Monday Morning Quarterback: Jim Flaherty vs. Big Banks

Well…..one of them is right!

But which one?  Who is looking out for Canadians, and who is looking out for shareholders?

Alright, so maybe I’m off base to suggest that the big banks are looking out for their profit margins and their shareholders.

It could just as easily be argued, “The big banks are looking out for Canadian consumers!  They’re offering low rates, which is what consumers want!”

I couldn’t exactly disagree with that.

But this battle between Jim Flaherty and the lending institutions is just heating up, in my opinion.

Everything we’ve seen in the past two weeks is just the start of a monumental shift in not only the mortgage and debt markets, but perhaps in the role of government in a free market.

For those that haven’t been following the story (or simply looking at the front page of the Globe & Mail every day for the last week), finance minister, Jim Flaherty, has started something of a war with the lending institutions over their ultra-low mortgage rates.

Two weeks ago, BMO began offering a 2.89%, 5-year, fixed-rate mortgage, and Mr. Flaherty publicly scolded the lender.

Last week, Manulife Bank made a move to match the 2.89% rates offered by BMO, and that’s when Mr. Flaherty intervened.

Some accounts have Mr. Flaherty intervening personally, and some have his office doing so, but regardless, Mr. Flaherty intervened, Manulife Bank withdrew their rate cut, and now Mr. Flaherty’s role is being questioned.

The finance minister has made changes to mortgage industry several times since 2008.  He brought the maximum amortization down from 40 years to 25, ensured that borrowers have 20% downpayments on second properties, decreased the amount that borrowers can take out against their home, and a host of other changes that were all designed to rein in mortgage debt.

But now it seems Mr. Flaherty is taking his debt-war to a whole other level, as he is beginning to regulate the mortgage market itself.

This is where critics (and there are many!) are taking issue.

The basic question becomes:is it in Mr. Flaherty’s job description to tell lenders how to lend?

The answer to that question depends on your political views, economic theory, and perhaps where you have your mortgage as well!

Jack Mintz, from the University of Calgary, wrote an article in the Globe & Mail last week called “Mortgage Rates Are Not The Finance Minister’s Business,” and said this:

“The crux of the issue is simple.  The Bank of Canada has held interest rates to low levels for almost five years due to the slack in the economy.  Consumer core inflation rates are well contained for now, and plodding growth does not suggest that we’re in for a bout of inflation any time soon.  But housing prices have been rising, especially in the heated markets of both Vancouver and Toronto.  Both the Governor of the Bank of Canada and the Finance Minister are concerned about Canadians taking on too much household debt, which has risen to 165 per cent of household income.”

Mr. Mintz raises an interesting topic: why, if Mr. Flaherty is so concerned about consumer debt, has he kept the overnight rate at 1.00% for the past 30 months?

Mr. Flaherty, critics argue, wants the best of both worlds.

He wants to reign in debt, but he doesn’t want to raise the overnight rate from 1%.

Instead, he wants to tell banks and other lending institutions what to do.

This is where free-market proponents take issue.

The Minister of State for Small Business, Maxime Bernier, said in a Globe & Mail article last week:

“Me, personally, I would not dictate to business what prices to decide.  It’s the market.  It’s supply and demand that decides the prices.  It is the case for interest rates, it is the case for other products too.”

Some are arguing that Mr. Flaherty has unfairly targeted Manulife Bank, since he’s only gone after ONE lending institution with such force.

Did Mr. Flaherty go after BMO with as much gusto?  It’s debatable.

And what if tomorrow, TD Bank, Scotia, and CIBC all cut their 5-year mortgage rates to 2.89%?  Would Mr. Flaherty ‘reprimand’ them as well?

Should Mr. Flaherty be able to do so?

Those in the mortgage industry don’t think so, and most proponents of open-market dynamics think Mr. Flaherty has overstepped.

Jack Mintz further opined:

“It’s targeted price control that’s particularly problematic with Mr. Flaherty’s intervention.  As the market is responding to excess supply, the government is pressing some financial institutions to keep interest rates high.  It’s not clear that this response is productive.  If we’re going to control interest rates in this way, why not use monetary policy to tighten up credit, which applies to the whole market?”

I see both sides to the coin, but let’s not forget that the government does intervene in many, many aspects of the so-called “open market.”

What do you think minimum wage laws are?  I’m sure companies would be lined up to pay workers $2.00 per hour instead of the $10-ish dollars that most provinces have instituted as a fair wage, but alas, the government has stepped into the free market.

I’m also sure that most corner stores would LOVE to sell beer and wine in Ontario, but once again, the government has regulated that trade – and much to their benefit if I do say so myself!  In fact, I bet 99% of consumers in Ontario would prefer to open the liquor and beer industry to competition, and be able to walk out to the 7-11 and get a six-pack of Labatt Blue, or a cheap bottle of Yellow Tail Shiraz, but the government seems to think it’s in our collective best interest to have to travel to location of their choosing, during business hours that they set, to purchase product that they decide on.

So I think the argument that the government should stay out of the mortgage market because they shouldn’t “intervene” in the free-market doesn’t really hold weight.

I understand the question about why Mr. Flaherty hasn’t increased the overnight lending rate, but in the end, I have to “trust” him over the big banks, who would sell their own mother down the river to get just a slightly bigger piece of the mortgage pie.

And if we take a look at Mr. Flaherty’s 2013 budget and associated plans, we see that perhaps he has bigger up his sleeve.

The federal government is now exploring ways increase competition in the financial sector by breaking down barriers to entry for new lenders.  Mr. Flaherty is promoting competition with the Big 5 Banks, which many people think is a long time coming.

So Mr. Flaherty is looking to increase competition for consumers, and he’s looking to help consumers take on less debt.  It sounds like he’s on our side, right?

My only question is this: won’t more lenders, and more competition for consumers, eventually lead to lenders slashing mortgage rates?

It seems like so many of these moves (and proposed moves) are contradictory.

The only conclusion we can draw, not to sound cheeky, is that there is no conclusion to this story and there won’t be any time soon.

I think this is just the start of a year, or maybe two, of Mr. Flaherty keeping a high public profile as he searches desperately for ways to reign in consumer debt, and protect consumers from the biggest threat out there: themselves.

Time will tell how this plays out, but in the meantime, take advantage of those low-low rates! 🙂

15 Comments

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Joe Q. says:

    I find a lot of the discussion around Flaherty’s interventions — and Canadian mortgage lending in general — to be at least a little disingenuous.

    With all due respect to David, I find it telling that he only chose to enumerate Flaherty’s mortgage interventions from 2008 on, and that he didn’t mention the CMHC at all in his post. When discussing Flaherty’s tightening of amortization lengths, few people seem to recall or admit that it was Flaherty himself who raised the maximum amortization for insured mortgages from 30 to 40 years (in 2006 — introduced along with the zero-down mortgage). And few people acknowledge the role of the CMHC — the Crown corporation that insures basically all of the high-LTV mortgages in Canada, along with many other less risky ones.

    To me, Flaherty’s moves since 2008 to tighten CMHC lending are just a reversal of the loosening he carried out in 2006 (shortly after becoming finance minister). And the fact that the CMHC exists at all puts a lie to the idea that there is a “free market” for mortgages for him to “interfere with” in the first place. (If you have any doubts, try eliminating the CMHC, and watch what happens to mortgage rates in this country.)

    The most important single determinant of house prices is the availability and cost of mortgage credit, and the most important single determinant of the availability and cost of mortgage credit is CMHC policy. In that sense, I do agree with those criticizing the way Flaherty has been intervening — calling up banks to chide them for lowering mortgage rates is ham-fisted in the extreme. He has much more direct (yet subtle) levers at his disposal if he’s truly concerned about Canadians’ mortgage debt — he could easily instruct the CMHC to strengthen its criteria around debt service ratios, down-payments, and refinancing. The fact that he chooses to chew out the banks instead shows that his moves may be more about politics than anything else.

    1. @ Joe Q.

      Believe me – there’s no ulterior motive here on my part.

      I’m just trying to get a sense of where people’s opinions lay.

      I didn’t mention CMHC because this blog post would be about 5,000 words if we discussed their role in insuring mortgages.

      You are right though – Flaherty is just tightening that which he previously loosened.

      1. Devore says:

        “I didn’t mention CMHC because this blog post would be about 5,000 words if we discussed their role in insuring mortgages.”

        But you have to. There’s much hubris in your post about ‘free markets’, which doesn’t jive with ‘rates are below 3% for 10 year mortgage because CMHC will guarantee it and we can pawn it off on MBS investors as Aaa paper’.

        At least you’re too smart and honest to admonish government interference in one direction after having cheered it on on the other.

        1. Appraiser says:

          Mortgages are available at below 3% for all potential mortgagors, not just those requiring CMHC insurance. Can we dispense with the CMHC as Satan incarnate already?

          1. ScottyP says:

            There are some serious anti-CMHC sentiments amongst David’s readers.

            While familiar with the basic talking points of the antis (“Taxpayers backing bad debt… $600 billion… Privatize! Privatize!”), I for one would love to learn more about what makes the crown corporation so evil… or, conversely, not.

          2. Joe Q. says:

            It’s not that the CMHC is “Satan” or “evil” — just acknowledging its role. I think that people across the bear-bull spectrum agree that the fact that the CMHC exists, and that it is a Crown corporation, has a huge effect on lending patterns in Canada.

  2. jeff316 says:

    The issue here isn’t whether or not he should intervene – it is how. And how he did it is the absolutely inappropriate.

    As a Minister in a majority parliament, Flaherty has ample tools to intervene in the market – if something is illegal he can prosecute. If something isn’t but should be, he can legislate, regulate, set guidelines/codes of practice. He can even dictate new conditions for CMHC insurance with regard to rates below x or y if he wished to.

    The way he intervened is without oversight, accountability, transparency, or consistency. It is open to influence and ego. What other lenders got a call? Which other ones didn’t? Why? Why now? Shady, shady, shady.

    Want to reign-in low mortgage rates? That’s his prerogative, but do it legitimately, through his powers or through parliament.

  3. Ralph Cramdown says:

    Manulife…. Isn’t that the company whose stock went from $40 before the financial crisis to under $10? The one that cut its dividend in half? And whose stock has roared back to $15? I’ve made some nice money trading Manulife shares in the last few years, but I didn’t buy it because I thought it was a well run company. I bought it because I thought the outlook for both it and the markets in general (which Manulife is leveraged to, when they don’t bugger up their hedges) wasn’t as bad as most investors were thinking. As a current shareholder, I say any time our Leprechaun Finance Minister wants to kick Don Guloien in the shins and tell him not to fight a public price war with the banks to gain share at the expense of margins, he’s welcome to. When the smart money can already negotiate these rates with their banks or through a mortgage broker, what kind of customer do you suppose thesefirms are picking up with their ad campaigns?

  4. Geoff says:

    I have to agree that Flaherty’s right here. If we’re not paying him to intervene when he (as an expert, and actually more likely his staff) say he should, what are we paying him for? I don’t like that my wife and I (both 37) couldn’t afford our own home today if we had to buy it (We bought in 2007, and the going rate is now $625K). That just means fewer young couples with children in our neighbourhood, which sucks.

  5. Vincent says:

    I say no need to intervene with the mortgage rates. Just privatize the CMHC and make the banks responsible for ALL loans. Then we can see what happens to mortgage rates.

    1. George says:

      I agree. It is twisted that we are responsible for insuring loans that the bank deems safe.

  6. ABB says:

    CMHC is a crown corporation of the government (ie. taxpayer-backed corporation).

    CMHC carried about $600 billion of mortgage debt on its books (backing loans issued to a large majority of customers of the big financial institutions)

    There are literally hundreds of billions in debt that CMHC (ie taxpayers) would have to pay to the financial institutions if in future a disorderly housing market (ie burst bubble) puts tens of thousands of new homeowners in negative equity and they default on repayments.

    Therefore, the finance minister has a DUTY to comment when he sees dangerous trends or behaviours in the home financing marketplace. With the government’s over-riding presence in the residential mortgage market, Flaherty has every right to comment when he sees troubling trends that threaten market stability.

    1. dave says:

      ABB, I agree with your post in principle. However, to clarify, even in the worst case scenario the CMHC/taxpayer would be out of pocket much less than “…hundreds of billions”.

      They would reimburse the banks for the net loss on the mortgage, ie net of the recovery from selling the mortgaged property.

      I’m pretty bearish on the RE market, but even an uber-bear like myself would put the absolute worst case scenario (<1% chance?) as a total payout of $50b. And much more likely to be $20-$30b if the minus 25% scenario was to develop over the next 5 years.

      1. Ricky Roma says:

        http://www.wellingtonfund.com/blog/2010/12/02/canadian-bank-bailout-total-touches-186-billion/#axzz2ObkQA43d

        It would help all of us if the banks were left to blow their brains out on their own without having the backstop of Joe Canadian.

        Morons leading idiots leading sheep.

        1. Geoff says:

          Yeah, because a banking collapse is a great thing for the economy. Wall Street hit main street pretty hard in the states. (Not a bank fan, but not quite ready to cut off my nose to spite my face either).

TWEETS