Why isn't the government controlling unsecured debt?

Why isn't the government controlling unsecured debt?

Why isn

Croft Axsen recently had to inform a client wanting to buy a $300,000 house that he didn’t qualify, so the client instead decided to buy a $95,000 truck. According to Axsen, it is but one example of how easily credit debt can accrue, and how it’s more detrimental to Canadian households than mortgage debt.

“I get it’s easier for the government to regulate mortgage debt, but I’m not sure they’re doing consumers any favours by saying, ‘We’re going to control whether you can buy a house or not, but we’re not going to control whether or not you can buy a $95,000 truck,” said Axsen, owner of Dominion Lending Centres Jencor Mortgage Corporation.

“Instead of buying an appreciating asset, he buys a truck with a bigger payment. By the time the seven-year loan is over, the truck will be worth virtually nothing.”

Canadian mortgage debt has surpassed the trillion dollar mark, and that is worrying the government, but DLC President Gary Mauris says there’s a much bigger problem.

“Unsecured debt is the biggest problem,” he said. “The sheer cost and monthly maintenance of unsecured debt is worrying. Credit card debt, line of credit debt and department store debt are what’s strangling Canadians. Unfortunately, there’s so much pushback from Canadian chartered banks, and it’s such a large business, that the government doesn’t want to take that fight on, so they look at mortgage debt instead. They should be looking at ways to limit unsecured debt, if anything. It’s much higher and much riskier debt, and it’s what we typically see strangling homeowners.”

Mauris can scarcely recall a time when the Canadian housing market endured as much tumult as it is today. He says that, fortunately, lenders and brokers have become creative—and the latter, in particular, have become even more indispensable to the Canadian public—but it’s still bewilderingly difficult to qualify for a mortgage in 2018.

Even more confusing is the fact that tighter mortgage qualification rules merely push homeowners into more expensive financing channels.

“It’s pushing Canadians into more expensive financing like B, where it used to be A,” said Mauris. “You’re making your consumers pay more for mortgage financing. Overall, we’re in a dog fight and it’s become more important than ever before to work with mortgage agents.”

Axsen understands the imperative not to expose mortgage insurers, but he doesn’t understand why ingenuity is an afterthought.

“I get they’re concerned about CMHC being exposed and the danger to the Canadian taxpayer if CMHC ever gets stressed by something with the housing market, but why not come up with a unique product? You can refinance, but the amortization has to be shorter. Or perhaps make it a higher premium on the refinance debt portion, yet still let them use their house to get away from higher credit card debt or lines of credit debt. It seems like the management of debt could have been done in a way that’s better for the consumer and limits the exposure of CMHC and other insurers.”

Credit cards have a higher arrears ratio than mortgages, however, they’re more profitable for banks—and therein lies the rub.

“There are systems in place to control mortgages, so it’s a lot easier than it would be for the government to tell banks how to give someone a consumer loan, a charge card or line of credit,” said Axsen. “They can appear to be these magnanimous, wonderful guys trying to control debt, and being thoughtful about the whole process, but it would be much harder for them to sit bankers down and say, ‘Okay, let’s look at all this other debt and how you’re making decisions to lend it.’”

  • Rosemary Madden 2018-08-31 10:30:05 AM
    This has been a thorn in my side for years. I have Blogged and Blabbed about this to everybody and anybody I could, I also sent a letter to the late Jim flaherty about the total lack of control over unsecured debt advanced to consumer with no response.

    I agree wholeheartedly that unsecured debt is the biggest problem and the major credit card companies and Chartered Banks are constantly bombarding Canadian's with the offer of more unsecured debts. It makes no sense that the Government is so focused on tightening mortgage rules while completely ignoring the rampant issue of high interest unsecured debt.

    Most Canadians will make sure their mortgage payment takes priority over the credit card payment and therein lies the real problem, when they look for help in solving their problem they hear the famous last words from their Bank - Sorry but you don't qualify - well HELLO was this question ever considered when they were given the credit facility in the first place, no, they had a job, they had a mortgage, they had a pulse and now the consumer is pushed into a market where they are forced to pay higher rates and fees.

    If only the Government would get their collective head's out of their collective rear ends and at least give some semblance of getting a handle on this problem would be somewhat encouraging.

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  • 2018-08-31 10:49:52 AM
    Perhaps this is not an entirely thought out commentary, but just seeing the words: "Why doesn't the Government control..." makes me cringe! Why do we have to turn to the Government to control everything? Are we children? And besides, do you really want the Government to have that much control? Not only that, just how do you imagine the Government is going to control this and everything else? Through legislation which requires a people to manage it, people to police it, people to enforce it -- in other words: another huge bureaucracy behind! And just how are bureaucracies funded: By more taxes! Now unsecured credit is a rather different matter than CMHC backed credit, because the only parties affected by any default are the Creditor and the Debtor really. (Well, I'm sure the Creditor probably has some kind of insurance, so that's possibly impacted -- which probably spreads out and impacts others.) Nothing on the scale of a CMHC Mortgage for which the Debtor goes into default. And when enough of those happen, the whole country and every tax payer, land-owner, citizen is severely impacted. I say that in this case, if a Creditor is foolish enough to lend money to a Debtor who is not qualified, then they both should suffer the consequences. Perhaps there shouldn't even be any insurance to cover the Creditor. If that were the case, there would be a heck of a lot more due diligence when it comes to lending money. Personal responsibility and not more Government control is the best course of action in this and in most cases!
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  • Leigh Graham 2018-08-31 1:46:41 PM
    Finding a balance between government involvement and personal responsibility is not easy. Good comments here from Axsen & Mauris both. Much has been made in the industry about rampant vehicle & unsecured credit, while putting real pressure on mortgages; this is a detriment not only to debt expansion but also from a simple lifestyle standpoint - government stress-testing rarely prohibits well-heeled borrowers from accomplishing their goals (yet it is always the million-dollar mortgages that we hear about creating the supposed 'risk'), while those at the bottom of the scale are told they cannot 'qualify' to purchase even a livable starter home. This benefits no one. When approached regarding these risks, OSFI - as an example - simply states that their mandate is to ensure banks have a prudent framework within which they can operate; they have effectively no comment on the lack of 'prudent' underwriting for unsecured credit, nor on how 'prudent' it is to eliminate first time home buyers from the marketplace, intentionally or otherwise.

    The government and its entities are truly detached from the credit challenges being faced by Canadians.

    More would be made of this if an article was published in the Post or Globe; I invite the author to perhaps consider this if not already..?
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