Imagine

Three months ago scoring a home equity line of credit was a snap. Swagger into your branch. Talk about your house. Show some leg. Get a loan. And not just any loan – but one at prime, with interest-only payments, for maybe 40% of your home’s value. Perfect for those people wanting to diversify from real estate into financial assets, while getting a tax-deductible borrowing to boot.

After all, what could be simpler? Borrow at 3%, invest for 8%, have your portfolio pay your loan while you get to claim the interest write-off.

But F made this strategy tougher the same day he killed the 35-year mortgage. HELOCs are no longer insured by CMHC, which means the banks are suddenly worried about risk.

So what?

So this week I helped a couple with $2 million worth of security get a $350,000 investment loan, and we needed personal lubricant to wiggle the deal through. No more prime – now it’s a full point higher. No more simple loan with interest-only payments. Now it’s an amortized borrowing with principal repayments. And every year these people have to reprove that they qualify – even though they could pay the sucker off with 15 minutes’ notice.

You see the difference CMHC insurance makes? Bankers man up real fast. They learn again what risk means. And it scares the poop out of them.

Now just imagine if Ottawa started to unwind CMHC insurance on mortgages. Imagine what lenders would do if a young couple without any savings walked in and asked for a $500,000 mortgage on a $525,000 house, if the taxpayers were not there to wipe away the threat of loss. They’d be banker road kill.

This is what’s happening in the US these days, where lending standards are far stricter than here. When Freddie Mac and Fannie Mae (American equivalents to CMHC) collapsed two years ago, it spelled a quick end to no-verifiable-income mortgages, no-money-down financing and teaser interest rates – all of which still flourish in Canada. Now risk matters. So Oakies don’t get to buy McMansions any more. Or hormonal young couples with good jobs and no savings, for that matter.

This is why the ‘it’s different here’ argument thrown up so often to justify Canadian house prices is bogus. America is living the consequences of too-east credit. Canadians have yet to taste them. They will. Because if F can do it to home equity loans, he can do it to home mortgages. And he should.

CHMC has a debt limit now of $600 billion – roughly the size of the national debt. Of course, the bulk of the loans  insured are high-ratio and high-risk – the stuff the banks wouldn’t touch at today’s interest rates without this backstop. South of here they’d be called subprime. We call them normal.

Why might Ottawa consider CMHC changes as a way of cooling off housing and dampening runaway household debt? Like in demented, self-lubing Vancouver?

Because it works. And it would spare the Bank of Canada from having to raise interest rates so high that the rest of the economy is drop-kicked in the fight against housing inflation. It would certainly stem the speculative casino mentality which has gripped much of the real estate market, and redirect income and savings into more productive areas – like saving for a pensionless retirement.

By doing what the US has – shifting risk back on to the lenders from the taxpayers – this change would drop housing values in short order (as it has done in the States), and remove a major reason why living costs are going up and standards of living going down. Rates could stay low enough to encourage business borrowing and job expansion, and we’d all get to enjoy house-horny Mainland Chinese buyers losing their cajones.

Has such a move been considered in the big, white, ugly Ottawa building where F’s staff hangs? You bet. In fact word is the removal of CHMC backing for home equity loans was a test balloon to see how the lenders would respond. It went exactly as expected.

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Bankers became pricks. But in a good way.