Flaherty moves to lessen taxpayer exposure to housing market in budget

OTTAWA – Finance Minister Jim Flaherty is still worried about debt in the over-valued housing market and is tightening the rules for banks to reduce taxpayer exposure.

The budget said the government will restrict banks’ ability to insure conventional mortgages, those with over 20 per cent householder equity, to only those used in Canada Mortgage and Housing securitization programs.

As well, it said it will prohibit the use of government-backed insurance — both on conventional and heavily leveraged mortgages — as collateral if they are not sponsored by CMHC.

The budget explained that financial institutions significantly increased purchases of portfolio insurance on pools of mortgages during the financial crisis because they were useful for bank funding.

The portfolio insurance is used to protect lenders against loan defaults.

However, since the financial crisis, the budget said financial institutions have begun to use the bulk insurance for capital and liquidity management, something they were not intended for.

“With the financial crisis well behind us, the government is amending the rules for portfolio insurance to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector,” the budget states.

The move potentially could increase interest rates indirectly for Canadians by increasing funding costs for the banks.

The minister has voiced concern in the past about taxpayer exposure to mortgages and last year set a $600-billion ceiling on the total amount of insurance CMHC can have on its books.

As well, the minister moved to tighten lending rules, and recently took credit for convincing Manulife to withdraw an offer to drop the posted five-year mortgage rate to a new low at 2.89 per cent, saying he wanted to avoid “a race to the bottom” in the mortgage wars.

At the consumer level, Flaherty has moved four times in as many years to rein in borrowing, most recently last July when he reduced the amortization rate to 25 years from 30, effectively increasing the monthly payments on new mortgages.

Analysts say the most recent changes follows along the same lines.

“The announcement today is another step in what has been a fairly well-signalled direction,” said Terry Campbell, president of the Canadian Bankers Association. “We noted that the amendment announced today will be implemented gradually and that there will be consultation with stakeholders.”

Flaherty’s concern with mortgages is that Canadians who enter the housing market when interest rates are at rock bottom will be unable to meet their commitments once rates start rising.

Although the market has shown signs of softening, and even of a correction, household debt to disposable income continued to rise slightly in the last quarter of 2012 to 165 per cent, a new all-time high.