“Time To Step Up The Oversight of CMHC Operations”


6 minute read

March 23, 2011

I was literally just having a conversation on this topic with a colleague of mine on Friday, and today comes a fantastic article on the subject in the Globe & Mail.

Does the tax-paying public know who CMHC is, what they do, and what the risks are for the general public?

I can’t help but think of the ongoing Phoenix Coyotes vs. Goldwater Institute saga and draw a serious parallel…

By: Boyd Erman
Globe & Mail
Tuesday, March 22nd, 2011

More than two years after the financial crisis brought down banks and mortgage insurers in the U.S., it’s hard to believe that there’s still a huge financial institution in this country that’s operating in a regulatory grey zone, with little in the way of oversight.

The federally owned Canada Mortgage and Housing Corp. is bigger than some big banks and its risks are borne by every Canadian. Yet the country’s main financial regulator does not oversee it. Nor does CMHC officially report to the Finance Minister.

Whether it is in Tuesday’s budget or after an election, Ottawa should improve the oversight of CMHC by fixing those flaws.

It’s one of the final but very necessary steps the government needs to take to rein in the risk to taxpayers posed by the housing sector. Finance Minister Jim Flaherty’s decision to pull back amortizations for insured mortgages from 40 to 30 years, and to increase down payment requirements for home buyers, were the right first moves, reducing not only CMHC’s risk but the risks to the financial health of everyday Canadians, without squashing the housing market (so far).

But now it’s time for structural changes to ensure that CMHC operates in a low-risk manner for the people who own it. That would, of course, be you and me. That means transferring oversight of the insurance and securitization operations of CMHC to the Office of the Superintendent of Financial Institutions, and making the Minister of Finance formally responsible for it.

CMHC is by any measure one of the biggest financial institutions in the country, and it’s getting bigger every year. It has estimated its own 2010 revenue at $14.7-billion, more than Canadian Imperial Bank of Commerce, the country’s fifth-largest bank. CMHC estimates it had net income of $1-billion last year, in line with that of the No. 6 bank, National Bank of Canada.

CMHC has mortgage insurance in force that will soon exceed half a trillion dollars. Because of that, it’s the very definition of systemically important institution. That insurance safeguards the balance sheets of Canada’s big banks, and is backed explicitly by the federal government.

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 andbuilding 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.

The insurance and securitization business of CMHC should report to the Finance Minister directly, and it should be explicitly overseen by OSFI. The board of directors overseeing the insurance and securitizationbusiness should have a stronger background in those fields.

If that means splitting CMHC’s functions, then that’s what should happen.

CMHC says it hews to the guidelines put forward by OSFI, in some areas like capital going one better, but there’s no watchdog from OSFI ensuring that’s the case. It’s a trust-me story.

Do something dumb, or take too much risk, and OSFI has a reputation for being in your face soon after demanding a fix. CMHC should face the same real-time scrutiny.

To be clear, from the numbers we can see, there is no indication that CMHC is badly run. It has come through the recession largely unscathed.

It’s profitable, funnelling $12.3-billion into government coffers in the past decade.

The balance sheet is sound. There is a big equity cushion ahead of the mortgages that CMHC insures, on average 45 per cent as of the end of 2009, according to the company. Capital levels are at two times the level that OSFI requires, according to CMHC.

In other words, if people start defaulting on their mortgages more often, there’s a lot of home equity and balance sheet capital to take the blow before the costs start falling on taxpayers.

At least, that’s what CMHC tells us. But it doesn’t tell us as much as it probably should. Public disclosure from CMHC is basically limited to financial statements in an annual report that, while audited by the Auditor General and a private firm, to lag behind the times. So far, there’s no sign of 2010’s final numbers.

From the point of view of the taxpayer, OSFI regulation of CMHC isn’t perfect. OSFI’s job is not to protect the shareholders of banks and insurers; it’s to protect depositors and policy holders. That means it wouldn’t be looking out for the taxpayers who own CMHC, but rather the people who bought insurance on their mortgages.

But given what’s at stake, more oversight is better than less, and OSFI is the best option.

So what do we conclude from this article?

The CMHC is making money, putting it in the government’s pocket, and there is zero risk to the general public?


Or perhaps if we saw anything but this bull real estate market that we’ve been blessed with in the past two decades, we might also see mortgage defaults and losses for the CMHC – meaning losses for taxpayers like you and me.

Meanwhile, in a completely unrelated story, the city of Glendale, Arizona is attempting to sell municipal bonds worth $100 Million to help Chicago businessman Matthew Hulsizer buy the Phoenix Coytoes.

Yes, you heard that right.

The City of Glendale is going to GIVE a man money to buy the hockey team.

Is that ridiculous, or is it just me?

Now I will be the first to admit that clearly I’m biased, since I’m a hockey fan, a Canadian patriot, and I consider myself to be a hockey historian.  The Canadian game of hockey was reduced from 8 teams in a league of 21 in the early 1990’s to 6 teams in a league of 30 at present.  An American lawyer, who has never played hockey, is running the National Hockey League, and he is determined to grow hockey in the United States, even though Americans in the south have routinely demonstrated that they have no interest.

The latest debaucle in Phoenix is insulting as a hockey fan and as a Canadian.

There are groups in Winnipeg and Quebec City that would bring an NHL hockey team to their cities tomorrow, if allowed, but down in Phoenix we’re seeing a city with a massive budget deficit try and raise $100 Million to give to a multi-millionaire businessman to buy the team!


Matther Hulsizer is going to pay $170 Million for the team, but the City of Glendale is going to give him $100 Million of that money!  The city is going to sell bonds to rais the money, and give it to Hulsizer under the guise that they would be paying him to run the arena over the next five years, and for precious parking rights that won’t bring in nearly as much money as they project.  After all – if they can’t get people to pay $10 to come watch a hockey game, how the hell do they expect people to pay $20 to park there?

I can’t believe that the Glendale taxpayers aren’t standing up and screaming “no.”

This whole situation makes no sense, and with no emotional attachment to the Phoenix Coyotes hockey team, how could the Glendale taxpayers be in favour of taking on such a monumental risk?

That’s why the Goldwater Institute – a federal conservative watchdog, has stepped in and tried to block the sale citing Arizona laws that prohibit government from “bailing out” or “propping up” businesses with handouts.

As I said – I’m hoping the sale doesn’t go through so that we can see this team move back to Winnipeg where it belongs.

But patriotism aside, doesn’t this situation seem ridiculous?

I’d like to think that our government is in place to protect us – the constituents, and work with our wants, needs, wishes, and promote our best interests.

Giving millions of dollars to a millionaire and potentially bankrupting the city is not in the constituents’ best interest.

Despite my seemingly off-topic rant, there are some parallels to be drawn to the article about the CMHC above.

The Goldwater Institute is stepping in because the City of Glendale has nobody watching them, and the city is free to do whatever it wants.

The article above surmises that the CMHC operates with no oversight, and thus things “could” turn ugly if we ever saw a bear market.  Canada’s main financial regulator does not oversee the CMHC, nor does the CMHC report to Finance Minister, Jim Flaherty.

Conventional wisdom would dictate the the CMHC would run hand-in-hand with the Finance Minister, and the author of this article calls for tighter regulations on CMHC actions.  I for one, agree.

As for the type of “risk” that the CMHC takes on, I might be less conservative than the author of the article and many members of the general public.  We’re a far cry from predatory lending practices that we saw in the United States during the 2000’s, and with the tightening of mortgage regulations over the last couple years (amortization periods and minimum downpayment requirements), I’d say much of the perceived risk has already been removed.

What’s next?  15-year amortizations and 20% minimum downpayments?

If that were the case, the CMHC wouldn’t be in business…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. Joe Q.

    at 10:54 am

    The main issue I have with the CMHC is that it has a side-effect of leading lending institutions to “moral hazard” situations (i.e. “we’ve got nothing to lose”). This was at play in the US housing crashes in the 1980s and 2000s — too much reckless lending that was ultimately back-stopped by the government.

    Not saying that this is common or even present in Canada today, but the possibility is there.

  2. Sam

    at 9:14 am

    2 major, major differences between Canada and the U.S. which limits the recklessness lending (at least in comparison to the U.S) :
    1. Mortgage interest is not tax deductible in Canada -therefore there is less of an incentive to load up on the biggest mortgage you can
    2. Mortgages in Canada are not ‘non-recourse’, if you ‘mail back the keys’ to the lender (i.e. walk away), they can and will come after your other assets…This is a moot point if you’ve lost your job and can’t pay the mortgage but in the U.S. you had people walking away from homes because they owed more than the home was worth -which simply made good business sense, if you could withstand the short-term hit to your credit.

  3. Peter Pan

    at 2:11 pm

    Sam, you’re missing the point… There are over 20 non-recourse states in the US… including Florida… That didn’t help their real estate prices, did it…

    Canadians swallow the myths manufactured by CREA that we’re “different and special” here…

  4. Peter Pan

    at 2:12 pm

    Sorry, I meant 20 “recourse” states, including Florida.

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