Canada’s Mortgage Hazard

The ‘must-read article of the day’ award goes to this gem in the Financial Post:

Canada’s Mortgage Hazard by Neil Mohindra, director of the Centre for Financial Policy Studies at the Fraser Institute.

Key quotes:

“If the Canadian government sees rising household debt levels as a real concern and bank underwriting standards as the solution, the logical course is to exit the business of mortgage insurance and stop guaranteeing residential mortgages with public money. Such a move would protect taxpayers from a business they do not need to be in.”

“As long as the government insists on backstopping the risk of high-ratio mortgages with taxpayers’ money, banks simply won’t have any skin in the game and will react half heartedly at most to calls for them to tighten lending standards to address concerns over rising household debt. Instead, the banks will simply sell as many high-ratio mortgages as they can, knowing that taxpayers will ultimately pay the price if rising household debt creates problems in the future”

Well said!

The following posts contain additional information on CMHC insurance and the push by the banks to tighten mortgage requirements:

Primer #4: CMHC- The enabler to Canada’s housing addiction

The Great Amortization Debate

Are the big banks really concerned about the consumer or are there ulterior motives?

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13 Responses to Canada’s Mortgage Hazard

  1. Drew says:

    Just to play devil’s advocate: the article discusses Australia’s successful mortgage business, which has no government-run insurance scheme. But Australia’s real estate bubble is arguably bigger than Canada’s. Banks may be taking risk more seriously, but at the end of the day, when the bubble bursts, the Australian government/taxpayer will most likely foot the bill through bailouts. Isn’t it better to have at least partial coverage via CMHC? (I know the best solution is to not bail out banks, but that’s not going to happen).

  2. Kevin says:

    CMHC a time frame of lowering the bar of home ownership.

    1954- CMHC introduced Mortgage Loan Insurance, taking on mortgage risks with a 25% down payment, making home ownership more accessible to Canadians.
    1954-1990- Somewhere along this time, 10% became minimum down payment.
    1990- 5% was introduced as a trial run, then officially accepted in 1999.
    2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market
    2001 – CIBC offered below-prime mortgages.
    Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
    Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
    Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
    Mar 2006 – AIG enters the Canadian mortgage insurance market
    Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth anounces 35 yr amortizations)
    Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
    Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
    Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 20% down.
    April 2010- CMHC did some minor tightening of their guidelines.
    2011???

    • HHV says:

      Kevin thanks for the comprehensive time line. I’m fairly certain that 5% down CMHC insurance for investment properties was offered up until the April 19, 2010 change to rate qualification rules.

  3. Pingback: Canada's Mortgage Hazard | Financial Insights | Mortgage info

  4. Kevin says:

    Thanks HHV,
    that should read
    Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 5% down.
    April 2010- CMHC did some minor tightening of their guidelines, investors need 20% down.

  5. debunking says:

    Like it or not CHMC is here to stay. What many people dont realise is that should our RE start to weaken significantly, not only will CHMC relax more its rules but the goverment will give more incentives like tax credit and interest deduction.
    70% of the canadians are owners, so no politician is going against their interests.
    With the strong dollar and low debt yields, as well as our natural resources, our goverment has extremely deep financing resources if more fiscal stimilus is needed to boost RE.

    • vreaa says:

      In other words: “Party on folks; Too big to fail; etc, etc”. (Moral hazard.)

      Okay, so how come this approach didn’t work in the US, or Ireland, or Spain, etc, etc? Surely their politicians didn’t want to “go against the interests” of all their owners either?

      And, if the relaxation that you suggest takes place, and ownership is pushed to 72.5%, and all the new even more marginal buyers are sucked in, and RE prices top up another 5%…. what then?
      Answer: An even bigger crash than the one that we’re going to have if they stand pat.

      No way of avoiding the end of a ponzi scheme, sorry.

      [And, PS, no way is Canada going to make mortgage interest tax exempt: We need all the tax we can get… look for more taxes, not fewer.]

      • John in Ottawa says:

        I would replace “no way” with “unlikely.” One of the problems with stimulus is it is very difficult to get the money to where it will do the most good. Stimulus in the hands of the wealthy or older boomers is more likely to be saved than spent.

        A well targeted tax cut is one where the recipient of government largess is likely to immediately go out and spend the money. So, if another round of stimulus is deemed appropriate and if the housing market is beginning to stall and needs another goosing, a tax holiday of say, 5 years, on mortgages below say, $350,000 would put the money right into the most appropriate hands.

        So it is possible that such a scenario could unfold and, in the right circumstances, it could look like quite a good move. Of course it may only kick the can further down the road.

  6. debunking says:

    vreaa,
    what most people bearish on RE here dont get is the extent to which our situation could last.
    I agree, nothing lasts forever, even when people think they are doing sustainable things, they fail, it is the law of enthropy. But my point is that this situation could go on for another 10 to 20 years, why not? You can easy make the point that in 2001 RE here was overvalued in relation to historical fundamentals. 10 years later we are much worse. It is all about the timeframe. Given enough time, everyone will be right, but we all will be dead as well, such is the nature of our frail human condition.

    • HHV says:

      “what most people bearish on RE here dont get is the extent to which our situation could last.”

      I don’t think this statement is remotely true. I rarely see “bears” making predictions about impending doom. Instead you see rational discussion about why real estate isn’t the sure thing investment that many Canadians believe it to be. The posters who do make predictions like “prices will fall 30% by 2012” are only setting themselves up for ridicule. Those types of statements shouldn’t be taken seriously by anyone. But it’s an entirely different thing to make a rational, data-supported argument that current prices are 30% above the historical mean.

      “But my point is that this situation could go on for another 10 to 20 years, why not?”

      Why don’t I trump out the same tired arguments we often hear from the bull side of the real estate argument: history repeats itself. If that’s true on the upside, it’s true on the down. So we’ve never experienced a 10-year long run of price run-ups like we just have (2000-2010) without a corresponding correction. Why is it different this time?

      “You can easy make the point that in 2001 RE here was overvalued in relation to historical fundamentals.”

      Which fundamentals? Price to rent (rent was more than ownership in Victoria in 2000 BTW)? Price to income (it only took 3.5 times annual income to purchase a home in Victoria in 2000 compared to 7.5 times income today)? So I don’t think the easy-to-make-argument is so easy to make.

  7. ATP says:

    “But my point is that this situation could go on for another 10 to 20 years, why not?”

    Here’s why not:
    1. Demographics.
    2. Boomers who not only did not save enough for retirement but are in debt mostly due to the housing bubble. De-leveraging continues.
    3. Over capacity in man power in developed countries due to erosion of industrial base. No jobs/low wages for working age individuals = low purchasing power and low credit worthiness.

  8. debunking says:

    @ ATP
    No offence meant, but every times I hear “boomers” in a sentence , I simply discard it as useless. I have been hearing arguments about boomers ad nauseum for the last 20 years. You can justify anything with “boomers” nowdays.

  9. ATP says:

    debunking:

    Defy gravity if you want. Peace. Out.

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