A recent item in the Globe and Mail clearly itemizes the unnecessary complexity regulators have introduced into the mortgage marketplace. The OSFI B20 guideline succeeds in making mortgage qualification, rate comparison, and prepayment penalty regimes less borrower friendly. The new guideline may ‘protect consumers’ from themselves and protect banks from excessive risk taking. However, we have lost some transparency.
Robert McLister presents the case for simplicity. He illustrates how the pain will be felt by both existing borrowers and new ones. His discussion of the posted (and discounted) rates and how the TD is likely to extract added penalty revenues is great. His outline of the ‘minimum qualifying rate’, which is set by a complex formula that few ordinary citizens might understand, similarly leaves the bank with the advantage.
OSFI may have had good intentions, but this new guideline will challenge even those who are ‘financially literate’.
In micro-economic terms, the banks have a significant ‘information’ advantage over consumers. Otherwise, this is known as an information asymmetry – the discovery of which resulted in a Nobel Prize in 2001. Banks know more about the product, the product features, the competing products, and even the borrower’s purchasing patterns and prospective repayment patterns than does the borrower. The new pricing approach just enhances the banker’s advantage.
In part, this tendency to introduce complex financial ‘risk management’ tools is done at the request of banks, because that gives them an advantage. They are experts in financial engineering. Similar measures are being championed in bank regulations for calculating minimum capital and minimum liquidity requirements – internal measures and targets are justified. All of these make it more difficult for investors and analysts to assess and compare institutions.
The guideline adds some new twists and turns for borrowers. The mortgage maze was already too complicated. Simpler is better.