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Why isn't the government controlling unsecured debt?

by Neil Sharma 2018 MBN

Croft Axsen recently had to inform a client wanting to buy a $300,000 house that he didn’t qualify, so the client instead decided to buy a $95,000 truck. According to Axsen, it is but one example of how easily credit debt can accrue, and how it’s more detrimental to Canadian households than mortgage debt.

“I get it’s easier for the government to regulate mortgage debt, but I’m not sure they’re doing consumers any favours by saying, ‘We’re going to control whether you can buy a house or not, but we’re not going to control whether or not you can buy a $95,000 truck,” said Axsen, owner of Dominion Lending Centres Jencor Mortgage Corporation.

“Instead of buying an appreciating asset, he buys a truck with a bigger payment. By the time the seven-year loan is over, the truck will be worth virtually nothing.”

Canadian mortgage debt has surpassed the trillion dollar mark, and that is worrying the government, but DLC President Gary Mauris says there’s a much bigger problem.

“Unsecured debt is the biggest problem,” he said. “The sheer cost and monthly maintenance of unsecured debt is worrying. Credit card debt, line of credit debt and department store debt are what’s strangling Canadians. Unfortunately, there’s so much pushback from Canadian chartered banks, and it’s such a large business, that the government doesn’t want to take that fight on, so they look at mortgage debt instead. They should be looking at ways to limit unsecured debt, if anything. It’s much higher and much riskier debt, and it’s what we typically see strangling homeowners.”

Mauris can scarcely recall a time when the Canadian housing market endured as much tumult as it is today. He says that, fortunately, lenders and brokers have become creative—and the latter, in particular, have become even more indispensable to the Canadian public—but it’s still bewilderingly difficult to qualify for a mortgage in 2018.

Even more confusing is the fact that tighter mortgage qualification rules merely push homeowners into more expensive financing channels

“It’s pushing Canadians into more expensive financing like B, where it used to be A,” said Mauris. “You’re making your consumers pay more for mortgage financing. Overall, we’re in a dog fight and it’s become more important than ever before to work with mortgage agents.”

Axsen understands the imperative not to expose mortgage insurers, but he doesn’t understand why ingenuity is an afterthought.

“I get they’re concerned about CMHC being exposed and the danger to the Canadian taxpayer if CMHC ever gets stressed by something with the housing market, but why not come up with a unique product? You can refinance, but the amortization has to be shorter. Or perhaps make it a higher premium on the refinance debt portion, yet still let them use their house to get away from higher credit card debt or lines of credit debt. It seems like the management of debt could have been done in a way that’s better for the consumer and limits the exposure of CMHC and other insurers.”

Credit cards have a higher arrears ratio than mortgages, however, they’re more profitable for banks—and therein lies the rub.

“There are systems in place to control mortgages, so it’s a lot easier than it would be for the government to tell banks how to give someone a consumer loan, a charge card or line of credit,” said Axsen. “They can appear to be these magnanimous, wonderful guys trying to control debt, and being thoughtful about the whole process, but it would be much harder for them to sit bankers down and say, ‘Okay, let’s look at all this other debt and how you’re making decisions to lend it.’”

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