Hand up or hand out

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Written by Submitted

There are three ways for governments to stop the fiscal bleeding.  Reduce spending, increase revenues and reduce catastrophic financial risks. The third one is largely ignored by governments until it’s too late.

The latest example was the Southern Alberta floods this past June.  Taxpayers are now on the hook for multi-billions of dollars since our provincial government chose not to invest in recommendations made following the 2005 flood.

Thankfully, the federal government and Finance Minister Jim Flaherty seem to be showing some wisdom about the huge and growing risk now being carried by Canadian taxpayers in the housing market.

Since the housing collapse in 2008, the American taxpayers have paid out multi-trillions of dollars–much of it because of their Federal Deposit Insurance Corporation and now-defunct, government-backed mortgage companies.

Ottawa announced last week that our equivalent agency, Canada Mortgage and Housing Corporation (CHMC) has immediately limited banks and other mortgage lenders to $350 million worth of new mortgage-based securities per month. Seems banks have been pretty free with their use of this guarantee.  By the end of July, they had already used $66 billion of the $85 billion annual allotment by CHMC for mortgage-backed security.

Granted it’s a two-edged sword. The intent behind governments guaranteeing a significant portion of mortgage debt is to give a ‘hand up’ to first-time buyers with small down payments.

But like every government policy with good intentions, people and corporations push the rules and take advantage of its original intent.

Banks, because they’re in the business of making money, encourage clients to take out higher mortgages than they ever would if taxpayers weren’t sharing the risk.  And our banks, like those in the United States, are probably giving low-interest mortgages to people who shouldn’t have them.

On the other hand, the borrowers are happy. This type of lending fits into our current psychic of instant gratification–that of wanting the “biggest and best” now, not having to wait and certainly not having to save.

Unfortunately in a housing collapse, it isn’t the little guy or the taxpayer who wins, it’s the financial institutions.  Between foreclosure sales and taxpayer-funded mortgage guarantees, financial institutions do okay. And, if they don’t, they argue “we’re too big to fail”. If the U.S. is any kind of example, and it surely is, it took little effort for their government to forego trillions more of taxpayer-funded help to uphold the financial big boys.

Canadian banks haven’t had to use any of these backstops yet, but it appears Ottawa is smart enough to realize our housing market can be as vulnerable as anywhere else in the world. Even a small increase in interest rate could set the ball rolling.

Mortgage providers today are passionately arguing that the government is killing the housing market and keeping young families from purchasing their first homes.

But it is likely more fair to argue that these policy revisions will be beneficial for the long-term.  It will stop those from purchasing homes who really can’t afford them at this point in their lives.  It will put boundaries around the amount of risk Canadian taxpayers carry on behalf of financial institutions. But even more important, it will make banks more risk-adverse when they write mortgages using a bigger percentage of their own money.

Last figures released show the housing agency has $562.6 billion worth of mortgages on its books and in the first three months of 2013 an additional $27.3 billion new guarantees were granted. That’s frightening!

Changes are long overdue.  For far too long, CHMC has become less of a ‘hand-up’ for deserving first-time buyers, and more of a ‘hand-out’ (risk buffer) for banking institutions.

And that’s bad policy and bad optics for the taxpayer.

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