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Saturday, April 29th, 2023

Flaherty’s decision to intervene in mortgage war raises questions

Flaherty’s decision to intervene in mortgage war raises question

Adil Virani Vancouver Mortgage Broker

Finance Minister Jim Flaherty has pressed Manulife Bank into reversing a mortgage-rate cut, underscoring the government’s determination to prevent lenders from stoking the housing market at a time of soaring consumer debt.

Mr. Flaherty instructed one of his officials to call Manulife on Monday night and indicate displeasure at its move to lower the rate on a five-year fixed mortgage to 2.89 per cent from 3.09 per cent, saying its new promotion was “unacceptable,” according to his spokesperson.

Unlike two weeks ago, when the Finance Minister personally scolded Bank of Montreal for cutting its rate to 2.99 per cent, his warning was heeded.

The unprecedented intervention reflects deep concern about residential real-estate prices and debt. The number of home sales has dropped markedly since Mr. Flaherty changed the rules last summer to make it more difficult to obtain mortgages, but house prices have not come down significantly in most areas of the country and debt-to-income levels continue to hit new highs.

A mortgage-rate war as the spring selling season begins could undo his steps to cool the market.

But the Finance Minister’s decision to intervene personally with rate-setting decisions is raising questions about the degree to which he should attempt to influence prices in the private sector. And it angered some bankers who suggested that Ottawa is not treating all financial institutions equally, while interfering with market forces.

For instance, a top executive at one of the big banks noted that tighter mortgage underwriting guidelines imposed by the federal banking regulator last year did not apply to provincially regulated credit unions, giving the latter an advantage. If the real goal of policy makers is to raise rates, then the Bank of Canada should raise interest rates, he said.

“Don’t sit there and tell the banks not to compete and not to be aggressive,” said the executive, who did not want to be named. “You can’t control it by telling a few banks and insurance companies what to do.”

Consumers are generally able to negotiate with banks to obtain mortgage rates below the advertised price, and many lenders are offering rates as low as the one promoted Monday by Manulife Bank, which is a fairly small player in the market.

The Finance Minister told reporters Tuesday that he was pleased by Manulife’s response. “I had one of my staff call and indicate my displeasure, which is the same thing I did with Bank of Montreal except [in that instance] I called myself,” he said. The concern is that by promoting ultra-low rates, lenders could spur a rebound in the housing market.

However, Mr. Flaherty and many economists believe that the current slowdown is healthy and will prevent a more serious market correction down the road.

Chartered banks had $865-billion in outstanding mortgages as of December, according to the Bank of Canada. And the government also has a keen interest in the country’s mortgage market because it backstops mortgage insurance, leaving taxpayers exposed to any serious upheaval, said National Bank Financial analyst Peter Routledge. In that sense, Mr. Flaherty is wisely using moral suasion to minimize potential future losses to government coffers, he said.

“I can’t think of another situation I’ve seen where government has intervened like this and caused a reversal in a pricing decision,” Mr. Routledge added. He said that Mr. Flaherty is now using this tactic because he’s already tightened mortgage insurance rules four times since 2008, and the central bank is maintaining low interest rates.

“Can you imagine a Conservative government trying to put a price control on the market?” Mr. Routledge said. “It underlines the seriousness of the problem of household debt.”

Glen Hodgson, vice-president and chief economist of the Conference Board of Canada, said Mr. Flaherty’s intentions are good, but his actions carry risk.

“He should be very careful about singling an individual bank out repeatedly. I mean, it’s legitimate for banks to want to win market share and clearly they think they can make money,” said Mr. Hodgson, who has worked at the federal finance department and Export Development Canada. “If ministers want to influence the course of markets in Canada, they can either use soft power or hard power, and this is him using the bully pulpit of the finance minister, to try and influence behaviour. I mean he can use much sharper tools if he wants. I wouldn’t encourage him to do that.”

NDP Leader Thomas Mulcair said Mr. Flaherty’s interventions are inappropriate.

“It’s banana-republic behaviour,” Mr. Mulcair said. “We live in a society based on the rule of law. Parliament enacts laws, the administration can have regulations, you can have orders in council, but since when do you use political weight to push back on financial institutions responding to a market parameter that’s totally legal?”

Liberal MP Ralph Goodale, who was federal finance minister from December 2003 to February 2006, said Mr. Flaherty’s “dubious” actions raise a lot of serious policy quest

Mr. Goodale said in his experience, interactions with banks were largely handled by the department’s deputy minister or other public servants, not the minister or political staff. He said Mr. Flaherty should meet with all the heads of banks as a group if he’s concerned about mortgage rates, rather than dealing with banks one at a time.

“Are we now into a situation where the minister is regulating retail rates?” he asked. “Well, that’s a pretty fundamental change in the way our financial institutions have operated.”

Bankers were extremely reluctant to speak on the record Tuesday for fear of further public rebukes. “No one’s going to risk having a comment on this issue for fear of irrational actions from Ottawa,” one banker said.


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