In Canada, as in every country, there are many regulations governing the terms of mortgages offered to consumers. In addition to that, some of Canada’s banks (called “Chartered” banks) have long enjoyed a special, protected status. Not just anyone can open up a bank. The country’s careful rules around mortgage lending terms, amortization periods, required down payments, and mortgage insurance have seemed wisely conservative in hindsight. No greed-driven bubbles of low-quality mortgage lending… less fallout in the form of bursting bubbles and plummeting asset prices.
But everyone knows there are no formal regulations pertaining to the actual posted rates the banks provide, based on their own calculations of profitability, communications strategy, and the cost of money to the banks. Despite being regulated, if their cost of money drops, they can offer special rates. It’s up to them. And that’s just what some of them have done.
Finance Minister Jim Flaherty decided they shouldn’t. Using not only the weight of his office as a prod, but also (undoubtedly) behind-the-scenes reminders of the special breaks, insider dealings, permission to enter certain categories of investment banking activity and global finance, and favorable legislation the major financial institutions may continue to enjoy (in areas such as service fees and credit card interest rates and terms, for example), Mr. Flaherty scolded some key financial institutions when they decided (based on cheap money in the global financial system, not least of which comes from the Bank of Canada’s monetary policy decisions) to post rates for five-year fixed mortgages as low as 2.99%, as a special Spring offer. He so harassed Manulife and BMO that they reversed their promotions. The government told private companies what to do, in other words, despite there being no law or regulation on the books that prohibited it.
Apparently Minister Flaherty was concerned about a potential housing bubble. People in their 30’s with lives to lead and babies on the way apparently want to do something crazy like lock down the same kind of home ownership lifestyle that has been the norm since Flaherty and his wife bought their first home sometime in the 1960’s. And with interest rates so low (thanks to the central banks’ monetary policy), who could blame them? Homeowners didn’t create cheap money. Neither did lending institutions.
At least one bank president, a Mr. Waugh of Scotiabank, railed against the excessive government interference.
Never mind, Mr. Flaherty, that mortgage brokers, second-tier institutions, etc., rub their hands with glee at automatically now being handed the mantle of “low-rate leader.” Never mind that anyone with strong credit who sits down with their banking rep will immediately be shown the “real” rates, and if they go across the street to a white label lender, will have a rate offer in their inbox numerous basis points below that by the end of the week.
Yet, several of the largest lending institutions decided to roll over and change their posted rates… in most cases to rates above the psychological barrier of 3.0%. Those who didn’t are getting the leg up in terms of consumer attention. What unseen governmental wrath may they now face?
As usual when governmental actors overstep even the bounds of already interventionist government policy, there is a bit of a domino or trickle-down effect. In this case, it trickles down to marketing. Do you think it is just a couple of disgruntled bank presidents or board members that are affected when a large line of business is asked to take a zigzag course in the middle of its busiest season? There are millions of shareholders to think about, first of all. Millions of consumers in the market for mortgages. And whole marketing departments and advertising vendors who need to “make do” with a watered-down message when they had earlier had coherent, well-thought out plans developed around rate specials intended to raise consumer interest in an important season during a fragile economic rebound.
It looks like the government’s random jawboning in the banking sector has just made pretty much everyone less effective in their jobs. And everyone is conditioned to stop driving forward in their area of expertise, lest the wise prophet of bubble doom have another bad hair day and announce his latest viewpoint.
I rarely get political here, because it’s not the place for it. But an agent of the government telling the financial sector what they can and can’t say… from a government that came into power promising less regulation and more economic freedom? It just proves: the longer they’re in office, the less connected they are to the real interests of consumers, and the real challenges of the private sector.
I just hope that most consumers understand that the informal, non-posted rates they may actually negotiate when they sit down with a bank rep haven’t changed. And in many cases, they’re below 3%. If you’re employed and bullish about the future, it’s not a bad time to buy.