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Selling CMHC’s Insurance Arm – The Risks

jim_flahertyFinance Minister Flaherty’s purported desire to privatize CMHC in “five or ten years” (as reported by the Globe) set off a storm of debate Monday. And it wouldn’t be the first time he’s floated this balloon.

Even though the Department of Finance denied any immediate plans to sell off CMHC, pundits tussled over the idea’s merits.

To avoid breaking into a dissertation on government-backed mortgage markets, we’ll defer this time to Scott Barlow who said it best in the Globe:

…A privately owned CMHC would be too big to fail. Any period of heavy losses would force the government to step in to prevent an implosion of the Canadian housing market. And that could leave Canadian taxpayers on the hook for any losses.

Even if CMHC were to avoid trouble…to convince investors to buy in to an IPO, the government might be forced to deeply discount the Crown Corporation’s assets or offer explicit assurances that Ottawa would backstop defaults on existing loans.

CMHCIn short, the claimed benefit of selling off CMHC (reducing taxpayer risk) may not hold water.

In addition, such a move could foreseeably:

  • Trigger additional housing volatility, with all the myriad of economic ramifications
  • Reduce insurance coverage and housing options in smaller towns and rural areas
    (44% of CMHC’s total rental and high-ratio residential business is in markets that are inadequately served or not served at all by the private sector.)
  • Strip taxpayers of billions in annual CMHC profits
    (CMHC profits have cut the federal deficit by $16 billion over the last decade — although critics argue this could be temporarily offset by default losses—if such losses ever exceed CMHC’s reserves.)
  • Potentially jeopardize mortgage liquidity and hinder securitization programs
    (Smaller lenders rely on these programs to compete with the banking oligopoly, which in turn holds down mortgage rates and broadens mortgage choices for consumers.)
  • Lessen stability during real estate crises
    (CMHC stood strongly behind our market to stabilize it during the global crisis of 2007-2009. Would a shareholder-driven insurer have that same resolve?)

NDP Leader Tom Mulcair asked today: “Can the finance minister inform…all Canadians, why he wants to dismantle a 60-year success story at CMHC?”

Indeed, it doesn’t seem too much to ask for Flaherty to justify his comments—which have shaken a housing market that’s already suffering from a confidence problem. Surely millions of homeowners would appreciate the Minister’s take on:

  • What’s broken in the current system
  • Why privatization is the only fix
  • Why he and his regulator army cannot address the supposed problems without turning Canada’s internationally-acclaimed system on its head.

Barring convincing answers to these questions, the balance of evidence favours retaining the current system and reducing its risks. And the government has already been working overtime on the latter.

Rob McLister, CMT