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Mr. Flaherty, don’t make Canadians overpay banks

Queens Drive in the Toronto community of Weston.

Tim Fraser/The Globe and Mail

Imagine the federal government lauding cellphone carriers for keeping rates high, or airlines for declining to match each other's fare cuts. There would be an outcry. Yet Finance Minister Jim Flaherty congratulates banks for not competing to offer the best loan price on what will likely be the biggest purchase most Canadians' ever make, their home, and nobody can gin up much outrage.

Once upon a time, people could get good and worked up by banks making a little extra money by keeping prices high. But such is the strange world created by the fear of a housing bubble in Canada.

Mr. Flaherty, in his zeal to look like a vigilant cop on the beat, not only warned against a "mortgage war" after Bank of Montreal cut its rate one-10th of one percentage point on a five-year fixed mortgage rate, taking the price to 2.99 per cent. He then thanked other banks for not matching.

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Canadians, apparently happy to be saved from themselves, are quiescent and accepting of the fact they are being overcharged for some greater good. Because now, the other big banks have not only license, but federal endorsement, to cream off a little extra margin on home loans.

Interest rates in the wider market where banks fund mortgages had come down in the days before the BMO mortgage rate cut, leaving room for a reduction. For example, the yield on a five-year bond had dropped about two-10ths of a percentage point in the three weeks preceding BMO's move.

Mortgage debt seems to becoming one of those perceived ills, like booze and cigarettes, where the government not only regulates how they can be sold, but sets minimum prices aimed at preventing people from overindulging. If that's the case, maybe the government ought to come right out and say it.

Protecting the banks, borrowers and the economy is crucial. When Air Canada struggles because of vicious price competition, or a cellphone company loses money, life goes on. Banking is surely different.

But price is a distraction, so long as banks are not lending at a loss, and judging from their first-quarter profit of more than $7-billion for the Big Five, they are not doing so.

The real focus should remain on lending standards, and ensuring that people who qualify at any given price can still make payments should rates rise. A jump in mortgage rates from 12 per cent to 14 per cent can be just as painful as going from 3 per cent to 4 four per cent – or more. Ask anyone who owned a home when rates and inflation were soaring 30 years ago.

Mr. Flaherty has done good work on this file in recent years, working with bank regulators to force lenders to raise the quality of borrowers.

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He has tightened rules on amortization, forcing Canadians to pay back debt faster and limiting their ability to take out even larger mortgages by spreading payments over many decades.

He has raised the bar for qualifying for a loan. He has capped the availability of government mortgage insurance, pushing more risk onto banks, which ought to improve their focus on borrowers' credit quality.

The numbers released by banks last week suggest that despite common perceptions, mortgage lending is not some sinkhole of unmanageable loans and risk foisted on the government.

The big five banks laid out their exposures to more than $900-billion in total home loans. Different banks disclosed different things, but some figures stand out.

For example, the idea that banks don't retain significant mortgage risk is unfounded. Adding up the figures shows about 56 per cent of the mortgages held by the Big Five are insured, while 44 per cent, or about $400-billion, are uninsured.

That's a lot of risk on bank balance sheets. There is also a lot of equity backing those uninsured loans. The banks that disclosed loan to value showed ratios in the 47 to 59 per cent range.

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Canadians also tend to pay down their loans more quickly than they have to, or at least those that bank at Canadian Imperial Bank of Commerce do. CIBC disclosed that, on a contractual basis, 82 per cent of its mortgages are for terms longer than 20 years. But taking into account the overpayments that customers are making, only 62 per cent of the loans will take longer than 20 years to pay off.

If that many customers have the wherewithal to regularly pay more on their mortgages, that suggests they have cash flow and could probably handle rate increases.

Mr. Flaherty has asked a lot, rightly so, of mortgage seekers in recent years. But suggesting they should overpay their banks is asking too much.

(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)

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