Should Flaherty Interveen In A Rate War?

March 20th, 2013

Oh my, this has certainly sparked a debate.

Let capitalism be capitalism and the government shouldn’t interfere in the business of big business?

Except of course when greed takes over and they almost destroy then entire global economy, then it’s OK for government to step in… in a major way… and try and recover the situation. That’s a whole other topic unto itself.

All I can say is that Flaherty and the BoC have been doing all they can with all the tools they have at their disposal. The BoC used to be able to control the economy with that big leaver called the “overnight lending rate”. That lever lost its leverage when it dropped below 1%. I think Flaherty realized this and then started his tinkering with the mortgage rules as it was deemed a “potential” exposure if all mortgages were to default and CMHC (i.e. the government) had to cover all these loans.

It did serve to almost stall the economy last year and it remains to be seen if that will carry over to this year or the demand will simply push through one way or another.

They twiddled with the mortgage rules and all the while the rates just kept slowly dropping. Why? Well the bond market that keeps buying the mortgage securities kept buying our bonds. The more bonds purchased, the lower the the value of the bond (yield). The lower the yield, the cheaper it becomes for lenders to borrow money and make money on the spread. When the spread is large enough, rates drop. When the spread is less, the rates rise.

It’s basic economics of supply and demand.

Now the BoC has indicated no rate change (up) in the near future (I think the US Fed said 2015 recently) and the bond market (yield) keeps dropping on this kind of news (or anticipated news) and thus borrowing for the banks/lenders becomes less. So what do the banks naturally do? Lower their rates to “stay” competitive with the market.

Does massive advertising that you have the lowest rate really bring in business? Just ask BMO, they didn’t necessarily gain a massive mortgage share, but their other lines of business sure saw an up tick from people coming in to discuss mortgages, which lead to other “opportunities”.

Now I found it amusing that Manulife got the call from Flaherty, because they “opted” to advertise their low rate of 2.99%, yet several other lenders just quietly changed their rates (and some lower than 2.99) and yet none of them were reported to have been called. One has to assume they didn’t get the call as their rates are still unchanged at 2.89%.

(So good news for us brokers? We’ve got rates available lower than what the government thinks it should be for the banks)

So does the minister want to call ALL mortgage lenders and ask them to change? Only ones who actively advertise? The ones that are not in the ministers good books? Change CMHC rules to dictate that 3% is the absolute minimum a fixed mortgage rate can be?

Then there’s the variable mortgage bond market (different set of funds for this security). They have seemingly finally had some sanity restored to their market and are now looking at 30, 40 and likely soon 50 bps off prime. Is the minister also going to step in and regulate how variable mortgages are set too?

Seems to be an uneven playing field in the bank world thanks to Mr. Flaherty. Will it continue? Can it? Will it cause ripples in the bond market? Fed gov’t dictates to Canadian banks that they MUST make more profit on their mortgages.

Wont the world be asking instead what is Flaherty so nervous about that he has to meddle? Rates are low around the world. Why are you keeping yours artificially high? I know Quebec went all NDP federally, but not the whole country.

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