This post was written in 2013, when 5-year fixed mortgages under 3% had bankers, economists, and politicians twitching. Canada had dodged the 2008 subprime crisis, but regulators were determined not to repeat it. The Finance Minister personally called banks to discourage low-rate competition. This action was unprecedented. It quietly marked the beginning of Canada’s hyper-regulated mortgage era.
Recently we have had two different lenders come up with “cut-rate” Mortgage (BMO and Manulife) “deals.” Both have now withdrawn those “deals” following government urging. This urging came specifically from the Department of Finance. In the case of Manulife, it involved the Finance Minister himself.
The direct quotes (from the CBC web site) from those involved were:
“My expectation is that banks will engage in prudent lending” not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Finance Minister Jim Flaherty said of BMO’s “cut rate” mortgage deal.
And a further quote from the finance minister:
“I had one of my staff call them and indicate my displeasure, which is the same thing I did with BMO, except I called myself,” the finance minister said.
So there you have it my fellow Canadians. Clearly, there is now plenty of room for the government in our bedrooms and homes. This paraphrases Pierre Trudeau.
I could not find enough information on what kind of "deal" both BMO and Manulife were offering for these alleged 5 year mortgages. However, they offered rates of 2.99% and then 2.79%. This makes these sound like great deals (however, I am willing to hear from folks who are better informed on the entire deal on whether over payments were possible, and whether there might have been hidden penalties as well), but that is not the real point, it is the fact that the "Harper Government" now feels that market forces cannot be trusted.
Have they overstepped their bounds? No, both of the firms could have said, "Sod off!" This might have been imprudent, but this was not an act of parliament. It does, however, open an interesting discussion about how big a Nursemaid the government must be.
Would there have been a run on "cut-rate" mortgages? There might have been, can you trust banks not to cut their own throats? Rhetorical question now, I suppose, but currently I am fairly certain that I could walk into my bank and after a lot of threatening to leave, I might get a fixed rate of somewhere near 3.5% (without too much work, maybe even lower, who knows). Would we end up with a Bunch of Stupid Mortgages causing a US-like Sub-prime debacle? Guess we shall never know.
Does the government think Canadians are Financially Stupid? Actions speak louder than words in this case.
Also, I find it hilarious to hear Tom Mulcair complain about the Conservatives interfering with the free market. I am a former Quebecois, so that is what we call him there. He is a staunch Socialist. The irony of him complaining that the Free Market should decide is not lost on me.
There is no word on the heir apparent for the Liberals. Mini Trudeau has not commented on whether the Government should step in here.
What do you folks think? Should the government stopped this foolishness or let the marketplace decide?
Grizzled Perspectives on Canadian mortgage regulation
I’ve watched this dance for decades. The “invisible hand” of the market in Canada always has Ottawa’s thumb on it. Every time rates dip or banks compete too aggressively, someone from Finance “suggests restraint.” What most people get wrong is assuming that means safety. It often just means less competition and more control. The smart move for borrowers is to consider a policy, not markets, that sets your mortgage ceiling and plan accordingly.
If this were only about getting renewed mortgages I would be ok with the low rates, but kinda iffy on new mortgages. I think that people should have to pass the test as to whether they can still pay if the mortgage rates were to double or even triple before they qualify.
Now if he (Minister Flaherty) were kicking the butts of the payday loan places instead, I would be cheering him on, (and so would many other people!)
Me too, but for some reason Pay Day Loan places are being left alone (for now).
Now this is a post loaded with possible discussions! Do I think that what the government did was wrong? Yes to some extent because these organizations are fairly large and lets be honest they can’t possibly be that stupid (I could be wrong). They’re all trying to compete for the same pool of mortgages and everyone knows what happened in the us so a sub-prime battle doesn’t seem likely.
With that said there is something to be said for the government keeping an eye on the industries and companies that really prop up a critical infrastructure position (in this case the financial segment). When Air Canada goes on strike does the government eventually not get involved? There are times when it makes sense for them to step in. Here it sounds like they were warned about the direction they were going rather than told to do anything.
As for the financial literacy of canadaians – that is a loaded question if I ever saw one and a discussion that needs a few beers because it’ll be a long one.
Yes, I think I should have prefaced this post with “It’s Inflammatory Comment Thursday!” 🙂 . I think I am OK with this intervention, but watching all the cojetations it caused in the media was entertaining. As for Canadian Financial Literacy, there are MANY posts out there dedicated to that discussion.
The race to the bottom is still on, but just not advertised:
http://forums.redflagdeals.com/official-mortgage-rates-thread-351105/1275/#post16528326
I’m hoping to get 2.89% or better when I renew in a few months time.
Interesting, as I said, I am curious to find out how low I could make my bank go if I say I want to lock in.
I’m all for the free market and I’m not a fan of gov’t regulations and intervention….but everything I see says that the gov’t regulators do a world class job of protecting consumers and our financial industry, particularly with respect to long term stability.
Does that mean they should be dictating specific business practices to specific banks? That’s probably over the line. The reasoning though, of ensuring Canadians en masse don’t end up over their head in debt, that’s a good reason. It prevents a complete meltdown across the country, that would impact all of us, even those without debt.
So, right idea, a bit too specific in it’s implementation though.
I think “over the line” is introducing legislation to control things, simply flexing their influence is maybe the right way to do this, but still an interesting problem.
I don’t mind him rumbling and getting lots of publicity for the problem but I would not support a government actually passing some sort of rule to prevent price competition on mortgage rates.
I think anything that makes Tom Mulcair whine about wanting a Free Market is well worth saying…
I totally agree – make the possible issue known, even encourage companies that look like they’re about to go down a dark road back but don’t actually dictate price policies at the legal level.
Agreed. Simply influencing is fine by me, but going to a legislative response is going too far.