CMHC feeling the heat
If you’ve read this blog for any time now, you’ll know my position on CMHC policies: They are inherently self-defeating and act as the enabler to Canada’s housing addiction. Most concerning, CMHC guarantees over half a trillion dollars in mortgages. But as they are a quasi-government agency, it is more appropriate to say that Canadian taxpayers are on the hook for these liabilities. Whether or not these scenarios play out is far from the main issue. While still a highly profitable entity (it had net income of an estimated $1 billion last year), I am fundamentally opposed to its stated mandate and frankly its very existence.
At its root, CMHC is a government agency created to guarantee bank profits while ensuring artificially low interest rates to those who would not otherwise qualify for them, creating excess credit in the process, and exposing the Canadian economy to adverse shocks in the event that this credit creation slows or God forbid goes negative.
Now we find that the mainstream media is shining this same light on the issue:
The CMHC: Canada’s Mortgage Monster – Macleans
This is an interesting article. I was a bit surprised to find that Macleans would suggest that CMHC is actively intimidating bank-employed economists who dare to speak out against CMHC policies. I find this a bit of a stretch, but nevertheless, here’s the quote:
“The apparent unwillingness of the country’s sixth-largest bank to challenge the CMHC is curious given the role similar U.S. institutions Fannie Mae and Freddie Mac—quasi-government agencies that securitized mortgages—played in the U.S. housing crash. But it’s far from unusual. Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack. One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.”
The Macleans article also discusses the apparent lack of oversight on the part of the CMHC, a topic examined in a Globe and Mail article earlier this week as well, which we’ll look at in a moment. From Macleans:
“On specific decisions that dramatically loosened mortgage lending rules last decade, CMHC officials have testified they did so on their own with the approval and oversight of the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional.”
“It all raises troubling questions about the agency, its oversight and, ultimately, the health of the country’s frothy housing market, a key driver of the Canadian economy.”
While lending practices between Canada and the US are certainly fundamentally different, I’ve long been highly skeptical of the ‘conservative Canadian bank’ mantra, a theme I discuss often. On this topic, the Macleans article had lots to say:
“The Canadian government mortgage apparatus echoes uncannily our experiences down here (in the US -ed.) with Fannie and Freddie” says Jim Grant, author of the widely read Grant’s Interest Rate Observer newsletter. “CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”
“What bothers Grant is that the CMHC’s government-backed guarantees encourage banks to feel they have less to lose if loans go bad. “The risk has been shifted, rather than reduced, from the stockholders and depositors of the big Canadian banks to the Canadian taxpayer,” he says. And if house prices fall and borrowers get into trouble, the ripples would run far and wide. “A sharp break in Canadian house prices would inflict terriﬁc damage to consumer conﬁdence, would hurt the Canadian labour market, and ultimately produce a lot of the unpleasant results that have been America’s burden to bear since 2007.”
And of course, CMHC’s predictable response to such allegations:
The CMHC argues such concerns are overblown. It points out that the Canadian mortgage system is fundamentally different than in the U.S. That’s because mortgage interest is not tax-deductible, a relatively small number of mortgages are securitized, and lenders can generally go after homeowners who don’t make their payments. The CMHC also points to Canada’s low rate of mortgage arrears, currently less than one per cent. Finally, the industry never got swept up in the subprime lending trend, the CMHC says. “We don’t have those products in Canada,” says Pierre Serré, the CMHC’s vice-president of insurance product and business development. “And if we did, CMHC certainly did not insure them.”
I’ve spent so much time debunking these ridiculous assertions that it pains me to regurgitate them again here. Yes our banking system is fundamentally different. But we did have (and continue to have) subprime mortgages which are fully insured by CMHC based on the widely held definition of the term ‘subprime’.
Our banks are far from conservative. We still have zero equity mortgages fully insured by CMHC, though they are now structured as 5% cash back mortgages by all of the big banks (5% is the minimum down payment, conveniently enough). The recourse system mentioned by CMHC whereby lenders can pursue borrowers has been shown to reduce defaults by 20%. By far the greatest predictor of default is negative equity…..which the US found out as the element of recourse available to lenders in more than half of all US states has done little to stem the tide.
For more on all of this, check out these posts:
Perhaps the quote that should bother you most in the enitre Macleans article is the following:
“So how much risk have taxpayers been exposed to? The CMHC doesn’t reveal specific data about the credit exposure that it has taken on, other than to say it is manageable and in line with internal guidelines.”
So it’s at least a half a trillion dollars, or over a third of our GDP, but taxpayers don’t get to know the details? Ridiculous! It’s this lack of transparency and oversight that led the Globe and Mail to run a story on CMHC earlier this week:
Time to step up the oversight of CMHC operations– Globe and Mail
“Who is minding this huge, crucial beast that puts taxpayer money on the line? The answer is Canada’s Minister of Human Resources – not Mr. Flaherty, despite his sway over items such as mortgage rules – and a board of directors that is largely drawn from the real estate and building businesses, with little background in banking or insurance.
That arrangement may have made sense when CMHC was primarily engaged in tasks like providing low-income housing, but now the mortgage insurance side of the business dwarfs other components and requires new gatekeepers.”
There’s very little to argue with here. CMHC insurance of residential mortgages remains the biggest factor in allowing and encouraging the current, significant overvaluation in the Canadian real estate market.
As a final note, perhaps one of the handful of CMHC economists who are email subscribers of this blog would like to weigh in with their opinion on this topic. I’m sure there’s much that has been written here that doesn’t sit well with you. We’d all love to hear your take.