Inside CMHC

CMHC CMHC is the biggest mortgage default insurer in Canada, and one of Canada’s biggest companies in general.

The federal government mandates that CMHC create policies to support Canada’s housing market. Yet, with home prices getting lofty, these very policies have been under the media microscope.

Most journalists analyze the default insurance market with the best of intentions. Due to a lack of publicly available facts, however, it’s become more common for the media to mischaracterize certain policies.  Recent stories from the National Post and the Globe made industry claims that left readers with a variety of unanswered questions. It therefore seemed logical (to us) to contact CMHC directly, pose these questions, and clarify from the source.

The primary goal was to learn about what happens behind the scenes of mortgage insurance, and share what we learned.  In the end, the information that follows gave us a much better sense for how insurer policies impact Canada’s housing market. 

Along the way, we were fortunate enough to speak with Pierre Serré.  Pierre is CMHC's Vice-President of Insurance Products and Business Development.  Below you’ll find the interview we did with Pierre, sprinkled with “side notes” (the stuff in italics) that we collected throughout our research.

Inside CMHC

  1. I want to express our appreciation again to CMHC for being so forthcoming with the information requested. I’m sure we took a lot of their time with all the people involved. At the end of the day, it was a beneficial exercise and we obtained a lot of good info throughout the process.
    Have an excellent day folks…

  2. Great in depth interview with details that would never make it into the G&M or FP. As I would expect, Pierre’s answers were a little guarded. Great explanatory side notes.

  3. Good job Rob. I find it amazing that Canada’s default rate was only 1% while rates were exploding in the early 80s. 1% sure pales in comparison to the 10% default rate down in the U.S. right now.

  4. So… we’re all putting $600B+ of our Country’s money at risk based on this “sophisticated electronic platform (emili)” that was written more than a decade ago.
    Hmmm – isn’t the housing market essentially on a 10-year bull run? I wonder how accurate ’emili’ will be when the bubble pops and all of the risk models are proven invalid because they assume that house prices will always rise?
    This was actually a real story in the US: one of the wall street banks was using a risk modeller that assumed house price growth was always positive! (the algorithm was taken from some University of Waterloo grad student paper) Look it up – I’m not joking.

  5. Interesting story guys. I was stunned by the inaccuracies in the Post article so it is good to see some facts come to the surface. The media really needs to check more sources before writing about mortgage issues. I find that there are constant misprints in the papers, not just about CMHC insurance, but about rates, terms, policies, etc.

  6. Insurers are actuaries. All they do is sit in a dark room all day and think about worst case scenarios. You can be sure as day that emili and its models are state of the art.

  7. @JV: I’d believe you, if CMHC was actually an insurance company. This interview clearly states that they are not. At this point, they are essentially an arm of the Conservative party, with the sole purpose of dousing the flames of the housing market as much as possible to make people think they are rich and the economy is “growing” and that Harper and Flaherty aren’t ruining the country’s finances.
    CMHC was supposed to be for niche/fringe buyers to get into the market… now it is backing THE ENTIRE HOUSING MARKET (over 60% of new mortgages I believe).
    It’s all out of control, and CMHC is too caught up in believing their out-dated mission statements from pre-bubble times (“we want to make housing affordable for Canadians”) to see that they’ve become the smoking gun in the pending death of the Canadian real estate bubble.

  8. whoops – mistyped one statement:
    “dousing the flames of the housing market”
    should read
    “pouring fuel the flames of the housing market”

  9. Hi Simon:
    We thought the default figure would have been higher as well. Rates exceeded 21% in 1981. The cost of carry back then was considerable.
    Hi T.O.:
    A large part of CMHC is, in fact, its insurance operations. CMHC earned $1.5 billion in insurance revenue last year, which is a huge number.
    Regarding comments about the motives of political parties, government “agendas,” etc., it’s kind of like debating religion. It leads to futilely emotive arguments that are beyond our scope. Instead of jumping on that merry-go-round, it’s far more constructive to state verifiable facts, and examine them one by one.
    We respect that you may have different views, but I think your characterization of CMHC’s purpose is not really fair. There are good reasons why Canada’s housing finance and securitization systems are the envy of industrialized nations. CMHC has a directive to support Canadian housing and operate in a risk-controlled fashion. The people behind its helm are far more cognizant of downside exposure than most of us could ever hope to be. Indeed, I suspect the very last thing CMHC wants is for its policies to affect home prices adversely. You can be certain that they monitor every crevice of the housing market daily with this in mind.

  10. Great article on CMHC…any thoughts on whether the Canadian government would ever level the playing field with other mortgage insurers (ie Genworth) and provide the same guarantee (100%) in the event of a default? I worry that by guaranteeing the CMHC mortgages 100% distorts the market and we don’t want to see a Fannie/Freddie problem in Canada.

  11. @ Rob:
    I will respond without any tie-ins to Harper/Flaherty (even though they control the direction of CMHC and other related programs such as IMPP).
    Let’s just look at a couple of these statements:
    “CMHC earned $1.5 billion in insurance revenue last year, which is a huge number.”
    $1.5B may seem “huge”, but it is 0.25% of the $600B in total mortgage dollars that are potentially at risk. Even if you just consider the $150B in new mortgages from 2009, for that is a 100-to-1 leverage ratio!
    And – in terms of directive:
    “CMHC has a directive to support Canadian housing and operate in a risk-controlled fashion.”
    I agree with the overall objective of CMHC. The very fact that they’ve existed for 50-60 years proves that they provide a neccessary service.
    However, my issue is that CMHC has strayed from its stated goal. At this point, CMHC is backing 50%-60% of all new mortgages. If 50%-60% of all new home buyers fall into the category of “requiring additional support outside of traditional mortgage financing”, something is seriously wrong with the RE market.
    From my perspective, CMHC’s vision has changed from “helping homebuyers just outside of the traditional market” to “helping the majority of new homebuyers across the entire market”.
    In my opinion, the extreme growth of CMHC has flipped the market upside down: now, it is the exception when a buyer can actually afford the home purchase based on traditional metrics (i.e. 20%-25% down). Having the majority of the real estate market driven by “fringe” buyers is not healthy.

  12. # T.O Resident,
    you are the only voice of reason in this forum. if anything Canada has become a subprime nation…Time will prove you right. If the mission of CHMC was to make housing affordable in this country, it has failed miserably…
    [Edited: Albanel. If you choose to impugn an organization on these forums, please back it up with verifiable facts. Otherwise it adds nothing constructive to the debate. Thank you for your understanding.]

  13. @ albanel:
    Thank you… it would be nice if the facts spoke more clearly for themselves, but apparently many people believe that “all growth is good growth”.
    I am a homeowner in Toronto, and in theory I am benefitting from this bubble. However, the short-term gains on paper are nothing compared to the long-term pains that most Canadians will face over the next 2-5 years because of what is transpiring right now.

  14. I agree with everything you’ve said T.O. Resident, just look at the CMHC insured mortgages by year – speaks for itself.
    2005…$46,001,515,493.69 2006…$58,446,930,419.30
    2008…$144,972,174,910.62 2009…$189,000,000,000.00 EST
    Source PDF was but no longer works.

  15. To T.O.
    Your facts are incorrect.
    CMHC does not have $600 million of insured mortgages outstanding. Moreover, the premium-to-mortgages outstanding ratio is reflective of Canada’s miniscule default rate and does not take into account CMHC’s “unrealized premiums” and significant capital reserves.
    Your percentage of mortgages insured is also misleading because CMHC insures a large amount of low-ratio mortgages just for securitization purposes.
    The average mortgage and average loan-to-value in Canada is very low. Fringe buyers, as you put it, do not control the market.
    The comments you make are a perfect example of how misinformation muddies the waters.
    I would urge you to research the issues in depth before commenting in public forums.

  16. @ T.O. Resident – Honest question: why do you think “traditional metrics” (i.e. 20-25% down) are necessary? You’re doing exactly what Pierre Serré implied was foolish: attempting to evaluate risk based on one factor alone.
    Characterizing, for example, someone with high income and a stable job that puts down 5-10% as a “fringe buyer”, is divorced from reality, IMO. Home ownership is not for everyone, but it’s also for more than just the very wealthy or middle aged.
    Renting sucks, quite frankly. It’s all some people can afford, but you’re at the mercy of a landlord, you usually have very little control over your own space, and if you’re like most renters and live in an apartment building, you have to share walls with up to 5 sets of neighbours, at least 2 of which will be incredibly noisy. I have no desire to subject low-risk individuals to renting for any longer than is absolutely necessary.
    Al R

  17. CMHC’s mortgage insurance limit was raised to $600B earlier this year, after they blew past the previous $450B limit.
    I believe that they currently stand around $500B. So, my $600B stat is maybe a couple of months early. Unless the entire market collapses, CMHC will have $600B in taxpayer dollars at risk in early-mid 2010.
    I actually AGREE that home ownership is not just for the very rich / middle-aged… which is exactly why the current market bubble must pop. The market will simply run out of buyers who are willing and able to throw $800k or more at a basic 3-bdrm house in Toronto or Vancouver.
    No matter what metrics you use, 5% down = at risk of being underwater with even a minor market correction. Calling a 5% down homebuyer an “owner” is actually a lie, because the 5% equity is a mirage: realtor commissions alone would eat up the 5% if you sold.
    If you don’t want to go by just the down payment metric, how about a few others…
    – Price to Income ratio: now higher in Canada than it was in the US at the height of their bubble.
    – Price vs. Potential Rental Income on the same property: rental incomes cannot cover the costs of owning
    – Affordability: given that interest rates are as low as they can possibly be, mortgage costs can only go up, so any home bought today will automatically be less affordable in the future. The only argument against this is if incomes rise faster than interest rates, which is impossible since even a small 1% interest rate increase on a 4% mortgage (4% –> 5%) would equate to almost a 15% increase in payment amount. There is no way incomes would rise 15% by the time that happens.
    And – just because renting sucks from your perspective, this doesn’t mean that “owning” is any cheaper (in quotes because the bank actually owns most of the home). The economics support renting as the better financial decision.
    When a $400k condo in Toronto rents for $1500-$2000/month, no one can make those numbers work.
    Even using 5% down/35-yr amort./4% mortage rate:
    Mortgage on $380k = $1675/month
    Condo Fees = $350/month
    So, you’re already over the $2000 you’d get in rent, and I haven’t even thrown in:
    – CMHC fees
    – Insurance
    – Property Tax
    – HST and other future increases to condo fees
    – Closing Costs
    – etc.
    Plus – the rental income is taxed! (I know that there are write-offs, but that doesn’t cover everything)
    It’s rather ironic that you’d compain about my “traditional metrics” when it appears the only statistic you’ve provided is “renting sucks”.

  18. From what I understand, our definition of foreclosure is more closely related to the U.S. definition of ‘Foreclosure Process’ than to their ‘Delinquency Rate’
    Here’s a chart comparing the two in the U.S. :
    Note, these US stats are are for people one month behind on payments, as opposed to the Canadian arrears that are three months behind… and as the 3 month mark is when foreclosure proceedings typically start, our arrears figures have more in common with the US foreclosure numbers for comparative purposes.

  19. @ T.O. Resident – You’ve misread my comment. I didn’t say renting never made economic sense in some cases. I’m saying that there is little reason to lock qualified, low-risk buyers out of the market because that’s how it used to be done in the old days.
    It seems like the housing bears haven’t put thought into what specific level eligibility thresholds should be pegged at – only that they be stricter. I’m fairly certain the small army of housing analysts, economists and actuaries that CMHC has at its disposal is on top of this.
    The metrics Pierre Serré noted in the interview are sensible, and based on risk models. In contrast, I don’t quite understand some of your proposed alternative metrics. An individual shouldn’t get a loan because the overall market is overpriced, in your opinion? That will be comforting to the guy in Moncton who can’t get a mortgage because Torontonians are engaging in ridiculous bidding wars.
    People should have to put 25% down because interest rates can only go up? I’m not sure that was quite what Mark Carney had in mind…
    Al R

  20. Those metrics were meant to indicate that houses are overpriced, not as credit qualifications to get a mortgage.
    I do not believe that everyone should have to put 25% down, but 5% (or 0% in 2006-2007) is too low. As I pointed out, 5% down guarantees that the “owner” is in an underwater position when he/she starts the mortgage since that 5% equity is less than commissions + closing costs if the property was sold. Even raising the minimum down payment to 10% would bring some much needed stability to the market, and avoid underwater mortgages and speculation in general.
    Now, I don’t see how you’ve linked the argument for higher down payments (i.e. that buyers should have some skin in the game to avoid speculation) with Mark Carney and interest rates… interest rates are obviously tied to the affordabilty argument: if rates are as low as they can possibly be today, and someone barely qualifies to get a particular mortgage with those record low rates, there is a siginificant risk to that same person not being able to afford the same mortgage in 5 years when it is up for renewal.
    I’ll stop commenting now, because it’s apparent that any opinion that isn’t pro-CMHC and anti-bubble is considered invalid on this site.

  21. T.O resident
    A hero is someone who can hang on one second longer than the others. It is not easy to keep your spirits in the middle of this insanity that is real estate in Canada. But time will prove you right. hang on there.

  22. T.O. Resident – Your anti-CMHC comments have received incredibly fair play on this blog site… especially considering that they are largely purely emotional reactions backed by highly selected information to support your point of view.
    The authors of this newsletter have made a real effort to be even handed, even perhaps to a fault. Because of the in-depth nature of this dialogue it would be easy for the casual reader to get the impression that your opinion IS the prevailing wisdom, which is far from the truth.
    Canada’s CMHC backed national housing market was virtually the only national housing market not destroyed by the collapse of the international bond markets last year – because of the NHA and CMHC.
    The lack of a similar program or insurance fund for construction and middle level commercial financing means that our national commercial and construction loan industry is at about the same levels as other international countries – a disaster.
    The will of a nation to make home ownership a priority has paid big dividends to Canadians, and to our economy and reputation as a whole.

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