Remember when F murdered the 30-year mortgage last July? Well, it didn’t exactly happen the way the elfin deity had expected. But this unruly little blog has learned that it will, next week.
Scared of the housing bubble they said didn’t exist and worried about runaway consumer debt they helped create, the feds last summer decreed mortgage insurance would no longer be available for mortgages longer than 25 years. That helped start the great deflate now leaking the real estate gasbag. First-time buyers were creamed and the condo market nailed.
However, the banks did not play nice with a finance minister they now see as a meddling twit. Instead of just shelving 30-year loans the way F intended, they’ve kept offering them, advertising them and writing them. The only wrinkle: to qualify you need 20% down, bypassing mortgage insurance.
For example, over at RBC, our largest bank, 30-year amortizations are showcased. “A longer amortization provides you lower monthly payments and because of this it is appealing to many people,” it says. “However, it does mean that more interest will be paid over the life of the mortgage and you will build the equity in your home at a slower pace.” You bet it does. The effect of shoving debt further into the future is dramatic. And it’s ballooning of credit which has Ottawa ready to take some drastic action.
For example, even on a teensy $150,000 mortgage at 4% over a five year term, extending a 25-year am to 30 years increases the interest shelled out from $86,707 to $106,779 – an increase of 23%, in return for a monthly payment lower by less than eighty bucks.
So today, every one of the Big Six banks continues to thumb its profitable nose at the feds, merrily penning 30-year deals. In fact a few lenders, like Vancity, Coast Capital and Laurentian Bank even have 35-year loans available.
Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada. Regulated financial institutions will also be prevented from buying any securities which are made up on mortgage with 30-year ams.
Because real estate isn’t croaking fast enough. As over-the-top as mortgage brokers, realtors and developers think Ottawa’s anti-house actions have been, TPTB are not satisfied. Consumer debt keeps rising. House prices have not fallen far enough, fast enough. The credit bubble inflates more, and the troika is convinced this will end badly.
It’s why F waded into the middle of the mortgage wars last month, forcing banks to raise deep-discounted loan rates to prevent a “race to the bottom.” Now it explains banning long mortgages, a move the Finance Department estimates (internally, and secretly) could shave another 5% to 10% off sales.
Also heavily influencing the decision are worries that when the International Monetary Fund comes calling in a few months, the feds will get a fail on doing enough to crush Canadian house horniness. The Financial Sector Assessment Program (FSAP) of the IMF and World Bank is interested in Canada because we have too-big-to-fail banks which dominate the financial sector, and are critical to the economy.
Says the IMF: “In jurisdictions with financial sectors deemed by the Fund to be systemically important, financial stability assessments under the FSAP are a mandatory part of Article IV surveillance, and are supposed to take place every five years.” And this is Canada’s year – which is why all those bubble-pricking actions were taken in concert last summer, killing long mortgages, ending CMHC insurance for million-dollar homes, upping debt ratios and banning cash-back loans.
They were supposed to have worked by now. Houses prices were slated to be falling steadily. But instead only sales have been clipped. Now F feels thwarted by the banks.
This is so not over.