping it from them when they come back because they trust me. What's good for my client is good for me. We're not competing with eachother, we're cooperating.

  • Derek Rowley on 2013-03-25 8:42:41 PM

    Must admit that I enjoy reading most of the comments. Kind of like "step across the Mason Dixon Line" and I see a lot of frustration and a lot of discontentment being sown amonst the brotherhood and sisterhood. No one ever wins an argument with an argument.

    Try this instread. Each day is a new beginning and when you wake up decide in your mind that it is going to be a great day if not the best day of your life. Move forward without looking back. As for me, I can't chaneg the circumstances but I can change how I am going to react. It's not worth getting all worked up and blowing a valve folks.

    Continued good selling to all

    Derek Rowley
    Viva Mortgage Agents
    Viva Mortgage Brokers
    Viva Monoline Lenders

    BE HAPPY

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