The 4th primer on the role of CMHC in inflating Canadian house prices has now been turned into a video. Enjoy.
Good summary. I ran some quick #s on CMHC’s taxpayer exposure. Based solely on EXISTING mortgages under insurance and guarantees in force, with a 30% nationwide drop in prices, the government is on the hook for about $15-20BB to cover the expected shortfall, meted out over the next 10 years or so.
But… here’s the problem: what happens when prices start falling and homeowners who had 20%+ equity in their properties renegotiate with banks? They suddenly find they need to be covered by mortgage insurance. Under these conditions, CMHC’s high ratio mortgages under insurance suddenly spike just as prices are dropping. In other words, CMHC will be insuring loans that are all but guaranteed to be underwater in the coming years. Add in this effect, and CMHC may be underwater a further $20BB over the coming decade.
Jesse, you are very confused
“Good summary. I ran some quick #s on CMHC’s taxpayer exposure. Based solely on EXISTING mortgages under insurance and guarantees in force, with a 30% nationwide drop in prices, the government is on the hook for about $15-20BB”
People need to defauly after a full recourse measure before you can knock on the door for cash. Housing value could drop 99% and as long as people make payments, nothing happens. HOUSING DROP DOESN”T MEAN HOUSING DEFAULT.
Job Loss>Stop Payments > Bank Nego> Assets recovered >Foreclosure> Insured – retained value from sale, then you start to talk about CMHC coming in to make a payment.
I think you should review your post and calcuations.
Here are my calculations for existing insured mortgages:
CMHC has about $8BB reserves for $500BB+ total insured assets. Some additional amount of loan repayments will have been established in almost all of these properties.
As a quick estimate, let’s say the national market drops 30% from peak in 10 years. Let’s assume the average mortgage is 15% below peak prices. Under the 30% price drop stress, this works out to about 15% average loss on $500BB, or $75BB notional shortfall assuming no principal payback (which there is). This would be the amount CMHC is on the hook for if all loans defaulted.
Now assume 20% foreclosure rate on insured loans over the 10 years, so that equals $15BB CMHC must pay out over 10 years.
15B is not enough to move the needle on Canada’s balance sheet.
I don’t disagree but it is still $15bb that is unavailable for productive purposes.
I don’t think CMHC is in a destabilizing position; the focus should be on its policies IMO. I threw up the #s for interest’s sake. I hear a lot of hyperbolic talk about notional insurance when the net is significantly less, as was briefly mentioned in the video.
Excellent, excellent video. Very well done. Thank you!
Jesse – good points.
This is a better video
That is a great video. House porn at its finest!
FANTASTICAL! well done ! I will refereed this to my colleague. I hope at one point the masses will wake-up. Stop buying houses at those prices its a loser deal for a very long time.
The masses will never wake up until:
1) Guys like Ben get his message into the real estate-backed mainstream media, where Joe Average constantly hears how prices will escalate ad infinitum and that they’d better buy now or be priced out forever. Of course, seeing that it’s the mainstream media, which outlet would ever even consider printing the stuff Ben puts forth?
2) When they’re hit square between the eyes with crushing price drops and a complete stop to the mania.
Sadly true! I pinch my self after talking with very smart people about those fact. The problem is they are to smart, so forget it, they know better. So *us* have to go on with our life until the inevitable happen! My mother told me one day you will tank me to have one skill that they dont teach you in school, witch is to be… street smart. The BANKERS are laughing at you, they are burning you people, wake up! Lets spread the message, one person at a time.
Are there no limits on the selling of existing, older residential properties to foreigners? Surely this only adds to demand, and in an city where (correct me if I’m wrong) restrictive planning rules already limit supply of new housing. Amazing! No surprise Vancouver is rated the most unaffordable city in the English speaking world. Closely followed by home town, Melbourne.
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