CMHC Corrects Two Critics

CMHCCMHC has called out both David Madani (Capital Economics) and Finn Poschmann (C.D. Howe) for questionable statements they made over the past few weeks.

CMHC’s response to Madani

CMHC’s response to Poschmann

CMHC’s responses, made Friday, countered various critical points made by Madani and Poschmann in their reports.

Among other things, CMHC stated:

  • The Canadian mortgage model “withstood the test of the economic downturn, when housing markets in the U.S., United Kingdom, and Ireland failed.”
  • “The average home equity within (CMHC’s) insurance portfolio is 45%” (“That’s a far cry from the five per cent or less that has been widely — and wrongly — reported in the media,” said CMHC President, Karen Kinsley, in this November speech.)
  • CMHC “operates at no cost to taxpayers” and, in fact, has earned $12 billion for Canadian taxpayers over the last decade. (This is after setting aside the necessary reserves.)
  • “CMHC has almost twice the minimum level of reserves” required by OSFI, Canada’s federal financial system regulator
  • Using foreign insurers to diversify Canadian default risk has “inherent risks” (This became clearly evident during the recent credit crisis when private insurers pulled back from, or out of, the market.)

Karen-Kinsley-CMHCCMHC VP of Policy and Planning, Douglas Stewart, also referred to these comments made by Kinsley in November (our comments in italics):

  • Housing represented over $307 billion in spending in 2009, about 20% of GDP.
  • “Canada, unlike the U.S. for instance, does not have an explicit policy goal of increasing the rate of homeownership. Rather, we encourage the availability of housing across a variety of tenure types.”
  • CMHC’s Canada Mortgage Bond program promotes “competition among a wide range of lenders, helps keep interest rates low and supports innovation, leading to more choice and price competition for Canadian borrowers.”(Without the CMB, Canadians could immediately say goodbye to several non-deposit-taking Canadian lenders—each of which competes effectively for homeowners’ business, thus keeping the banks in check.)
  • Canadian lenders have “a strong financial interest in ensuring the borrower doesn’t take on excessive risk that they can’t handle.”(Here is our recent story on this topic.)
  • “In the event the borrower does run into difficulty,” lenders are responsible for “employing all reasonable means — including the related costs — to help bring or keep the loan current before seeking any payment from CMHC if the loan was insured.”
  • “Research consistently shows that Canadians are working hard to pay off their mortgages: half of (CMHC) insured borrowers consistently make some form of accelerated payment.”
  • CMHC’s “latest stress testing results concluded that when applying all 10,000 economic scenarios, combined with plausible adverse business scenarios, CMHC had a less than one half of one percent probability of insolvency.”(A less than 1 in 200 chance of insolvency is reasonably acceptable, even for a major mega-catastrophe insurer, including huge property/casualty companies who insure against random multi-billion-dollar risk exposures [such as hurricanes for example])
  • “CMHC is the only mortgage insurer that serves our large rental market, the financing of nursing and retirement homes, and often is the only insurer approving applications in rural and remote areas of the country. In 2009, close to 40 per cent of CMHC’s mortgage loan approvals were in these areas.”
  1. This debate is philosophical.
    What is the purpose of government supporting mortgage lending? Individual circumstances will dictate individual answers.
    The Canadian discussion, if there’s actually a discussion, is occuring against the backdrop of Obama proposing to wind down Fannie / Freddie. This should influence our government.
    “What’s the best way for Canada to manage 1 trillion+ in residential mortgages?” is a better question than “is the CMHC worthwhile?”

  2. The problem that no one is addressing is that because of CMHC housing is now unaffordable for many people. By propping up the housing market prices have inflated to an unsustainable level. Without CMHC house prices would be much lower.

  3. What is wrong with higher home prices? People who own property want prices to go up. Is that somehow news to people??
    I just can’t understand the logic of people who hope home prices fall, at the expense of millions of other homeowners.
    My other beef is that you make it sound like CMHC is the only reason prices have risen. The #1 reason home prices go up is demand for housing, plain and simple. Yes, 35-40 year amortizations have boosted prices but that is not the main cause of higher prices over the long run.

  4. Jeff,
    A couple of questions for you,
    What do you think is the main cause of higher prices over the long run?
    And what do you think qualifies as “the long run”?

  5. CMHC is a taxation system. An unfair taxation system – as the American’s would say that is taxation without representation.
    They generated $1.2 billion per year for the past 10 years for the federal government.
    “CMHC “operates at no cost to taxpayers” and, in fact, has earned $12 billion for Canadian taxpayers over the last decade. (This is after setting aside the necessary reserves.)“

  6. Ladies and gents,
    $12 billion of profit in a decade for the size of CMHC’s insurance portfolio is pathetically low.
    Don’t think so? Genworth makes $440M annually on a book of business that is a fraction of CMHC.
    Profit is hardly a validation for CMHC. Next.

  7. So, which one is it?
    Is a ‘low’ profit level an indicator that the CHMC is not providing a good return? If so, comparing them to Genworth (a private corporation that gets to pick and choose the best apples from the bin) is not particularly relevant.
    Or is profit not a validation of the CMHC? If it’s the latter, it makes the previous question/assertion irrelevant.
    There are getting to be too many uninformed agendas in the comments sections recently – on both sides of the equation.
    It’s always a balance on internet sites, but this is starting to become more of a personal sounding board and less of a discussion.

  8. You are profoundly misinformed. $12 billion + reserves + all the revenue retained for housing programs is not low at all given CMHC’s mandate. Furthermore, comparing CMHC to Genworth is ridiculous because Genworth doesn’t reinvest billions in Canadian social initiatives. The least you could do is read CMHC’s annual report before you pretend to know something.

  9. Finally, a well informed and intelligent post. I might also add, CMHC’s mandate has never been to maximize profit at the expense of homeowners. Also, whenever CMHC has made excessive profits, they reduced their insurance premiums rates. Something Genworth has never done to my knowledge!

  10. There are many elements that contribute to the cost of housing, both on the supply and the demand side of the equation. For the purpose of this discussion I will only address those that relate to the influence of government backed institutions, government departments, provincial initiatives, and municipal regulations and processes.
    The federal government has its hands all over residential housing. CMHC, Genworth and Canada Guarantee mortgage insurance is directly backed by the Department of Finance, and the CMHC mortgage bond program is backed 100% by the Federal government as well.
    In addition to the direct action in the market as outlined above the Federal government is indirectly involved through its ownership of CMHC as well.
    It is difficult to overstate the importance of government back insurance in maintaining an orderly residential housing market, however, to say that it is the cause of high prices is a little bit of an overstatement, since it could be equally stated that it prevents the overheating of the marketplace, and the overbuilding of new housing by tightening the rules when necessary to prevent this rise. Sometimes restrictions of mortgages backed by the government insurance providers is directly responsible for declines in the value of property, which may indeed be happening now is some parts of the Canadian marketplace.
    However the federal government is not the only playing involved in increasing housing costs.
    In BC the property purchase tax adds direct purchase cost every single time a property exchanges hands. This tax slows down the amount of sales for speculative buyers, because of its ability to wipe out fractional gains, and may actually act as a brake on higher values from supply/demand point of view, at the same time as it increases costs directly.
    Finally, at the municipal or regional level, land use is controlled by local governments through a combination of zoning and building permits. I personally believe that local building rules and zoning have far more impact on home prices than any other factor.
    Land is not scarce, however, zoning and building permits make land that can be used for residential housing scarce and expensive, by the time that builders have the numerous fees that the local authorities demand, and gone through the huge delays and time required to get zoning approval and building permits.
    In summary, the cost of housing is influenced by government, at every level in Canada. The influence of government is neither necessarily benign nor malicious, it simple is. Does it drive up the cost of housing… OF COURSE! Does it slow down the increase in the cost of housing…sometimes.
    It is seldom a simple equation.

  11. >>> What is wrong with higher home prices?
    What’s wrong with higher shelter prices? The same thing that is wrong with higher food, clothing, or heating prices. These are basic necessities, the cost of which shouldn’t rise faster than average incomes.
    I agree CMHC wasn’t the only cause of the bubble in shelter prices. But the fact CMHC had any role at all in helping sustain and grow that bubble is shameful.

  12. The CMHC has been drinking Jim Flaherty’s “Financial Punch” Koolaid.
    *Banks don’t care if customers pay back their mortgages since the CMHC is on the hook if they default. This inept policy increases prices, which only benefits sellers, realtors and the government. If CMHC didn’t exist, home prices would be more affordable all around. In this regard, the CMHC implicitly raises home prices, which is the exact opposite of it’s mandate.
    * Canada has tried desperately to increase home ownership with government policies like the $0-down/40-year mortgage. If prices correct (which is all-too-possible in our hyper-inflated housing market), a huge swath of recent buyers will be underwater. Can you say “sub-prime”?
    * Operates at no cost to the taxpayer? How about we stop paying salaries at CMHC before we make such a ridiculous claim?
    * The CMHC Mortgage Bond Program does not foster competition and lower rates. Customers have to beg for better rates and the BoC sets interest rates nationally. Period.
    * Average incomes can no longer afford average houses in most Canadian city centers, thanks to ridiculous policies that have driven up prices exponentially in the last 5 years. CMHC helps home-buyers with this…how…?
    * Where exactly did that $12-billion “profit” go???

  13. theletterM,
    Respectful viewpoints are always welcome. Please note, however, that critical claims must be properly supported. Facts help readers get to the truth faster than opinions. Many of these statements are groundless in that you provide little fact to substantiate your positions.
    Assertions of this nature have been made many times before and, with respect, add little quality to the debate. In deference to informed readers, future comments along these lines will not be published without at least rudimentary support.
    Regarding: “Banks don’t care if customers pay back their mortgages since the CMHC is on the hook”
    That is wholly inaccurate. See this for an explanation of lenders’ aversion to defaults.
    Regarding: “Can you say ‘sub-prime'”
    Here is a definition of sub-prime. Insured mortgages are the furthest thing from sub-prime because borrowers generally have good credit, are low default risk compared to “sub-prime” (compare the CBA’s prime mortgage statistics to a typical sub-prime lender’s default ratio, for example), and must meet firm underwriting standards (regarding TDS, Beacons, equity, employment, etc.).
    Regarding: “How about we stop paying salaries at CMHC”
    CMHC’s salaries are offset by its income.
    Regarding: “The CMHC Mortgage Bond Program does not foster competition and lower rates.”
    Certain lenders would not exist at all without the CMB. In addition, major banks would not be able to lend as cheaply without the CMB because securitization diversifies their funding. By default, this and other CMB benefits keep rates much lower than they otherwise would be, with no government subsidies.
    Rob

  14. Now I’ve heard it all.
    *Saving this and every other article so that in a year from now I can call out those who deserve it most.*
    The CMHC is in large part responsible for our current housing bubble. F’s 40yr mortgages are another huge factor. Open your eyes people! That bubble is about to burst. Hang onto your pants!

  15. I guess if home prices fall 15% you’ll blame CMHC huh, as if there has never been a price correction in real estate before? How dumb. There should be a mute button to block certain people.

  16. I agree. There’s so much nonsense floating around these days about CMHC that it’s just astonishing how little people understand. I actually ran across some posters who think CMHC insures B-segment mortgages! The ignorance out there is just unbelievable!

  17. That’s funny.
    You know what else is funny?
    People who praise the competitive benefits of multiple players in mortgage lending, but prefer the gov’t be the single player in mortgage insurance because this fulfills a “mandate” and because a few bucks are put into seniors homes and Native reserves.
    It would be refreshing if we just said “…the CMHC is the reason I make my living – period.”

  18. Isn’t the CMHC mortgage portfolio totally comprised of borrowers who cannot obtain conventional financing at a chartered bank or equivalent?….for whatever reason.
    Inherent therefore is a higher risk factor and a commensurate insurance fee attached.
    Why wouldn’t the CMHC and the federal government simply allow the canadian lenders to do the same – charge an insurance fee AND accept all the inherent risk while bundling their mortgages (with whatever fancy name) and market them to whomever?
    Probably not socialist enough for the capitalistic Ed Clark at TD.

  19. “The average home equity within (CMHC’s) insurance portfolio is 45%” (“That’s a far cry from the five per cent or less that has been widely — and wrongly — reported in the media,” said CMHC President, Karen Kinsley, in this November speech.)
    Right, but I am sure the people who are most likely default are the once who have the least equity hence the potential losses are much greater than this statement assumes. If real estate values decline that 45% equity will quickly disappear. It would be interesting to see the breakdown of mortgages that CMHC has with regards to interest rate sensitivity.

  20. ” 45% equity will quickly disappear ”
    Ya okay buddy. Let me know when that 45% market crash is coming so I can sell my house beforehand.

  21. Did I say anyhere anything about a crash? I guess you have been drinking kool aid and read fairy tales that real estate prices always go up. Real estate in Canad has corrected before and that scenario is possible. No asset class is immune to corrections especially one that is highly driven by leverage and ability to borrow.
    I am sure that 45% equity is part of the real estate price gains which I would say you probably need less than that to wipe out the equity. Obviously you must have a hard time with math. So lets say somebodys property went up 30% in 3 years. You would only need a 22% haircut to get close to the original amount and don’t forget the person would face closing costs if they were going to sell th property.
    Look at the real estate prices around the world they have corrected eventually. One thing is for sure high house prices are detramental to the economies in the long run, especially once that derive they GDP from personal consumption.
    The future household faces higher food prices, gas prices, utility prices, interest rates, taxes and you could go on and on.

  22. So CMHC is the reason house prices have gone up? That is laughable and like saying your local grocery store is the reason the price of bread has gone up over the years. To blame it on an insurer is shallow. There are numerous factors that contribute to housing price increases.

  23. Chet,
    Can you outline some of those factors?
    Would lower mortgage rates (due to insurance) and greater amounts loaned (due to longer amortizations covered by said insurance) qualify as two of those factors?
    Why is it that when someone suggests that the expansion of the CMHC over the past 10 years has contributed to the higher prices over the past 10 years, the most common counter-argument is that the mere suggestion is “laughable” or “ignorant” or “shallow”.
    Purchasing real estate is the biggest single financial event in the lives of most Canadians. Doesn’t the role of the CMHC merit careful discussion and review? If it is so obvious that the CMHC provides nothing but benefit, with no drawbacks whatsoever, then it should be simple enough to prove that.

  24. I’m not sure Chet said anywhere in his post that “CMHC provides nothing but benefit, with no drawbacks whatsoever”. For someone that complains about people misrepresenting arguments…
    Most reasonable people would agree that CMHC is one of a number of factors that drive housing prices. Some are fixated upon their role, to the exclusion of other factors (e.g. interest rates, preference for housing, wage growth, employment rates, urbanization, et cetera).
    You seem to be implying that the role of the CMHC isn’t subject to careful discussion and review, but it certainly doesn’t operate without the benefit of oversight, as the Department of Finance has recently demonstrated. They submit annual reports to Parliament, and have their books audited by both the Auditor General of Canada and Ernst & Young. It even won an award from the Canadian Institute of Chartered Accountants (CICA) for excellence in corporate reporting for large crown corporations.

  25. Has anyone else noticed the uptick of extremist views and misrepresentations expressed on this site readers since Mr. T (I pity the fool) Turner, featured this site in his blog a few weeks back? Its like a cult invasion of Mr. T. muppets!
    Since when is capitalism, asset appreciation, low interest rates or high home ownership bad for a society? Maybe its whenever a person sees fit to blame others like CMHC, banks, RE market or low interest rates for their own shortcomings? Just calling it as I see it!

  26. The expansion of the CMHC balance sheet 2000-2010 has tracked the movement in housing prices during that same time frame.
    To clarify – one can talk about a car in the context of its position, its speed, and its acceleration.
    The changes of the CMHC over the past 10 year (removing the limit on the maximum insurable mortgage, lower down payments, longer amortizations) have increased the borrowing power in the marketplace. I equate that increase to the acceleration of a car.
    The acceleration has allowed the market to offset other drags which might have slowed it.
    Now, in the past year, borrowing power is no longer increasing, and indeed has been reduced slightly due to the recent pullbacks.
    From my layman’s perspectve, it seems reasonable to consider how this absence of acceleration (and indeed deceleration) will affect the market.
    As I noted in my prior post, why is it that raising this topic for discussion is greeted with such scorn? I’m always amazed at the ability of others to undertake complex psychoanalysis based upon only a few internet posts
    Although I admit that if one can’t debate the argument, ridiculing those with the different opinion is a time honoured tradition.
    “Resort is had to ridicule only when reason is against us.”
    Thomas Jefferson
    In any event, time will tell. Perhaps I should just take a hint, and move along to other forums.

  27. I’ve noticed the same. It seems fact and logic are little match for Turnerites. Fortunately they don’t have the home field advantage here.

  28. Dave,
    Inflation. Sounds basic but prices go up.
    The economy. In Alberta, Calgary in particuliar prices went up because thousands of people were moving their weekly and they wanted homes.
    As Al R said there are many reasons.
    If CMHC was not there are you saying prices would not have gone up?
    We have seen a pull back in some prices in some markets and may see more but I really don’t see a crash happening that the doomsdayers have been talking about for years…

  29. “What is wrong with higher home prices? People who own property want prices to go up. Is that somehow news to people??”
    When home prices (actually, price-to-income ratios) become excessive, the cost of servicing mortgages goes up and tends to choke off the rest of the economy.

  30. Yes but what is “excessive” and what is just natural market value.
    The wealth effects of higher home prices completely offset the mortgage payment effect. The proof of this is that people spend the same percentage of income on mortgages today as they have for 30 years, despite prices being at record highs.

  31. The reason people pay the same fraction of their income for their mortgages is because of low interest rates. If they go up to 7-8%, do you think your statement will still hold?

  32. There is zero chance rates will jump 7-8% in the next decade. Economic growth and inflation won’t justify 10% prime.

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