We were just talking about this very subject two weeks ago, and as if on cue, the Financial Post gives us a fantastic article!
One of the largest complaints I hear about the mortgage industry from financially-responsible, somewhat better-off Canadians, is that the CMHC is insuring all kinds of high-ratio mortgages across Canada, for any and every type of real estate, resulting in a $562 Billion liability.
A prudent, frugal Canadian might suggest that the mere presence of the CMHC is “unfair” to the taxpayer.
A would-be borrower might disagree.
Let’s read an excerpt from the F.P. article and then discuss…
Here’s an excerpt from the FP article last Friday:
“Could CMHC Disappear Over Time?”
By: Garry Marr
The Financial Post
Imagine a world without Canada Mortgage and Housing Corp.
Today you can walk into a financial institution and try to borrow money for a home with only 5% of the purchase price, provided there’s an agreement between you and the bank that you’ll buy mortgage default insurance.
What happens next if the government is no longer behind that mortgage, making sure the people loaning the money or the investors buying that loan get paid, should you not make your payments?
For starters, you might gently be shown the door because nobody wants your credit risk or you might be told the risk is so high you can forget about interest calculated at 3.25% for the next five years — the rate you can still get in part because of Ottawa’s backing.
The International Monetary Fund waded into Canada’s housing market Wednesday and while it didn’t come right out and suggest that the CMHC should be abolished and the government get out of backing loans, the institution is calling for changes.
“Over the long run, the need for extensive government-backed mortgage insurance should be re-examined,” said the IMF, in its statement.
“Looking ahead, further measures should be considered to encourage appropriate risk retention by the private sector and increase the market share of private mortgage insurers. Importantly, any structural change should be made gradually over time to avoid any unintended consequence on financial stability,” the IMF said.
Further to the conversation, here’s another excerpt from an article that ran last week as well:
“IMF Urges Ottawa To Cut Back On Mortgage Insurance Through CMHC”
By: The Canadian Press
The Financial Post
Ottawa should consider phasing out insuring home mortgage through Canada Mortgage and Housing Corp., the International Monetary Fund said Wednesday.
Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.
Some analysts have credited the system for providing much needed confidence in Canada’s housing sector during the 2008-09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.
The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.
“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.
“We suspect the fact that banks may benefit from government-backed insurance on mortgages (…) it sort of makes it easier for banks to do mortgages than other kinds of lending which presumably, we think, is going to be more useful for the real economy.”
I had some extended family in from Atlanta over the weekend for a dinner, and in between talking about how bad the Atlanta Falcons are playing, and whether or not Toronto is getting its own N.F.L. team called “The Toronto Bon Jon’s,” we talked about what else – the housing market!
We talked about the difference between the U.S. and Canada when it comes to banking, and lending practices, and how the United States’ financial crisis of 2008 provided a warning to Canadians that we heeded and used to change our ways.
At one point, I said, “The Canadian finance minister has tried multiple times to cool the housing market, but it just keeps going!”
I explained the changes to lending practices we’ve seen in the last two years, as well as Jim Flaherty’s outlook and what he would like to do.
Then my wife’s cousin asked me, “If you needed to immediately halt the housing market tomorrow, what is the one thing you could do?”
Simple: double the existing mortgage rate.
But that’s never going to happen, or at least, if it did, it would happen very gradually, over a very long period of time.
If you took today’s 3.49%, 5-year, fixed-rate mortgage, and suddenly made it 7%, I think it’s safe to say that the housing market would cool significantly!
The higher interest rate would make it much tougher for all of us – lower, middle, and upper segments of the market, to pay our monthly mortgage charges.
And it might take the bottom out of the market, as little Johnny with $30,000 in savings, who can afford $1,300 per month, but can’t afford $1,900 per month, would no longer be a buyer.
But just for the sake of argument, let’s ask the question: what would happen to the real estate market if the CMHC no longer insured high-ratio mortgages?
Wow, where to begin…
For those of you that need a crash-course in the Canadian Mortgage & Housing Corporation – they are a Canadian crown corporation who insure residential mortgage loans provided by financial institutions such as TD Bank, Scotiabank, etc.
So when your bank gives you $300,000 to purchase your home, that loan is insured by the CMHC, so that if you default, TD Bank or Scotia doesn’t take the loss.
The risk is therefore transferred from a massive financial institution, worth, say, a trillion-dollars, to the government of Canada, and thus the individual Canadian taxpayer.
It is estimated that the insurance risk is approximately $17,000 per Canadian, although that figure is from 2010, so I’m sure it’s now substantially more.
So what happens if the CMHC stops insuring mortgages?
Well first and foremost, banks would completely change the way they do business! No longer would banks lend 95% loan-to-value for any property that comes across their desks!
Banks might also charge a higher mortgage rate, if they did decide to lend, to try and even out the “risk versus reward” equation.
So if a bank was looking at lending $900,000 for a young couple to buy a $950,000 home, with a $50,000 down-payment, with a 3.49% mortgage rate, maybe they wouldn’t do that deal if the CMHC wasn’t insuring their $900,000!
Maybe they would do the deal, but they would charge 5.5% instead.
It’s all speculation.
I honestly don’t think the CMHC is going to disappear, although if the IMF is encouraging them to insure fewer high ratio residential mortgages, perhaps we could see a change on the horizon.
I think the powers-that-be are way too smart to kill the goose that lays the golden egg, and while there has been talk of “slowing down” the real estate market, nobody will benefit from a self-induced collapse.
It just isn’t going to happen.
So if you’re a tax-paying Canadian, and you work hard, and happen to be very fiscally conservative and made a 65% down payment on your home, do you think the CHMC should be providing insurance on each and every loan that a big bank makes?
Does it bother you that their lending practices are the way they are?
We could argue about this all day, and we’re all biased, based on our own financial situations.
But I see a growing number of financially-responsible Canadians who are wondering why the government continues to back high-ratio mortgages, and provide the banks with a fail-safe…