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Brokers heat up mortgage debt debate

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The debate on mortgage debt versus consumer debt is heating up after the CMHC released previously confidential remarks about its concern for the housing market, but is it time to finally put that discussion to bed?

“Mortgage debt represents about 80 per cent of national household debt; consumer debt has no government backing [and] mortgage debt often has government backing. That's the source of the worry,” writes Ron Butler of Butler Mortgage wrote on REP sister site, “Very simple folks: if 20 per cent of the credit cards in this country went into default tomorrow it would be a problem for the banks but a manageable one.

“If five per cent of all the mortgages in this country went into full default it would be a massive problem for the banks, the mortgage insurers, the government and all of us.”

Butler’s comment was in response to a bevy of broker responses calling for the government to focus more on unsecured consumer debt than mortgage debt.

“If the government and CMHC are so very concerned about debt load of Canadians, can anyone answer why they've put so many restrictions on mortgage lending (cheap borrowing costs) and no costs on unsecured lending,” one commenter wrote. “Dollar for dollar, the Banks earn far more on credit cards, loans, & PLCs than they earn on mortgages.”

The housing market would undoubtedly suffer if large banks opted to further tighten its lending criteria. However, Canadians might be even less inclined to purchase properties in need of renovations – which are the only options in many of the country’s larger centres – if bank loans were regulated more stringently.

CMHC admitted this week that it told the finance ministry in 2014 its concerns about increasing high household debt levels and rising prices in a number of urban property markets.

CMHC’s comments were initially confidential, sent in May 2014 through a memorandum.

"We are, however, concerned about reduced household flexibility resulting from elevated debt levels as well as diversion of capital into residential housing investments," the memo last year stated. "Likewise, elevated prices in some urban markets further compound affordability concerns."

This week, CMHC provided Reuters a copy after the Blacklock's Reporter online website first reported it.

The memo also stated CMHC would “look at options for loan-level risk sharing with lenders to reduce risk, increase market discipline and further optimize taxpayer exposure.”
Have your say: Should Canadian debt be more closely regulated?