IMF: Don't rule out more mortgage rule changes

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The IMF doesn’t dictate monetary policy, but it is strongly suggesting Canada may need to ratchet up mortgage rules yet again if debt levels rise.

If consumer debt continues to increase rapidly and home prices “continue to outperform, there is clearly scope for a further tightening of measures,” Gian Milesi-Ferretti, the International Monetary Fund’s assistant director for North American, told reporters in Toronto. “But there are signs that mortgage debt, the rate of growth, is slowing."

The assessment comes after the IMF finished its yearly review of the Canadian economy this week. Its report is expected to highlight escalating housing prices in both Toronto and Vancouver as a concern at the same time noting the government’s most recent moves to cap record levels of household debt with new, more stringent mortgage rules.

While that appears to have had some effect in terms of discouraging Canadians from taking on more debt around refinancing, average existing debt levels continue to hover just over 150 per cent of disposable income.

The IMF suggests that the federal government may eventually need to raise mortgage down payment requirements or lower debt service-to-income ratios in order to keep more vulnerable Canadians from further borrowing.

While most brokers want to see the government focus on unsecured debt and the underwriting policies of the banks, others are echoing the IMF’s sentiments. They suggest the government would have little choice but to revisit mortgage rules if consumer debt levels creep back.

“If debt levels start increasing rapidly again, more changes to mortgage rules are inevitable,” David Larock, a mortgage agent with TMG The Mortgage Group in Toronto, told recently. “The Bank of Canada won’t raise rates to slow borrowing if the broader economy still needs the stimulus – that could trigger a recession at the worst possible time.  Instead, Finance Minister Flaherty will tighten mortgage rules to reduce the risk of a credit bubble. If that happens, though, my hope is that these changes will be phased in over time.”

  • Angela Wong-Liao, Invis Inc on 2011-11-02 3:47:38 AM

    Our world is becoming smaller because of internet and other technologies over the past 10 years. Canada would be affected when other countries are having economic problems. Yes, if we cannot control and lower our current debt ratio, I think our government will have no choice but to further tightening our lending rules, especially in mortgage lending.

  • Paul on 2011-11-02 5:07:39 AM

    I fail to understand why the IMF and the Canadian Government continue to feel that they need to tighten mortgage lending. Statistically secure lending has a much lower deliquency rate than unsecured lending, especially lending secured by property. People pay their housing costs first in Canada, car and other secured lending second, and unsecured last in tougher times. Even with the economic turmoil the banks have not had outrageous arrears in mortgages. The banks continue to lend unsecured monies unabated, and there continues to be no restrictions on this lending. Rates for unsecured products are much higher, and for too many Canadians the reason why they experience financial hardship. So why is it that government continues to focus on mortgages? Simple - Unsecured lending, even with the much higher rate of arrears, is FAR more profitable for the banks than secured lending. Unsecured lending is the primary reason for a consumer doing a proposal or bankruptcy. Unsecured lending most drastically impacts day to day living expenses. Unsecured lending is the tool by which we impulse spend. BUT the government would never consider bringing in rules to restrict unsecured lending because the banks are far too powerful a lobby - and they would never tolerate a hit to such a profitable channel. The banks are OK with tighter mortgage lending rules because it means that they can increase their margins on this product. It is time for people to stop blaming mortgage lending in this country and start looking at the real cause.

  • Elfie Hayes on 2011-11-03 5:00:36 AM

    Couldn't have put it any better myself. Sadly as you mentioned the banks are very powerful and will never allow government to tell them how to manage unsecured lending just because of profits. How painful for Canadians to see record profits by the banks who are one of the main causes of the debt problem in this country.

  • Bonnie Hudson on 2011-11-04 2:51:13 AM

    Unfortunately, the tighter the rules get with mortgages, the more people will use unsecured debt. They will continue to pay high credit card debt with high rate lines of credit. At some point the general public will need to get off this merry-go-round and we won't be able to help them.

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