How stupid is stupid?

Tony Wanless | Image: Jupiter | Published: July 17, 2008

So Canada Mortgage and Housing Corporation has ridden to the “rescue” of all those stupid homebuyers out there by refusing to back the 40-year-mortgage, effectively killing it.

Too dangerous, say CMHC's clients (lenders) who have been spooked by the US subprime mortgage crisis, which they aided and abetted. According to the boffins, always willing to help save us from ourselves, a 40-year, no money or little down mortgage tends to draw the marginals who can't really afford mortgages.

Normally, I'd be with them. For most people a 40-year mortgage is about as stupid as stupid gets. You end up paying three times the cost of your home in fees and interest, just for the dubious privilege of getting into the housing market.

But there's fallout in this move, and it's going to affect millions of Canadians, most specifically in BC.

That's because the 40-year flexible mortgage was perfect for the self-employed, or micro-business operator (who make up more than 90 per cent of BC businesses). The long-term mortgage meant they could get into homeownership, which meant they could have an asset to help fund their businesses.

And, in many cases, it was the only way they could get a mortgage at all.

Ever since mortgages were invented, the lending system has insisted on a dependable repayment schedule, almost always tied to a steady job. The bankers are right from a math point of view, but not from a life or business point of view, which is filled with ups and downs. This is especially true for the self employed and very small business people, who have routinely been treated like pariahs by bankers.

Self employed and micro business operators have extremely variable income: Their businesses have rhythms, which cause bankers to shudder and recoil in horror. Undependable income? Take a hike.

Most (I hope) experienced business operators know about these rhythms and usually budget for them. In entrepreneur training, I've long taught a form of this called feast or famine budgeting. Or they have coverage in the form of operating lines of credit – usually tied to their homes -- to smooth out the peaks and valleys.

But most bankers, firmly rooted in the mid 20th century when everybody had a job, don't like non-conformity. So they tend to give these potential mortgagees the bum's rush.

As an example, I can recall one situation where a couple applied for a mortgage, and the husband

who nominally owned the (successful) company was rejected because he was self-employed, but the wife was approved because she was “employed” by her husband.

More generous lenders insist that the self-employed bring in tax forms for three years, or often, five years to prove they have steady revenue. But if entrepreneurs are doing their jobs properly, they show very little taxable income: Their imperative is to get their taxable income down to as little as possible.

So the long-term mortgage was very helpful for these people. It meant they could keep their expected payments very low – budgeting for lean times, so to speak – and then could slap on extra payments during fat times. Usually this flexible approach resulted in a mortgage paydown similar to those performed by the steady jobholders.

But, of course that would mean self-control and discipline, and the authorities obviously don't think these people have that.

Sure entrepreneurs might be able to leap into the business world and carve out a living on sheer skill, drive, and ability to react to change.

But trust them to be able to pay back a mortgage? Forget it.