Guest Blog by Mark Kerzner, President TMG The Mortgage Group
Right now our industry is being inundated with news of change and uncertainty. It was August 2007 when we felt the first ripple on the Canadian financial landscape. That’s when holders of approximately $30 billion of ABCPs (Asset Backed Commercial Paper) were facing the prospect of huge losses. What followed was a period of tightened liquidity, the unravelling of the U.S. mortgage securitization markets, loss of confidence in the markets, plummeting U.S. home values and bailouts.
That seems like such a long time ago. The saying "time heals all wounds" is a reminder that we desensitize with the passing of time, when the reality we lived through becomes a mere memory. What has helped us here in Canada is that in the midst of the global economic crisis, when the rest of the world was in meltdown mode, we felt only small waves. Today, our housing markets are strong, we continue to borrow and invest, our employment numbers have remained relatively healthy (in comparison with those in the G20), our arrears numbers have remained at less than half of one percent, and our economy continues to grow.
Our Government, our lenders and our own industry have been working on the premise of needing to protect Canadian consumers. Protect their future with respect to increased future borrowing costs. Protect their housing investments by trying to stave off the notion of a real estate bubble. And protect their ability to manage their debt levels on incomes that are not rising in step.
Perhaps the most over-hyped ratio in the mortgage lending environment in the past few years is debt-to-income. Its upward sloping line on a graph has been etched in our minds. We have been warned about it, we have been endlessly compared to the U.S., our Minister of Finance has take actions to alter lending guidelines and the Governor of the Bank of Canada has repeatedly warned us of the consequences. What seems to be forgotten in the whole discussion are two pretty important words, "debt" and "income". Let’s examine these terms:
Debt – this includes all debt, secured and unsecured. Secured lending in the form of mortgages is the slowest growing segment of the debt world yet it is the cheapest. The most common use for refinancing is debt consolidation. The second most common reason is home improvements and renovations.
It is important to understand that all debt cannot be attributed to outstanding mortgages. While it catches the majority of our attention it is really our debt siblings -- credit cards and secured and unsecured credit lines -- that are contributing to the fast pace growth of consumer debt and yes, at higher interest rates. While it is often the case to focus on the "oldest child" in this case we need to turn our attention to the rest of the family.
Income – this one is a little simpler. When calculating debt to income ratios we divide total debt by total income. If income goes up and debt remains constant the ratio decreases. What we are seeing in Canada is the inverse. Income is not rising. So as much as this is being portrayed as a debt issue in actual fact it is very much an income issue as well.
CIBC published an interesting market report recently on this issue and compared us to other countries --Canada held up very well. The report also said that debt is a very generic term and that those heavy habitual debtors are taking on even more debt, which means the majority of consumers with manageable debt loads are being painted with the same brush strokes as the few heavy debtors.
As mortgage professionals we must maintain our belief that we provide value. As a client’s advocate we are uniquely positioned to explain to them the context of all this news and noise. At the same time we are personally in the middle of it with respect to our livelihood. I feel we are living through one of the most interesting story lines of the current economic recovery. Strong companies and successful hard working brokers and agents will succeed. Now is not the time to dwell. Now is the time to lead.