For the first time, the Office of the Superintendent of Financial Institutions (OSFI) has put together a set of guidelines that would require banks to exercise extensive due diligence when it comes to granting residential mortgages. Big brother is watching! When the regulator needs to come in and tell the participants how to run their businesses, you know something is wrong. What’s even worse is that the banks have been asking for government regulators to come in and tell them what to do. Not because they don’t know how to run their businesses, but because they’re afraid to be different and have it cost them market share. All for one and one for all, or something like that.
The real issue at play here is that we have an oligopoly of lenders who are happy to keep a mortgage a commodity and then split the business between them. On the one hand this is good for consumers because it simplifies a complex product and leaves the selection decision to mortgage rates and/or ease of process. On the other hand (and you knew there was another hand) it’s bad for consumers because it allows for collusion. We see collusion today on mortgage rates and risk tolerances with very few mortgage lenders willing to set themselves apart.
In a free society where supply and demand should be the main drivers of our economy, ever tightening government regulation is not the answer. The underlying concern here is that our banks are too big to fail. If government intervention is needed to protect public funds, government insurance and large employers, then the answer is to encourage more market participation. By reducing the barriers to entry and letting mortgage lenders compete on an even playing field we will create a diverse mortgage market that serves the needs of Canadians while diversifying financial risks. Yes, government regulation will always be prudent and necessary, but let’s not go off the deep end!