The battle over the mortgage changes heats up

Wikipedia defines the OFSI (the Office of the Superintendent of Financial Institutions) as an independent agency of the Government of Canada reporting to the Minister of Finance created "to contribute to public confidence in the Canadian financial system".

Seems with all the backlash about recent changes to the regulations surrounding the mortgage industry, the OFSI feels it is in need of some public confidence themselves.

Yesterday the OFSI set up a twitter account.  Their 2nd tweet?

OSFI has authorized CMHC to commence web-based social-networking campaign to booster public image.

Which seems odd because while the OFSI joined twitter yesterday, CMHC has been on twitter since July 2011.  Mind you the sum total of their twitter contribution so far has been only 2 tweets:

The backlash in question, in case you have missed it, is coming from the mortgage broker industry, as the Huffington Post noted a few days ago.

The press coverage comes as CAAMP (the Canadian Association of Accredited Mortgage Professionals)  issued a report declaring that “the changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

As the Huffington Post notes:

Ever since Canada’s housing market began swooning earlier this year, mortgage brokers, bankers and real estate agents have been busy telling us that the federal government is to blame, thanks to its tightening of mortgage lending rules this past June.

Never mind the evidence that the most overheated markets were already cooling by the time the mortgage rules were announced; never mind the rather extreme “coincidence” that our housing market began to slide just as we reached household debt levels similar to those seen in the U.S. and U.K. when their housing markets crashed. No; the real problem, according to the industry, is Finance Minister Jim Flaherty’s reduction of government-insured mortgage amortization periods from 30 years to 25.

The CAAMP report presents data to suggest the new rules have priced some percentage of prospective homebuyers out of the market.

According to CAAMP's estimates, if the new mortgage rules had been in place in 2010, 11 per cent of the high-ratio mortgages approved that year wouldn’t have been. A high-ratio mortgage is one where the buyer has put down less than 20% as a down payment.

CAAMP argues that this will impact employment as the construction sector struggles.

And that's the heart of the offensive.  CAAMP argues real estate has become such a significant part of the economy and as real estate goes, so goes the economy... so, federal government, don't stick with the changes you have made to mortgages.

But as the Huffington Post notes:

[CAAMP's] warning about the economic dangers of an overheated housing market could just as easily be an argument for Flaherty’s mortgage rule changes as they are an argument against them. If the economy stands to be devastated by a housing slowdown, then the best thing to do is to stop the overheating as soon as possible — or face an ever larger crash. This is what the mortgage rule changes were meant to accomplish.

And the effect of the mortgage rule changes is really no more than what one would expect to see with a fairly small hike in interest rates.

Right now, a 25-year mortgage at three per cent interest on a $350,000 house (the average price in Canada right now) would cost you $1,656 per month, according to TD Bank’s rate calculator. If the rate went up to four per cent, the payment would jump nearly $200 per month, to $1,847.

According to estimates, the new mortgage rules would jump housing payments on average by $140, due to the shorter repayment periods. In other words, the new mortgage rules have less of an impact on affordability than a one-per-cent interest rate hike.

This is what the real estate industry is freaking out about and blaming Flaherty for — the equivalent of a small hike in interest rates.

The hypocrisy in CAAMP's arguments are gleefully exploited by the Post:

And yet Dunning’s report asserts that “Canadian mortgage borrowers and lenders have been prudent and there is very substantial room to absorb higher interest rates.”

Really? Really?! Our household debt burden is now 163 per cent of household income, a record high and a higher level, slightly, than what the U.S. and U.K. saw before their housing market collapsed.

So how is it that Canadians have room for more debt, when the same debt levels in the U.S. and Britain proved to be unsustainable?

The truth is, Canadians don’t have room for more debt. And the contradictory argument that they can handle higher interest rates but not tougher mortgage rules is proof that the blame-the-mortgage-rules argument doesn’t hold water.

Our housing market isn’t experiencing what Dunning calls a “policy-induced housing slowdown.” It’s experiencing fatigue from excessively high debt levels, and a long run-up in prices, combined with general weakness in the job market and unimpressive wage gains.

Yet it seems the industry will continue to maintain that the blame for the housing market slowdown lies not with the irrational exuberance of a housing bubble, but with the entirely rational efforts to fix it.

You can be sure this battle is only getting started. 

Which is why the OFSI is taking to social media as part of it's counter-offensive.

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