27 Mar 2017
Consumer Debt vs Mortgage Debt
During a recent trip to our nation’s Capital with folks from Dominion Lending Centres and other mortgage groups, an Ottawa insider made an interesting comment: “We don’t care about consumer debt, because we don’t guarantee it.”
This comment was made in an effort to justify recent increased restrictions placed on borrowers taking out insured mortgages (i.e. backed by CMHC, Genworth, or Canada Guaranty – effectively the federal government) due to increasing concerns in Ottawa around the optics of “taxpayer backed” mortgages.
This use of such hot button language would be laughable if taxpayers understood a few key things about CMHC in particular:
1. It is incredibly profitable and has generated tens of billions of general revenue for the Federal Government over the years. (This is arguably one of the most profitable Crown Corporations ever created).
2. The actual numbers as to just what CMHC (taxpayers) are “on the hook” for. (see chart below).
3. The incontrovertible fact that the government will, should the need arise, bail out the privately-owned banks should they ever truly misstep and get into trouble – meaning all debt in Canada is truly government guaranteed when you get right down to it.
What hit me as most stunning about such a laissez faire attitude towards consumer debt, setting aside the question of protecting consumers from themselves (got a pulse? No job? No established credit? No problem, here is a 14% car loan and a $20,000 credit card) was that the very people managing these “taxpayer guaranteed” mortgages cannot see the problem with a system in which the major banks approve the mortgage itself under strict guidelines and then the moment it is approved offer the newly leveraged client an additional $5,000 – $80,000 in unsecured credit “just in case” the new homeowners “need” new furniture, a new car, a vacation, etc.
How is that not a significantly relevant factor in the stability and security of the guaranteed mortgage product?
The real irony in this?
The Fed backs these mortgages through two sorts of lenders, and has arguably been creating policy to heavily restrict the competitive ability of one of the two channels. More tomorrow on just how misdirected the regulations being imposed are in their targeting of one supplier channel over another.