“Four Changes CMHC Needs To Make To Rein In Its Mortgage Market Influence”

We had this discussion back in mid-November, when we debated actions that CMHC can take to “cool the market,” as well as whether or not it should be their job to do so in the first place!

Noted Canadian economist, Ben Rabidoux, wrote something similar last week in the Globe & Mail, and interestingly enough, he came up with four other suggestions to what I had discussed on my blog, and to what readers subsequently came up with on their own.

Here are four great ideas that none of us would have come up with on our own…


I didn’t like when my readers lumped Ben Rabidoux and Garth Turner into the same category in last week’s blog discussion.

I know Ben in a professional capacity, and he’s exceptionally intelligent, extremely knowledgeable, but he’s also just a really nice guy.

Even though he’s a real estate bear, he and I get along quite well.  While he notes that Toronto is “second from the bottom” in terms of Canadian markets he worries about, he still believes overall that the Canadian real estate market is overheated.

He’s a numbers guy, and I’m a “feel” kind of guy, so despite the debt-to-income ratios, inventory levels, and other metrics that a real estate bear can bring up, I always find myself saying, “Yes, but Ben – there’s NOTHING FOR SALE!”  Single family homes are in short supply, and we’re only half-way into January.

In any event, let’s take a look at Ben’s column and the suggestions he believes CMHC should consider…



“Four Changes CMHC Needs To Make To Rein In Its Mortgage Market Influence”
By: Ben Rabidoux
The Globe & Mail

My nomination for the understatement of the year goes to Finance Minister Jim Flaherty, who in early December observed that “regrettably, CMHC became something rather more grand I think than it was intended to be.”

Indeed. The Crown corporation, which originally had a humble mandate of helping first-time buyers obtain favourable financing, now insures $560-billion of some of Canada’s riskiest mortgages, more than double what it insured in 2005.

To their credit, the current government has implemented several measures since 2010 aimed at reducing taxpayer exposure to the Canadian mortgage market, but some structural issues remain. Below are four changes that the government should consider making in 2014.

1) Increase income documentation requirements on insured mortgages

Canadians are rightfully proud of the stricter mortgage underwriting that spared us from some of the particularly egregious lending practices seen stateside before their real estate bust.

However, most Canadians would be surprised to learn that “prime” Canadian mortgages, particularly high-ratio mortgages insured by Canada Mortgage and Housing Corp., involve far less documentation than comparably-labelled “prime” loans in the U.S. … and this was true even during the subprime years.

Today, a borrower can obtain a prime, CMHC-insured mortgage with as little as a pay stub and a job letter, which would make it a low-documentation Alt-A mortgage by U.S. standards. RBC recently tweeted about this, noting that securing a mortgage in the U.S. requires more documentation than in Canada.

Interestingly, CMHC places the integrity of the underwriting primarily with the lenders themselves who profit from the mortgages, as the insurer seldom sees the physical documentation and very rarely spot checks mortgage applications at origination.

This relatively low standard for mortgage documentation coupled with a very obvious moral hazard leaves the door open for what the mortgage industry calls “soft fraud” or “fraud for shelter,” which typically involves the applicant (often with the knowledge of the lender) misrepresenting their financial circumstances, usually related to their income or job status.

There’s really nothing “soft” about this form of fraud, particularly when it’s a CMHC-insured mortgage where taxpayers are holding the bag. And while it’s impossible to know the true extent of the problem, one highly respected Canadian mortgage website suggested that it is “one of the most widespread and under-reported problems in mortgage lending” and that it is “surprisingly common these days.”

Regardless of the scope of the problem, the solution is relatively simple: CMHC should demand Canada Revenue Agency notice of assessments (NOAs) for all mortgage applications. This is common practice for prime mortgages in the U.S. and is a simple way to ensure that income or employment has not been significantly misrepresented given that NOAs are very difficult to alter or forge.

Interestingly enough, many lenders insist on seeing NOAs for conventional mortgages that aren’t being insured. This suggests, not surprisingly, that their underwriting is more stringent when they are forced to bear the risk for the mortgage they originate rather than insuring the mortgage through CMHC and passing the risk on to taxpayers.

2) Reinstate the regional mortgage cap

Prior to 2003, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure. This made a lot of sense given that CMHC’s original mandate was geared toward helping first-time buyers get into entry-level housing. The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy to do so.

In what can only be described as a massive policy blunder, this cap was eliminated in 2003. For nearly a decade, CMHC would insure mortgages of any size, from simple starter homes to opulent mansions, a truly epic case of “mandate creep.” In 2012, a nationwide limit was re-established; CMHC will no longer insure mortgages on homes that are purchased for more than $1,000,000.

This is a step in the right direction, but it ignores the fact that a million-dollar home is well above a starter home in nearly all parts of Canada. This should change. One possible solution would be to set the maximum mortgage cap to the average resale price in each census metropolitan area and have that cap change annually to reflect changing house prices.

3) Eliminate the second home program

CMHC currently has a program that allows buyers to purchase a second home with as little as 5 per cent down. This program is most commonly used for purchasing recreational properties such as cottages, but can also be used to purchase a “pied-à-terre” for those who have to often travel to another city for work, or to purchase a home for children while they are attending college or university.

In the context of CMHC’s original mandate, this program is simply indefensible. If someone is fortunate enough to have the income and assets to purchase a second home, for recreational purposes or otherwise, they should not require taxpayers to bear the risk, particularly considering that the majority of Canadians are not fortunate enough to own multiple properties themselves. This program needs to go.

As an aside, contacts in the mortgage industry suggest that some investors are also currently abusing this program. In 2010, the government wisely changed the rules so that investors must put down 20 per cent on investment properties. However, the door has been left open to purchase investment properties with 5 per cent down through the Second Home Program, with taxpayers bearing the risk. Of course, the applicant can’t state up front that the home will be rented out, but they are free to quietly rent out their second home after the deal closes.

4) Increase transparency and oversight

The ironic part about Mr. Flaherty’s comments that CMHC has become something more “grand” than it was intended to be is that Canadians still have no idea just how “grand” CMHC has actually become since we still don’t know exactly what is included in that $560-billion in insurance in force.

This was driven home to me last year when a developer told me that CMHC recently had a program (and perhaps still does) that allowed developers to get insurance on loans for their condo developments. This is unbelievably bad policy. This effectively lowers the interest rate the developer would pay, but you can be assured that those cost savings would not be passed on to consumers at the other end. In essence, taxpayers were assuming risk on these development loans to pad developer pockets.

Dr. Ian Lee from Carleton University’s Sprott School of Business has in the past been an outspoken critic of CMHC’s lack of transparency. He recently told me via e-mail that “CMHC is the least transparent of all Canadian Crown corporations concerning its numerous activities and detailed breakdown of its insurance guarantees.”

This needs to change. Canadians have a right to know exactly what is in CMHC’s insurance portfolio considering that all taxpayers are collectively on the hook if these insured loans were to sour.

As we enter 2014 with Canadian households having higher debt loads than ever and house prices in most Canadian metropolitan areas at all-time highs relative to local incomes, Canadians should increasingly be asking if CMHC, in its current form, is serving and protecting their best interests.



One point to note however – Ben told me last night, “I sent this to some mortgage broker friends of mine for review, and they made very valid comments regarding my proposed regional cap.  After consideration, I agreed that it was probably too punitive to limit it to the average resale price.  So I’d say I’m in favour of a regional cap, but would probably rethink the suggestion I put in that article.”

Rob McLister from Canadian Mortgage Trends wrote THIS follow-up which analyzed Ben’s article, and stimulated a pretty good debate.

I also see my friends “Potato” and “Joe Q.” commented on there, so that alone has to be worth clicking the link for… 🙂


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  3. Paully says:

    I used to think that the CMHC limits just needed to be severely reduced, but now I think that the best thing to do would be to shut it down completely. The taxpayers do not need to be backstopping million dollar mortgages for anybody. Once you fold up the CMHC, prices can move to a reality set by the market, not skewed by government policy.

  4. Rob Fjord says:

    “Yes, but Ben – there’s NOTHING FOR SALE!” – eliminate CMHC and i bet you would see a lot more inventory added!!! CMHC is just another way the government distorts markets, it should not be reformed or be tinkered with, but junked, as should the bank of canada and the canadian dollar…all potent tools to distort markets and transfer wealth.

    But yeah, if you want to rein in, thats simple, change the rules, in time they will do it…to intentionally blow up the market and transfer wealth. The hunt brothers tried to corner the silver market in the 70’s, they used massive leverage, all that the gov/banksters had to do to destroy the hunts was change the rules, they increased the margin requirements on silver futures, and poof, the hunts were forced liquidated, silver collapsed, and they went bankrupt.

    The rule makers rule…and toy with you.

  5. George says:

    I do not believe the CMHC needs to exist. If someone can only afford to pay 5% of the purchase price of a home then why should the rest of the country help them stretch their budget?

    I believe the CMHC was originally created to help out returning soldiers from World War 2, so the rest of the country had every reason to return the favour by helping them buy a home in a tight lending market. That purpose is long gone, and now the CMHC just seems like unnecessary government intervention that primarily benefits financial institutions who really don’t need private citizens helping them out.

  6. Long Time Realtor says:

    Sorry, I can’t share your opinion of Ben Rabidoux’s qualities as a so-called ‘economist.’ Rob McLister’s excellent response piece essentially eviscerated Rabidoux’s suggestions quite skillfully.

    Eliminating the second home program is tantamount to concentrating on minutiae and would have a miniscule affect on the overall CMHC program. It should also be noted that under the Minister of Finance’s direction, CMHC has recently come under the auspices of our bank regulator (OFSI), such that the level of transparency and oversight will be greatly improved.

    1. Joe Q. says:

      David writes: I also see my friends “Potato” and “Joe Q.” commented on there, so that alone has to be worth clicking the link for…

      Puh-LEEEZE. 🙂

      Anyway, I must be reading the CMT article very differently from everyone else, because while I see criticism, I don’t see the “evisceration” others are pointing to. My take is that McLister thinks proposal no. 1 is pointless, proposal no. 2 has some merit but the “lines” are in the wrong place, and proposals nos. 3 and 4 are generally sound if not necessarily that consequential. CMT is a bit of a strange venue in any case, as the comments tend to get personal with little provocation.

      Many aspects of this discussion boil down to arguments about the role of the CMHC. What is its mandate, and who is it meant to serve? First-time home buyers, all home buyers, vacation home buyers, condo developers, or the federal Treasury? Some or all of the above? What happens if its activities start to run counter to its mandate? Unfortunately, the issues with transparency and oversight mentioned by Long Time Realtor have in the past made it tricky to work out the answers to these questions. Hopefully the change to OSFI oversight will remedy this.

  7. Kyle says:

    1. Wouldn’t it be easier for CMHC to simply not pay out claims, if it turns out the borrower didn’t actually qualify? This puts the onus back on the underwriter where it belongs. I don’t want my tax dollars going to hire more people at CMHC to double check what the underwriters are supposed to.

    2. This only makes sense if we agree that CMHC is ONLY suppose to benefit lower income households. Otherwise it is reverse income discrimination. So a doctor, or lawyer who makes $333K/ year who wants to buy a 1.0M house, will have to wait until he has saved 20% ($200K or more than a year’s take home), while the guy who makes67K/year can go buy a 200K condo after only saving 5% (10K or about 2.5 months of take home). Meanwhile the Doctor or Lawyer pays significantly more taxes, or you could say shoulders more of CMHC’s risk in the event of a pay out.

    3 & 4. I’m with you, Ben.

    1. Anonymous says:

      I couldn’t agree more with you Kyle. My husband and I are in fact in the exact same situation. We make a very high income, but are being forced to look at cheaper homes in neighbourhoods other than the ones we would have liked, only because we haven’t worked enough years to save up the 20%. It’s really unfortunate. And because every property we bid on is at the higher end of the limit of 1 million, they request physical assessments each time, and we lose the deal because we can’t make an unconditional offer–it’s subject to CMHC approval always and they’re the ones making things difficult. And we are still first time home buyers.

      Comletely agree on points 1, 3 and 4 with this article.