Overprime Lite

“It's a bit like closing the barn door after the horse has already run down the road.”

Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc. (Ottawa tightens mortgage rules to avoid 'bubble' - LORI MCLEOD AND KEVIN CARMICHAEL, G&M July 9, 2008)

Couldn't have said it better, Mr Porter.

The official story that the Big Banks, the Harperites and the mainstream media like to spin is that there is no housing bubble in Canada, despite the fact that Canadian home prices have risen about the same as the US did (pre 2007). Why? There is no big subprime here.

I've explained the Overprime concept here before: 40 year mortgages, 0% down...

The government, both Liberal and Tory, allowed it become easier and easier to buy a home. They poured fuel on the fire back in 2006 by extending the backing of mortgages from 25 years to 40 years.

Today, the announced that as of October 15, they will no longer back mortgages longer than 35 years and will demand a 5% down payment. According to the Globe, the government is trying to protect against creating a bubble.

If this were true, I would say: Good move! In fact, they probably should have tightened their standards back in 2006 instead of loosening them.

However, there already is a bubble and now that the bubble is bursting, they are to compound their first mistake by bursting it even faster!

Why Canadian banks would even contemplate making overprime mortgages currently given what is happening everywhere in the world, is beyond me. In recent months, Freddie Mac and Fannie Mae (publicly traded US Government Sponsored Entities) have been annihilated (falling 80%). Maybe the Harperites are worried about something similar happening here?

I believe that ultimately the market will go where it has to go regardless of the government, but this move is definitely going to hurt some buyers thereby depressing demand further. In a healthy market, this move would likely have little impact. In a market that is possibly about to crash, this move will have an impact.

As a renter looking to one day buy a house, I am supporting this move from Overprime to Overprime Lite.