10/04/2016 03:45 EDT | Updated 10/04/2016 03:54 EDT

Federal Government Totally Misses The Point On New Mortgage Rules

Chris Helgren / Reuters
Canada's Finance Minister Bill Morneau makes an announcement about the country's housing market at government offices in Toronto, Ontario, Canada October 3, 2016. REUTERS/Chris Helgren

Under new mortgage rules just announced by Finance Minister Bill Morneau, all insured mortgage borrowers must now pass a "stress test" proving that they can carry a mortgage at a realistic rate (the Bank of Canada's conventional five-year fixed posted rate), and not simply the "teaser" rate offered for a short period by the mortgage lender. Up until now, this stress test only applied to insured mortgages with a variable rate or with terms of less than five years.

These tighter rules will reduce the mortgage amount a homeowner can qualify for at the same level of income. According to RateHub, a household with $100,000 in income and a $40,000 down payment would qualify for a mortgage on a home worth $665,435 (using today's best mortgage rate of 2.17 per cent), but under the new rules this same purchaser can only qualify for a mortgage on a home worth $505,762.

I don't know whether or not these new rules will cool the heated housing market in cities like Toronto and Vancouver, but it may reduce the rapid growth in the number of at risk households carrying more debt than they can handle. As a Licensed Insolvency Trustee, I see first hand the impact of high ratio mortgages, so for individual consumers who are about to over-borrow, this added stress test is a good thing.

Is it really necessary for the federal government to protect Big Banks that earn huge profits from loan losses?

Federal law requires federally regulated lenders (the Big Banks) to have mortgage insurance for mortgages where the borrower has less than a 20 per cent down payment. The Canada Mortgage and Housing Corporation (CMHC), a government agency, provides this mortgage insurance, so it is the federal government that insures the Big Banks against loan losses.

In simple terms it is you, the taxpayer (through CMHC and the federal government), that is protecting the Big Banks from losses on high risk mortgages.

The largest bank in Canada is the Royal Bank, who recently reported a record net income for the last three months of almost $3 billion.

Is it really necessary for the federal government to protect Big Banks that earn huge profits from loan losses? Doesn't this government guarantee simply cause the Big Banks to lend more money on high ratio mortgages to more heavily indebted consumers?

Think of it this way: would you loan your friend $1,000? Perhaps, but only if you felt that you had a good chance that they would pay you back. Would you loan your friend $2,000 if the government said "don't worry, if your friend doesn't pay you back, we'll cover your losses?" In that case you would loan your friend as much money as he wants, because there is no risk to you.

That, in simple terms, is the Canadian mortgage market today. The Big Banks, mortgage lenders and more and more private lenders can lend as much as they want, at very low interest rates, to less than perfectly qualified borrowers, because if there are any losses the taxpayer will cover them.

I agree that the Toronto real estate market is crazy, and it's difficult for the average person to buy a house. The solution is not to create even more government rules.

The solution is for the government to say to the Big Banks "we're not going to cover for you; if you lose, you cover your losses." If they did that the real estate market would normalize very quickly.

Of course the Big Banks may not be able to earn a billion dollars a month, but that's not my worry.

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