Government intervention....from where I sit....

This week we once again saw the government propose changes to mortgage insurance regulation that will go into effect on April 19th 2010. For anyone who hasn’t seen what the changes will be, here they are in a nutshell:

• All borrowers must meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate or a shorter term. This will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw when refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

Normally I’m not a big supporter of excess regulation by the government but with this one I’ve got mixed feelings. The government is basically trying to protect consumers and lenders from ourselves. It’s hard not to look south of the border and see why Jim Flaherty would want to impose such measures and protect our economy from what happened in the US. With the changes above, borrowers are forced to qualify at a rate that ensures they will still be able to afford their payments should rates rise and they’re also forced to maintain an equity level of at least 10%, which will a) provide an equity buffer should real estate values fall and hopefully prevent homeowners from getting into a negative equity position and b) help Canadians with their “savings”.

I’m all for bolstering the economy and preventing potential disasters down the road. It’s good to have a little foresight, learn from experience and make positive changes. What I have a problem with is the scope of that foresight and the changes they decided to implement. The scope is very narrow and doesn’t take into account all the elements that make up homeowners’ debt. I’ve made mention of this in the past but what about the predatory practices of credit card companies that keep sending notices that they’ve increased your limit until before you know it you have a $30,000 visa limit with an 18% interest rate. Or retail cards that are able to charge 30%?! How many people that were lined up for hours and hours on boxing day at electronics stores bought their computers and big screen TVs on their retail cards and are now paying 30% to finance those purchases? Shouldn’t the government be looking at regulating some of those practices to protect Canadians? Right, the Government effectively controls mortgage insurance in Canada so it’s a much easier change to implement rather than going after big business to pull back the reins.

I see first-hand the amount of people who use their homes as an ATM. As the values go up, they’re constantly removing equity to pay for other things or pay off the debts they’ve accumulated outside their mortgages. Unfortunately, limiting them to how much equity they’re going to remove from their homes isn’t necessarily going to help them. In a lot of cases it will actually hurt them. It means they will likely end up carrying more high interest debt than if they were able to refinance. In my opinion, forcing all possible lenders (mortgage, credit card, retail, etc.) to have more customer-friendly practices would be a much better long-term solution.

The glaring piece I see missing from the Government changes is education. I see the proposed changes like a parent trying to protect their kids by constantly saying “you can’t do this, you can’t do that” without actually explaining why. As a parent I always do my best to explain to my kids why they can or can’t do something so they can learn. They need to understand why and what they’re being protected from so at some point they can protect themselves. If I constantly say “no, no, no” without explaining myself, they’ll never be able to make their own decisions and good ones at that. I’ve said this for years that there is a huge gap surrounding personal finances in our educational system. Kids aren’t being taught how to manage finances. Like so many other things it seems the system leaves that to parents to teach their kids and if anyone has read my previous posts you know where I stand regarding learning about finances from your parents. I know that the Ontario Government has recently expressed that they will be including personal finances in grade-school curriculums in the coming years and I think it can’t be soon enough.

All in all I think the changes are likely a good thing but are only part of the puzzle. If the Government broadens the scope of their efforts, they will have a much greater impact down the road.

If anybody has similar or differing opinions, I’d love to hear them.....

Peter