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Finance Minister Jim Flaherty has tightened mortgage insurance rules four times in four years in an effort to stem the growth of consumer debt and house prices. (Adrian Wyld/THE CANADIAN PRESS)
Finance Minister Jim Flaherty has tightened mortgage insurance rules four times in four years in an effort to stem the growth of consumer debt and house prices. (Adrian Wyld/THE CANADIAN PRESS)

Decoding the mortgage market

Is Canada's mortgage market safer because of Jim Flaherty? Add to ...

The man who ran our nation’s finances for eight years is gone. In Jim Flaherty’s wake are a legacy of housing policies that will impact homeowners for years to come.

When it came to Canada’s mortgage market, the former minister of finance made tough decisions in tough times, and he had his share of detractors.

“I might liken his interventionist tendencies in the mortgage market to ‘pouring gas on a fire’ and, then ‘shooting a dead horse,’” says Gordon McCallum, president at First Foundation Inc., a mortgage and financial services firm.

Jim Murphy, President and CEO of the Canadian Association of Accredited Mortgage Professionals, adds, “We believe many of the earlier mortgage rule changes were required… not so much the more recent ones.”

“Mortgage credit growth is slowing and people are paying down their mortgages. Canada needs to maintain the economic importance of housing.”

But real estate, if not at a gallop, is still very much trotting. Many of us in the mortgage industry thought Mr. Flaherty’s moves would derail housing and trigger significant job losses, but most of his policies have since proven prescient and sound.

Here are seven roles Mr. Flaherty took on as he managed the mortgage market throughout his tenure:

1. Financial crisis hero: When bad mortgages endangered the world’s financial system, Mr. Flaherty bolstered Canada’s by purchasing $69-billion worth of mortgage-backed securities. It was a shrewd move that added no new risk to taxpayers (as the mortgages were already insured). That plan motivated the banks to keep lending at reasonable rates, helping the country avert a liquidity crisis.

2. Mortgage loosener: From 2006 to 2008, under Mr. Flaherty‘s watch, the government backed 100 per cent financing (even for rental properties), lower down payment requirements to avoid default insurance, 40-year amortizations and more lenient stated-income financing than we have today.

3. Mortgage tightener: With debt-to-income ratios, mortgage rates and home prices breaking record after record, Mr. Flaherty did an about-face. His regulators slashed amortizations from 40 to 25 years, banned insured refinances and rental financing without 20-per-cent equity, cut the ratio of debt that borrowers could carry, and brought a host of conventional mortgage restrictions (dubbed “Guideline B-20”). On insured mortgages alone, he stiffened rules four times in four years.

4. Funding cost raiser: He capped government-backed Canada Mortgage and Housing Corporation (CMHC) insurance at $600-billion, limited the use of insurance on mortgages with 20 per cent or more equity, put new curbs on mortgage securitization (selling mortgages to investors), and prohibited government-backed mortgages in covered bonds and non-CMHC securitization. These and other measures raised mortgage funding and regulatory costs, which in turn boosted the mortgage rates Canadians pay.

5. Market meddler: Setting national policy wasn’t enough. Mr. Flaherty did what no finance minister ever has – or should. He used his influence to push individual banks to raise their privately-set mortgage rates. His media comments publicly called out institutions like Bank of Montreal and Manulife Financial Corp. This fear of reprisal from the finance department is still fresh in lenders’ minds, and it’s a big reason we haven’t seen banks widely advertising 2.99 per cent five-year fixed mortgages.

6. International conciliator: As skepticism of Canada’s richly valued housing market grew internationally, Mr. Flaherty’s efforts to rein in housing reassured international governments and investors. That was key for reducing the risk premiums that government and lenders have to pay to finance themselves.

7. Regulator: One of his wisest moves was placing the CMHC, one of Canada’s biggest financial institutions, under the watchful eye of banking/insurance regulator OSFI (Office of the Superintendent of Financial Institutions). For a $600-billion insurance company, that move was a long time coming.

Many people are now asking: What happens next under newly installed Finance Minister Joe Oliver? With his Bay Street roots and arguably more free-market mindset, some anticipate a more hands-off approach to the mortgage market.

“We do not expect any further mortgage rule changes, although the new minister will obviously review the file,” Mr. Murphy says. “Mr. Flaherty and the government seem content with where the housing/mortgage market is ‎now.”

In protecting Canadians homeowners from themselves and lenders from excesses, Mr. Flaherty ultimately made it harder for millions of families to get mortgages. But he also reinforced the very foundation of Canada’s banking system. We ended up with a safer mortgage market because of him.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of RateSpy.com. You can follow him on Twitter at @RateSpy and @CdnMortgageNews.

Follow on Twitter: @CdnMortgageNews

 

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