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Banks advocate Ottawa to mend mortgage regulations
Monday February 08, 2010


The bankers` effort is all the more notable given the unique structure of the Canadian mortgage business. Banks get the profits from mortgages with their decades of interest payments, but have little risk of direct loss because of mortgage insurance.

Consumers cover the premiums and, because most mortgage insurance is underwritten by CMHC, the federal government ultimately takes the risk.

It`s not the potential of big losses on mortgages that scares banks, says Mr. Routledge of Moody`s. But if there were a spike in foreclosures in Canada, as has happened in the United States, consumers would likely struggle to make payments on other loans that aren`t insured, such as credit card debt. Such a situation would also likely cause a big economic slowdown.

"Imagine instead of a few hundred people in Toronto in any particular month being foreclosed upon, it`s a few thousand," said Mr. Routledge.

"The impact on the broader economy and the overall level of consumer confidence is significant in the U.S."

Mr. Carney, who said again this week that he too believes there`s no bubble, has raised concerns about the level of debt that consumers are taking on.

He has said that interest rates are likely to rise in coming years, and warned that banks should not be lulled into complacency by the fact that mortgages are insured.

But a number of voices in the mortgage industry caution that a dramatic change to the rules could put too much of a damper on the market, and possibly be more damaging to the economy than the problem Ottawa is trying to avoid.

Much of the population`s net worth is tied up in their houses, and the concern is that if tighter rules caused home prices to fall, consumers would rein in their spending.

"Some people talk about 10 per cent down payments, and we would have serious concerns with that," said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.

CMHC has already increased its vigilance when it comes to approving insurance, said mortgage planner Robert McLister.

"These days, if a deal remotely smells funny, or an appraisal is slightly unrealistic, it`s shot down without hesitation. There is such an aversion to defaults in our market."

Should the government decline to move, the banks could always try to tighten lending standards on their own. But that might not have the desired impact because are many other providers of mortgages.

"Even though we`re in an oligopoly, every mortgage has a dozen bidders on it," said Mr. Routledge.

***

The tale of Canada`s housing market

Residential mortgage debt as a percentage of personal disposable income has been rising since the early 1980s.

But thanks to lower mortgage rates, the debt service ratio - a measure of how well Canadians can afford their monthly interest payments - was trending downwards until a couple years ago.

And since the banks losses on mortgages in Canada are so small as to be insignificant, they have steadily continued to dole out more in mortgages each and every year.

Meanwhile, the country enjoyed unusually strong growth in home prices this decade. After a brief drop in late 2008, house prices resumed their upward trajectory, catching bankers and economists off guard and separating Canada`s housing market greatly from the experience in the U.S.

Tara Perkins


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