Would’nt it be interesting if an article in the mainstream news cut through all the sound bites and blame over fears of ballooning consumer debt in Canada? Flaherty tells consumers they must be prudent with their debt loads. Banks say they need new mortgage rules because they can’t limit lending without them. Carney reminds buyers that values go up and down but debt endures.
How did we get to the point where Canadian household debt is as high as the USA at it’s housing bubble peak? Is it just ‘cheap credit’ or is there another reason?
.. Oh, look! The CBC has published something interesting:
The reason consumers are borrowing so much is that the government has been encouraging them, just as it’s also been encouraging the banks to lend. It’s called CMHC insurance and the way it works is that Ottawa guarantees virtually all of the risky home loans made by the banks.
The program was originally conceived as a way for low-income Canadians to get mortgages and buy homes.
That’s a good thing but it also provides a key benefit to the lenders since it removes risk of default. In effect, CMHC insured home loans are as safe as government bonds and that’s allowed the banks to treat them as such.
“What’s happened is it’s become the major source of bank financing in Canada,” said Mr. Kilgour. “At a time when you’ve got basically a stagnant economy you have free-flowing liquidity to residential credit.”
Simply put, loans that would otherwise be regarded as less than top quality are transformed into triple A gold, courtesy of the tax payer.
“If the government wanted to slow down the growth in consumer debt, a hugely effective policy move would be to reduce the cap on the level of mortgages that CMHC is allowed to insure,” said Mr. Kilgour.
But don’t we need mortgage insurance for a healthy economy? Shouldn’t we be keeping it in place while the future looks a bit rocky?
Maybe.. or maybe we just shouldn’t be pumping more and more money into a scheme with no long term benefits:
For the first time the amount of outstanding mortgage backed securities passed the $300-billion mark earlier this year, more than double the amount at the start of 2007.
2010 issuance is expected to reach $100-billion, the third highest level in history.
The banks love it because it’s risk free business, and investors love it for the same reason.
The problem is that it’s encouraging banks to lend at a time when they need to put their foot on the brake.
According to Mr. Kilgour, what needs to happen is for the CMHC to reduce the amount of insurance it provides.
Without that, “there’s no motivation for the banks to tighten up on lending – since they know that by the time the stuff hits the fan, much of their risk will be off the table,” said Mr. Kilgour
Read the full article over at the CBC website.