Finance Minister not impressed with BMO

Heavy competition among the major Canadian banks for mortgage customers has recently  prompted lenders to cut rates heading into the key spring home-buying season. Finance Minister Jim Flaherty isn’t all that happy about the impending situation, he issued a strong warning on Sunday.

“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” he said after reports surfaced the Bank of Montreal had lowered their price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.

The highest risk factor facing the economy is high household debt, the majority of which is mortages according to  the  Bank of Canada While Canada’s housing market rebounded quicker than most from the financial crisis, some observers have questioned whether a bubble was forming.

But home sales have been dropping substantially on a year-over-year basis for months now, and with the most important season for those sales now kicking into gear, competition among lenders is heating up.

“There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand,” Gord Nixon, CEO of Royal Bank of Canada, said on a conference call last week.

Lower rates could entice more buyers into the housing market this spring, and encourage some buyers to take out larger mortgages than they otherwise would, lending support to house prices. That’s not what policy-makers in Ottawa are hoping for.

Mr. Flaherty noted Sunday that he has taken action “to make sure the housing market remains sound.” He tightened the mortgage insurance rules in July, amid concern the market was overheating, making it slightly more difficult for borrowers to obtain mortgages. The changes included cutting the maximum length of an insured mortgage to 25 years from 30. Home sales subsequently fell sharply in the fall, compared to their levels a year earlier, and have not rebounded since.

BMO has been looking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks, according to Canaccord Genuity analyst Mario Mendonca.