Stephen Poloz’s ‘call to arms’ for mortgage market shakeup is something worth fighting for
Six years ago this month, Stephen Poloz was appointed governor of the Bank of Canada. And just like that, it’s the final year of his mandate.
A 76-year-old Joe Biden is running for the opportunity to challenge 72-year-old Donald Trump in the 2020 U.S. presidential election, so maybe the 62-year-old Poloz will decide to apply for a second term when the time comes.
But that seems unlikely. No Canadian central bank governor has served longer than seven years since Gerald Bouey, who was appointed in 1973 and retired in 1987. And judging by Poloz’s speech in Winnipeg this week, the governor entered the final phase of his tenure in a mood to make some noise. That could be a tell, since a veteran of Ottawa like Poloz would know that outspokenness rarely leads to an order-in-council appointment.
An oligopoly that splits roughly $10 billion of profits between its five members every quarter has little incentive to mess with a good thing
Almost everything Poloz does is understated. In 2016, he used a 6,100-word lecture at the University of Ottawa to deliver what remains the most devastating critique of the post-crisis obsession with balanced budgets. Rather than scold, which was the rhetorical approach favoured by his predecessor, Mark Carney, Poloz simply explained why austere fiscal policy forced the Bank of Canada to keep interest rates low, shifting the debt burden to households. It was up to us to decide what we wanted to do with information.
In Winnipeg, as subtly as one can, Poloz called for a shakeup of the Canadian mortgage market.
He wondered aloud why almost half of all mortgages issued by a supposedly competitive financial system are for five years at fixed rates. He lamented the failure of Canada’s sophisticated bankers, institutional investors and policy makers to create a secondary market for mortgage-backed securities that aren’t guaranteed by the federal treasury. And he criticized them for lacking the imagination and ambition necessary to come up a portfolio of shared-equity offerings, or some other mortgage product that isn’t based entirely on debt.
“There are many other possible variations on mortgage design, so many that it makes me wonder why so little has happened in my lifetime,” Poloz said at an event sponsored by the Canadian Credit Union Association and the Winnipeg Chamber of Commerce.
I bet Poloz knows exactly why so little has happened.
An oligopoly that splits roughly $10 billion of profits between its five members every quarter has little incentive to mess with a good thing. Its regulator’s primary mandate is to keep a big bank from collapsing, so it has little interest in encouraging risky bets that might threaten those profits. The Competition Bureau stands aside every time one of the Big Five pops an innovative upstart into its maw. Large numbers of us say we like the banks, even though they charge many of us hundreds of dollars in hidden fees, so politicians have little reason to pick a fight with them. Financial institutions dominate the Toronto Stock Exchange, so any threat to the oligopoly is also a threat to our retirement plans.
Those conditions and few others are a recipe for inertia.
“There ought to be more innovation,” Poloz said at a press conference after his speech. “The answer, `If it ain’t broke don’t fix it,’ it’s not much of an answer. [The system] isn’t broken. It’s served us very well. I’m not trying to change it. But I do think there are ways to make it more flexible and to mitigate the normal risks in the system both for lenders and for borrowers. Those things are worth pursuing.”
The financial crisis was good for Canada’s banks. They got a scare, but as soon as it became clear that Ottawa wouldn’t let them fail, they quickly got back to doing what they do best: taking advantage of their market power to make money for their investors. Competition for them was seeing who could sell more government-backed mortgages. Most of them got bigger by purchasing distressed American regional banks. None of this was particularly innovative, and so what if it wasn’t? No one went bankrupt in 2009, so Canada must be doing something right. What we lose in terms of choice we get back with financial stability.
Except the two aren’t mutually exclusive. Poloz observed that the main reason lenders offer only short-term mortgages is a law written in the late 1800s. The Interest Act gave Canadians the right to pay off their mortgages after five years, immediately creating a disincentive for lenders to offer loans for longer periods than that. The five-year mortgage became the convention.
And now it’s a vulnerability. There may be no bigger threat to the Canadian economy than what happens when all those five-year mortgages that households took out to chase the housing the boom come up for renewal, possibly at higher interest rates. If they had had the option of 10-year, 25-year, or 30-year loans, the risk of a financial crisis would be lower.
Poloz told reporters that his speech was “kind of a call to arms.” We should join his posse. It’s something worth fighting for.