In the media’s race to break down last month’s mortgage rule changes, accuracy has seemingly taken a backseat to fast-published, under-researched commentary.
Here’s a case in point, a Globe story that ran October 17. (And yes, I hate to criticize my own because the Globe has some extraordinary professional journalists.) But this particular story is drastically misleading by virtue of it omitting or mischaracterizing a slew of essential points, including:
- A primary reason that banks support the new insurance rules:
- Limiting which mortgages can be insured eliminates securitization options. That handicaps bank competitors, thus providing banks an opportunity for higher net interest margins. By no means is this the only reason banks support the changes, but it’s one that’s too important to overlook.
- Why banks chose to offer low rates (like 2.99%) in the past:
- The author’s insinuation that banks were somehow reckless or irresponsible because they advertised competitive rates is absurd. At the time that 2.99% made headlines, market rates had already fallen to levels that permitted such pricing. Are banks expected to ignore market forces and price themselves out of the game to slow housing? No. That’s not their duty, in any sense of the word duty.
- The true level of default risk:
- The author doesn’t mention that people who refinance must have 20%+ equity. People with 20%+ “skin in the game” will do everything humanly (and inhumanly) possible to avoid losing their tens or hundreds of thousands of dollars of equity. If they hit rough waters financially and their ship is sinking, they generally get off the ship (sell) or plug their financial leak some other way…before they lose their house.
- Stakeholder motives:
- Ad hominems are the most rampant fallacy in the housing debate. The argument typically goes something like this: Brokers make less money with more rules, so they can’t be honest about a mortgage rule’s true impact. The Globe writer plays right into this by charging mortgage finance companies and brokers with “griping” and making a “stink” about the changes. And he writes barely one sentence to explain the industry’s actual positions on these issues.
- The competitive impact:
- The author claims that “what’s been proposed isn’t so tough that it should decimate” bank challengers. Is that so? Well let’s see. Up to a third or more of most mortgage finance companies’ (MFCs’) residential business comes from refinances, extended amortizations, rentals and (to a lesser extent) jumbos. If MFCs are immediately less competitive on that much product, and it results in borrowers paying hundreds of millions more in interest every year, that ain’t something to celebrate…or ignore.
- The business models of bank challengers should be “questioned”
- Here’s a real beauty. “If some lenders’ futures are severely hurt by what’s on the table, then their business models ought to be questioned,” the author proclaims. Of course, he makes no attempt to explain said models.
- Fine. Question them. But don’t just assume that they’re abnormally risky or non-value-added. If you want to see the effects of oligopoly pricing, where MFCs are marginalized, check out Australia’s mortgage market. There, four banks rule supreme over 90% of the market. “The figures tell us that the non-bank lenders are the most competitive when it comes to interest rates, yet they are being squeezed out of the market,” Mortgage & Finance Association of Australia CEO Phil Naylor told Your Mortgage magazine. Naylor, incidentally, has called on Australia’s government to review Canada’s mortgage model, which “guarantees competitively priced funding pools accessible by non-bank lenders.” Well, at one time it did guarantee that anyhow.
- The facts speak for themselves. Securitizing lenders put enormous aggregate savings back into consumers’ pockets, and it’s made possible only by our sovereign’s guarantee. These savings offset all and any exposure borne by insurers and citizens, multiple times over, as has been demonstrated time and again.
- Confusing prime and non-prime lenders (and the public):
- The story mislabels prime lenders like First National as “alternative lenders” (“alternative lenders” is common parlance for non-prime lenders).
- Worse yet, the story charges mortgage finance companies with making “riskier loans.” Say what? Anyone covering this business should know that arrears rates for most MFCs are less than half that of major banks. Heck, even CMHC data confirms this if a journalist takes the time to look.
“I get it that our business is totally misunderstood by 95% of the media,” says broker Ron Butler, “but if you are going to devote this many column inches to something, at least take a stab at understanding the difference between non-bank ‘A’ lenders and non-bank ‘B’ lenders.” That’s not too much to ask.