After the exit of man who ran the Canada’s finances for eight years, the wake of Jim Flaherty’s legacy impacted the housing policies for years to come.
Speaking of the Canada’s mortgage market, Jim made tough decisions in tough times. The former minister of finance also had his share of critics as well.
Gordon McCallum, President at First Foundation Inc. said that he might like Jim’s intervention tendencies in the mortgage market. According to McCallum, Flaherty’s intervention seems like pouring gas on fire and then killing the dead horse.
The President and CEO of the Canadian Association of Accredited Mortgage Professionals, Jim Murphy adds that although he accepts that many of mortgage rule changes announced earlier were required but not so much as the more recent ones.
As the mortgage credit growth is slowing down and the people are paying their mortgages. Canada needs to strictly maintain the economic significance of housing.
Even though the real estate is not a gallop, but it’s still quite trotting. Most people in the mortgage industry thought that Mr. Flaherty’s moves would derail the housing, result into substantial job losses. But the fact is that most of his policies have proven to be perspective and sound.
Here are seven roles of Mr. Flaherty which he took to manage the mortgage market throughout his tenure.
1. Financial Crisis Hero: When bad mortgages threatened the world’s financial system, Flaherty boosted Canada’s financial system by purchasing $69 billion mortgage-based securities. It was a smart move which added no new risk to the taxpayers as the mortgages were already secured. This plan inspired the banks to keep the lending at reasonable amounts. It helped the country to avert a liquidity crisis.
2. International Conciliator: As a cynicism of Canada’s richly valued housing market grew internationally, Jim’s restriction in housing reassured then international governments and investors. This was the key to lower the risk premiums which government and lenders paid to finance themselves.
3. Regulator: Jim Flaherty’s wisest move was placing the CMHC under the observant eye of banking/insurance regulator Office of the superintendent of Financial Institutions (OSFI). Considering $600 billion insurance company, this move was pending for a long time.
4. Mortgage Loosener: In the period of 2006 to 2008 under tenure of Flaherty, the government backed 100% financing including the rental properties. It also supported lowering the payment requirements to avoid any default insurance, lenient stated-income financing and 40-year remunerations.
5. Mortgage Tightener: Considering record breaking the mortgage rates, debt-to-income ratio and home prices, Flaherty tightened the mortgages. He regularized amortizations from 40 to 25 years, cut the ratio of debt that borrowers could carry, banned rental financing and insured refinances without 20% equity and brought restrictions on mortgages which was named as “Guideline B-20”. He stiffened the rules four times in four years on insured mortgages alone.
6. Funding Cost Raiser: He capped insurance on the government backed Canada Mortgage and Housing Corporation (CMCH) at $600 billion, restricted the use of insurance on the mortgages with 20% or more equity, prohibited government backed mortgages in covered bonds, limited the mortgage securitization and non-CMHC securitization. All these measures boosted the mortgage funding and regulatory costs which in turn increased the mortgage amounts to be paid by the Canadians.
7. Market Meddler: For Mr. Flaherty setting the national policy alone wasn’t sufficient, so he did what no finance minister ever has done. He used his power to push the individual banks to increase their privately set mortgage rates. He commented publicly in media by calling the institutions like the Bank of Montreal and Manulife Financial Corp. The fear of reprisal from the financial department is a reason why the banks have widely not advertised 2.99% in 5-year fixed mortgages.
Most people are now enquiring what will happen next under the newly installed finance minister Joe Oliver. Bearing in mind, his Bay street roots and more free-market mindset, some people anticipate more laid back approach to the mortgage market.
Mr. Murphy says that even though the new minister will review the file he is not expecting further rule changes in mortgage. The government and Mr. Flaherty seem to be happy with the current position of the mortgage and housing market.
In order to protect the Canadian homeowners from the lenders, Jim Flaherty eventually made it tougher for millions of families to get the mortgages. He also secured the foundation of Canada’s Banking System. The result is that he saved the mortgage market of Canada.