Bank of Canada's Carolyn Rogers urges 'close look' at negative-amortization mortgages

financialpost.com:

Canadian banks and regulators should take a hard look at mortgages that have allowed some households to run up large amounts of long-term debt as interest rates went up, the Bank of Canada’s no. 2 official said.

Carolyn Rogers, the Bank of Canada’s senior deputy governor, said in an interview that the number of so-called “negative amortization” mortgages is a concern. The loans have that label because they allow the borrowers to pay fixed payments, even as interest rates rise.

In the short term, that reduces the shock of higher borrowing costs. But the flip side is the amortization period — the time it takes to pay off the loan — is extended by years or even decades. Rates have gone up so quickly that there are now more than $200 billion in mortgages in Canada with very long amortization periods; many borrowers are paying little to no principal on them.

“I think that product needs a close look and I think it’ll get a close look,” Rogers told Bloomberg News, shortly after she attended a meeting with senior bank executives in Toronto on Friday. “I think you’ll see the industry reflect on how much they want to offer that product.”

“It is concerning. You don’t want a big portfolio of negative amortizing mortgages,” she said. “It’s not good for the banks and it’s not good for the mortgage holders. But our understanding is there’s a pretty concerted effort to try and resolve these” before borrowers hit the renewal date on those loans.

It’s rare for a senior Bank of Canada official to weigh in on a specific financial product. Prudential regulation of banks and insurance companies in Canada rests not with the central bank but with the Office of the Superintendent of Financial Institutions — where Rogers worked during a long