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opendoor · 10-06-2016, 10:15 AM

I don't know, I think something like this was a long time coming. If portfolio insurance is as common as it sounds, the government is on the hook for a huge portion of the mortgages in the country, both high ratio and low ratio. And from what I understand, even ones insured privately are ultimately backed by the government and the company that insured them is only responsible for a 10% deductible in the case of a default.

So essentially what has been happening is that taxpayers have been subsidizing both low rates for consumers and lender profits by taking on virtually all the risk of the mortgages. It hasn't caused a problem yet, but if interest rates go up and a bunch of people can't afford the payments, the government is on the hook for a lot of money. It'd be a pretty classic case of privatized profits and socialized losses if that happened.

Consumer rates will likely go up as a result and fewer people will have access to funds, but that's not necessarily a bad thing. The same thing happened when they got rid of 40 year amortizations and I don't think people are clamoring for that to return. In fact, at current rates the effect on affordability from going from 40 year to 30 year amortizations is actually greater than the effect of using the BoC rate compared to a 5 year fixed rate. At a 2.5% interest rate, a 40 year mortgage would allow you a 20% higher principal than a 30 year one and a 36% higher principal than a 25 year one. On the other hand, a 2.5% qualifying rate only gets you about 14% more in compared to a 4.64% one on a 25 year mortgage.

I do agree that anything that consolidates the power of the big banks isn't a good thing, so I don't like that aspect of it. But I also get why the government wants to have more stringent rules if taxpayers are assuming almost all of the risk in the event of a bubble bursting.

10-06-2016, 10:15 AM	#76
opendoor Franchise Player Join Date: Apr 2007 Exp:	I don't know, I think something like this was a long time coming. If portfolio insurance is as common as it sounds, the government is on the hook for a huge portion of the mortgages in the country, both high ratio and low ratio. And from what I understand, even ones insured privately are ultimately backed by the government and the company that insured them is only responsible for a 10% deductible in the case of a default. So essentially what has been happening is that taxpayers have been subsidizing both low rates for consumers and lender profits by taking on virtually all the risk of the mortgages. It hasn't caused a problem yet, but if interest rates go up and a bunch of people can't afford the payments, the government is on the hook for a lot of money. It'd be a pretty classic case of privatized profits and socialized losses if that happened. Consumer rates will likely go up as a result and fewer people will have access to funds, but that's not necessarily a bad thing. The same thing happened when they got rid of 40 year amortizations and I don't think people are clamoring for that to return. In fact, at current rates the effect on affordability from going from 40 year to 30 year amortizations is actually greater than the effect of using the BoC rate compared to a 5 year fixed rate. At a 2.5% interest rate, a 40 year mortgage would allow you a 20% higher principal than a 30 year one and a 36% higher principal than a 25 year one. On the other hand, a 2.5% qualifying rate only gets you about 14% more in compared to a 4.64% one on a 25 year mortgage. I do agree that anything that consolidates the power of the big banks isn't a good thing, so I don't like that aspect of it. But I also get why the government wants to have more stringent rules if taxpayers are assuming almost all of the risk in the event of a bubble bursting.