TD economist to Govt: Raise minimum down payment

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Brokers are guaranteed to bristle at the suggestion, but a top bank economist is among the first to advocate for an increase in the minimum down payment to 7 per cent instead of 5 – an option  with significant implications for first-time and cash-back clients.

"We need to acknowledge that a significant imbalance has developed and it poses a clear and present danger to Canada's medium-term economic outlook,” Craig Alexander, chief economist with TD Bank, said in a report late last week. “It also suggests that further actions to constrain lending growth may be prudent.

"If the overvaluation was fully unwound rapidly, it would be three times the correction in the early 1990s."

While other economists have called for further tightening of the country’s mortgage rules, Alexander is among the first to call for an increase in the minimum down payment to 7 per cent from 5 per cent.

He has also broached the idea of instituting a minimum interest-rate floor for income tests, focused on ensuring borrowers can handle a higher rate environment. Another, more commonly debated option, is shortening the maximum amortization to 25 years from 30.

Brokers, and their associations, have roundly rejected the need for more stringent mortgage rules, despite near-record high levels of household debt relative to income.

That situation became even less sustainable after the Central Bank decided to hold its overnight rate steady last month, further raising concerns that consumers would move to raise their debt levels instead of cutting them.

Alexander is now pegging the overvaluation of Canadian home prices at between 10 and 15 per cent.

He argues that the real culprit in spiking debt levels has been growing home purchases in the current low interest-rate environment.

"The outlook is for mild employment and income growth in the coming year, implying that households will gradually become more lever-aged over time," he said.

 

  • Ken on 2012-03-20 2:38:32 AM

    Once again the banks economists are picking the people who actually make them money. whats the issue with 5 ? If TD and all the others would simply monitor their credit card portfolio's and stop giving $ away to every Tom, Dick and Harry, they would be better off. The housing market is the safest investment for clients and the lenders. Cut the crap - leave it all alone ! You all do know the dudes writing this poop are high 6 figure (poss7) incomers and they want to make it tuff for the little guy ... I could go on !

  • Chris on 2012-03-20 2:39:49 AM

    Interestingly, this TD Economist has this opinion: "He argues that the real culprit in spiking debt levels has been growing home purchases in the current low interest-rate environment."
    ....and yet his bank has arbitrarily increased my unsecured line of credit interest by almost 5% since late 2008 and, correct me if I'm wrong, I don't think I have heard any news of TD losing money or a significant decrease in profits.

  • Eric Putnam, Debt Coach Canada on 2012-03-20 2:44:53 AM

    Why not tighten up the rules on credit cards and other unsecured credit so people can access mortgages to buy or renovate their homes For those interested here is link to TD report http://www.td.com/document/PDF/economics/special/ca0312_risk.pdf

  • Kevin J. Power, President Power Mortgages Inc on 2012-03-20 2:46:47 AM

    It is very interesting that TDCT wants to advise the Government of Canada about further tightening of mortgage rules by increasing the amount of down payment requirements and shortening amortization periods.

    This is from a lender, as with the other major banks, load people up with revolving consumer debt and bill for interest only or minimum payments and then jamb consumers in the corer by using collateral charge mortgage documents.

    The Federal Government should be listening to other sources if they want a realistic view on what is contributing to debt loads.

  • Joe on 2012-03-20 3:02:14 AM

    market will tank quick if these changes come in.....

  • toronto-mortgage.ca on 2012-03-20 3:05:23 AM

    I think increasing the minimum DP to 10% with further increases based on the market would be in order moving forward. If the BoC cannot increase rates because they are scared of a housing market correction, they need to tighten regulations to get the same affect. Look at what Greenspan did in 2004 for the U.S. under the same situation. He tightened regulations to get the results that we need in Canada today. I feel that decreasing amortization back to 25 years is a must but 10% downpayments should only be the starting point of the tightening of regulations. If it is required, we may have to go back to 20% DP. Only time will tell.

  • Chad on 2012-03-20 3:26:04 AM

    Well it is very Mr. Alexander if you feel TD is should only at 93% ltv then go ahead. Stop giving people 25,000 worth of credit cards at 18%. Oh wait, I see the idea. Tighten mortgage rules where the margins are thin and give extra unsecured debt where you have nice beefy profit margins. Makes perfect sense.

  • Paul Therien on 2012-03-20 3:26:20 AM

    I have said it before, and I will say it again... there is such a large focus on mortgage debt... and yet no focus on consumer credit... yet the banks and the governments own statistics do not support the tightening of mortgage lending.

    The banks continue to push for tighter mortgage guidelines, yet... they essentially ignore them. If they did truly support them... then why would they register a collateral charge on title to 100 + % of the property value? Why would they grant seconds as lines of credit to 100% LTV, attach credit cards and other credit facilities to title? It is ALL about profitability. Lower the max LTV, freeing up room so that other, higher interest bearing products, can be registered behind the mortgage. Those other credit facilities then do not technically fall under Mortgage Products, but they also do not classify as Consumer credit because they are secured. They become "un-reported" credit facilities. The banks look the hero's and they dramatically increase their profitability.

    It also give them greater protection against consumer insolvency, which is increasing exponentially in this country.

    From a business profitability perspective, makes great sense... protection for the consumer? Not so much.

    That the banks are a powerful lobby group is obvious, but when is that power too much?

  • Just Another Broker on 2012-03-20 3:26:22 AM

    No doubt even more clients will be pushed into TD's long term posted rate mortgages that are asociated with the cash back, making TD even more money over the next 5, 6, 7, or 10 years which are the terms for their cash back mortgages.
    Doesn't anyone see how self serving this is for TD and the big 5 banks?

  • Jeremy on 2012-03-20 3:28:06 AM

    What I find interesting is that this suggestion of "an interest-rate floor" is going to help anything. We do that now on all variable and fixed terms less than 5 yrs and is it working? I think what Craig means to say is that by instituting an interest rate floor, it allows some much need room for the consumer to except TD's (and others) credit card and insurance solicitations after possession. Qualifying at a higher rate today doesn't prevent consumers from obtaining massive amounts of credit debt a week after they take possession.

    Just my thoughts...

  • Pete on 2012-03-20 3:32:37 AM

    wow...unsecured consumer debt is the culprit, not secured mortgage debt. These guys need to crack down on VISA, Mastercard and all the financial institutions that allow a guy who makes $40k a year to rack up $80k in unsecured debt!! Who now faces bankruptcy since he can no longer refinance and access cheaper secured funds to pay out his consumer spending.

  • Pete on 2012-03-20 3:35:07 AM

    Unsecured consumer debt is the culprit, not secured mortgage debt. We need regulations on financial institutions who allow ppl who make $40k annually to rack up $80k in unsecured debt. Who by the way can no longer refinance to pay out these guys so will be forced into proposal or bankruptcy.

  • Mark Nelson on 2012-03-20 4:39:13 AM

    Wouldnt higher employment and wages de-leverage property?

  • Paul Therien on 2012-03-20 5:24:56 AM

    In regards to property value inflation... is property expensive in Canada? Yes it is.

    However to state that they are inflated is necessarily the case. Pricing is driven by demand (its called a free market), and thus far the demand for property at current pricing levels is being supported by the consumer.

    Making it more difficult to purchase a home is not going to drive prices lower, it is going to restrict homeownership to the wealthier segments of the population. LTV statistics do not support the banks calls for increasing minimum downpayment - 6% of homeowners have 5% equity... 78% have more than 25% equity.

    Let market demand take care of itself, so long as there are consumers out there that will purchase at current levels, pricing will remain the same. Want to lower the cost to purchase a home for first timers? Stop building homes that have $50,000 kitchens, $20,000 bathrooms, etc in them - everyone needs a starter home, and it need not be a palace.

  • Rob Campbell, Verico The Mortgage Wellness Group on 2012-03-20 6:19:04 AM

    It is clear from all of the comments here, as well as the consumer's concerns themselves, that the real culprit here is the Big 6 willingly lending out high amounts at high interest. The government will NOT touch that area. Instead, they will lower amortization first, then possibly increase down payment requirements. Values will come down because of increased supply and over valuation for the past while, then home owners will experience very little equity stakes in their home, some even upside down. Dark cloud, I know, but just watch. I've been warning people about this for over a year now.

  • Ron Butler on 2012-03-20 7:25:34 AM

    Rob, I could not agree with you more. Tightening of mortgage guidelines is a reflection of the government being afraid to voice their real concerns in plain English: there is too much spec buying, to much dependence on gauranteed value increases and we are scared to death of property value reversal.

    Everything said about consumer deb, credit card interest and the banks drive to put LOCs on every house is true and factual but the danger of property value reversal in the GTA and Lower Mainland drives the fed's concerns.

  • AB Broker on 2012-03-20 8:19:56 AM

    By the sounds of it, Flaherty is a wimp with tinie tiny balls and unable to stand up against the banks. Jim, pull your head out of your ass and do something to actually help the consumer. Stop being the puppet and take back control of your office.

  • Paul Therien on 2012-03-20 9:25:38 AM

    Value reversal will only change when demand drops, and thus far in Vancouver there is still Demand. Developers and the City have both taken pains to ensure that the market is not over-saturated with stock.

    Toronto and Vancouver are very different cities with very different economic bases... to draw identical parallels between the two is not accurate.

  • Rockey on 2012-03-21 1:53:47 AM

    Coming from a Bank that had one of the most aggressive no income policies ????

  • Maureen Haslehurst on 2012-03-21 5:18:40 AM

    Disingenuous of TD to suggest these changes to the government considering their recent change in mortgage documentation allowing the client to register the mortgage for 125% of mortgage requested to facilitate future equity take outs for the client.
    Maybe this economist has floated this idea as CMHC edges towards ceiling having used funds to provide bulk insurance to lenders. Increasing downpayment requirements would take some pressure off CMHC.
    Finally, why isn't this economist suggesting the government legislate changes to credit card debt if he has indentified a 'debt problem' Could it be credit card debt is most profitable to the big banks and they don't want government legislation?...Just some thoughts.

  • Dennis on 2012-03-21 5:15:45 AM

    We go on and on about this issue while the government turns off the volume on its hearing aid. They have no idea how the reduction in amortization may affect the many who are already in at 35-40 years and coming up for renewal. They will have a double hit, one for the eventual rate increases and another for the reduced amortization.

    Way to stick it to your constituents Mr. Elected Member!!! Look after the money train and to heck with the majority of Canadians!

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