Mortgage rules should be stricter: TD chief

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Less than a year after Ottawa forced the banking sector to cut back on risky mortgage lending, the head of one of Canada's biggest banks says the federal government should go even further.

Ed Clark, the chief executive officer of Toronto-Dominion Bank , said in an interview that he believes Ottawa could tighten the rules on housing loans more than it already has, without hurting the economy or putting the housing market at risk.

Mr. Clark believes cutting the maximum length on federally insured mortgages to 25 years, from 30 years, would be a good step to slow rising household debt, which hit a new record this week, surpassing that of the United States and Britain.

"If you thought the Canadian economy was strong enough to take another adjustment, then we would say take the 30 [year amortization limit]down to 25 and get this back to where it originally was," Mr. Clark told The Globe and Mail.

"It's hard to know whether the economy can take another crank like that," he said, referring to Ottawa's last round of changes. "But my own gut would tell me that it may turn out that we do have the absorption capacity."

Just under a year ago, the government waded into the mortgage market to curtail riskier lending as consumer debt levels soared to alarming levels. Finance Minister Jim Flaherty announced in January that the government would no longer insure mortgages with 35-year amortization periods, essentially reducing the limit on insured mortgages to 30 years.

The government's intention was to put constraints on consumer borrowing at a time when interest rates are being kept low to spur an economic recovery through business expansion and investment.

Mr. Clark said he is optimistic that the Canadian economy will be resilient in 2012, since it has performed better than expected for the past two years. However, TD economists downgraded their expectations for the Canadian economy Wednesday. The bank said it expects growth in Canada to be modest at 1.7 per cent, and at 2.5 per cent globally, which is slightly below what the Bank of Canada is forecasting.

Data from Statistics Canada this week showed debt levels of Canadian households have soared to a new high after reaching unprecedented heights last year. The ratio of debt to personal disposable income for the average Canadian home reached 152.98 in the third quarter. That compared to 150.57 per cent in the second quarter, and 146 per cent in 2010. The ratio is a measure of all debt – including mortgages – to annual income after taxes.

Bank of Canada Governor Mark Carney has been warning Canadians for more than a year about high household debt levels, and he has continued delivering that message this year.

A spokesman for the Finance Department would not comment whether the government is contemplating further changes to mortgage rules.

Despite his comments, Mr. Clark said he doesn't expect the government to make a change in the near future.

"I think the government will pause here and not do any tweaks, because they're hoping that the housing market is slowing down on its own but not collapsing and they don't want to push it over and make it go down rapidly," Mr. Clark said.

Ottawa has altered the mortgage market several times in recent years, eliminating the 40-year mortgages banks were offering in 2008, then halting 35-year amortizations. Finance Minister Jim Flaherty said in the House of Commons on Wednesday that, despite such changes, the government has seen Canadians increase their borrowing.

"We have tightened the rules three times … including this year, with respect to residential mortgages," Mr. Flaherty said. "However, we have low interest rates and Canadians – some Canadians – are taking advantage of those to take on some larger mortgages, so again we need to caution Canadians not to overextend themselves because interest rates eventually will go up."

The banks prefer that the government direct the industry on mortgage lending, concerned that if one lender were to stop offering 30-year mortgages, another would likely swoop in and try to steal that market share. Last December, Mr. Clark warned that if a bank tried to cut back on longer mortgages on its own, it would be "carved up" by its rivals.

"We're respectful of the fact that when you're sitting in the government that's not an easy choice to make," Mr. Clark said of Ottawa's need to balance its concern over rising debt levels with its desire to not stunt an economic recovery by tightening lending.