More Government Overreach

Today's show is about another example of government overreach. In January 2017 Canadian federal government instituted a mortgage stress test rule. This required banks to subject borrowers to a financial stress test when applying for a residential mortgage loan. The stress test was designed to protect the marketplace and the banks from the risk of rising interest rates in the future. Borrowers would need to qualify for an interest-rate two points higher than the actual prevailing interest-rate in the market. So if interest rates were at, say, 3%, the borrower would need to qualify as if the rates were 5%. 

In the latest twist the Canadian federal government is now examining whether the same rules should also be applied to private lenders. This information was reported by the Globe and Mail who cited three sources directly familiar with the talks taking place behind closed doors. 

Since the rule change in 2017, fewer borrowers have qualified for bank financing. Borrowers have responded by turning to alternative lenders to complete their financings. In the wake of the rule change last year there has been considerable growth in the market share for private lenders. Private lenders have different underwriting rules than banks, and they generally charge a premium compared with banks for an equivalent loan. So these loans are more expensive for borrowers. But they are a last resort for many borrowers.

Today private lenders represent about 10% of the residential mortgage market. That represents a significant increase compared with a year earlier.

Some banks have expressed a concern that private lenders could eventually represent 15% of the overall market. 

The banks have been quietly lobbying the federal mortgage insurer and the federal bank regulator over the loss of market share. 

So exactly what is the rationale for imposing more rules on private lenders? The regulators are concerned about the risk being transferred from Banks to private lenders. So here we have a government that has created a side effect from a new rule that they didn’t anticipate. Their idea of a solution is to layer another rule on top of the new rule instead of eliminating the rule that caused the problem. 

Wait a minute. Since when has the government been concerned about protecting accredited investors from taking financial risks? 

In my opinion this has nothing to do with protecting wealthy investors. The federal government does not want the banks to lose market share. In fact I would argue that the banks have lobbied the federal government and convince them that they should protect the banks market share. 

I’m not hearing complaints from private investors that they government to step in, to help them with new rules on how they should under-write their loans. They’re not asking government to compensate them for losses that haven’t even happened, or that might happen at some point in the future.