In a world where every day seems to bring about “exceptional circumstances” for the financial market, the Financial Consumer Agency of Canada (FCAC) has been at the forefront in providing extraordinary mortgage relief measures through the country’s banks. The recent report from the FCAC highlights the significant impact of over 8,000 mortgage relief measures implemented over the past year, saving consumers millions in penalties. However, beneath the surface lies a troubling normalization of excessive leverage and moral hazard that cannot be ignored.
Canadian Mortgage Borrowers Benefit from “8,000 Relief Measures”
The FCAC’s Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances sets the standard for mitigating mortgage delinquencies, leading to more than 8,000 relief measures facilitated by federally regulated financial institutions (FRFIs), commonly known as banks. Frank Lofranco, Deputy Commissioner of Supervision and Enforcement at the FCAC, acknowledges the crucial role these relief measures have played in assisting Canadians facing financial challenges.
While the financial stress for mortgage holders has been relatively stable, with more mortgages coming up for renewal in the near future, the FCAC’s guideline remains a vital safeguard for those experiencing financial difficulty. The relief measures have not only helped consumers bridge temporary gaps in mortgage payments but have also resulted in significant savings, with an estimated $4 million in avoided penalties and $200k in waived fees and costs by the banks.
However, the situation becomes more complex with mortgage loans issued at record-low variable interest rates leading to negative amortization. Despite appearing beneficial initially, negative amortization can result in longer mortgage terms, akin to the subprime interest-only loans from the 2006-2008 housing bubble. The most common relief measures implemented by banks include waiving penalties for lump-sum payments to avoid negative amortization and waiving interest charges on interest.
The concept of compound interest, known as interest on interest, raises questions about how lenders cover liabilities resulting from waived interest charges. While it is commendable that the FCAC has mitigated losses for both lenders and households, the prevalence of extensive relief programs signals a growing moral hazard in the financial system. Each bailout contributes to a larger problem, leading to potential repercussions beyond financial implications.
In conclusion, while the FCAC’s efforts in providing mortgage relief measures are commendable, the underlying issues of excessive leverage, negative amortization, and moral hazard must be addressed to prevent further financial instability. As Canadians navigate through uncertain times, it is crucial to monitor and regulate financial practices to ensure long-term economic resilience and stability.
