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

  1. Crown corporation profits = a tax.
    Mortgagors could have saved 16 billion in the last decade instead of paying out to CMHC.
    I know, I know, you don’t see it that way.
    You are right to focus on this issue however. Private CMHC = much less securitization = diminished mono-lines.
    A private entity would not bother hedging the prepayment risk like CMHC does, they’d pocket that $$$.

  2. We all thought the big American banks were too big to fail too, yet some did.
    By privatizing it, they lose a little bit of the control they have on the housing market, and government intervention in the financial world is IMO what has kept our heads above water.
    Flaherty’s gotta go before we can no longer repair the damages.

  3. CMHC’s profits are not free money. Those insurance premiums comes with the explicit promise of the government’s backstopping. Most commentators naively talk about CMHC’s profitability without discussing $567 Billion of contingent liabilities. If CMHC is too big to fail, then it’s too big. Time to starve the beast and reduce it to a manageable size.

  4. When you start siding with the NDP on financial and economic issues, you should wonder if you’ve strayed away from sanity. You either believe in free markets, or you don’t. Funny how most people who describe themselves as free enterprise, just mean free enterprise for everyone else, while they benefit from government intervention.

  5. Spot on. How about we replace the CMHC with a tax on first time homebuyers? Then we can keep the benefit to our budget that so many people point to as a good thing.
    Thing is, CMHC is too big to fail. Instead of privatizing the behemoth they would need to split it up and sell of its portfolio. This also means a long and painful deleveraging of consumers as prices return to normality without the artificial boost from government stimulus. It would require some assurances and government backstopping, since no private company of sound mind would take on that risk for so little return. But it’s a transition. Better for some pain now than worse in the future.

  6. Borrowers wouldn’t save a dime. The law requires that high-ratio mortgages be insured. People would still pay insurance premiums. Not only that, they’d pay higher rates as mortgage competition withered.

  7. “CMHC’s profits are not free money.”
    What a meaningless statement. No one makes free money. It takes a business to make money and that is what CMHC is. CMHC is an insurance company and the best run insurance company in the country. I defy you to name another insurer anywhere that has the same degree of scrutiny as CMHC.
    By the way, your $567 billion figure is wrong. It is $576 billion. That is CMHC’s overall insurance in force. You’d obviously love people to believe that this $576 billion is all high risk mortgages wouldn’t you? That’s like saying Manulife’s $200 million of insurance exposure is all high-risk people about to die. You need an actuarial lesson, badly.

  8. They need to change their underwriting guidelines. I know of a property they insured up to 95% LTV and the property has an addition that is falling off. Yet no sub search for outstanding work orders from the building department and no appraisal required. Very shoddy underwriting.

  9. The NDP and Liberals care about preserving mortgage options for working Canadians. That’s more than I can say for the Conservatives.
    Your last statement doesn’t make much sense. It is clearly possible to have a regulated free market. The two concepts don’t have to be mutually exclusive.

  10. Do you know how many deals CMHC insures? Its crazy for you to say, I know of this one deal that the addition is falling off. Maybe you do, but that’s like saying I know this one guy in Toronto. Silly. And your shoddy underwriting comment would also indicate you have knowledge of default rates. If you actually had default rate knowledge, you would know that default rates are trending down and not up. Last, ask around to brokers and lenders if they feel there is some “shoddy underwriting” at CMHC, I’m pretty sure the majority would disagree with that and your whole point in your comment.

  11. If CMHC is too big to fail, then it is already too big to exist. I do not understand why the Government is in the business of insuring Mortgages to begin with. If the banks want to give out mortgages, they should also be able to enjoy the profits from the mortgages, and if they are able to enjoy the profits, they should be able arrange insurance coverage for any losses they might sustain. The presence of the CMHC makes a mortgage collapse inevitable at some point -because the CMHC is the main reason why banks are lending irresponsibly.
    If the CMHC is sold off, housing prices will be normalised,as opposed to being ‘bubblelised’, and everyone will benefit in the long-run.

  12. RBC is too big to fail.
    TD is too big to fail.
    Scotiabank is too big to fail.
    Several Canadian institutions are too big to fail.
    That doesn’t mean they will fail. That doesn’t mean they aren’t essential.
    If you don’t understand the purpose of CMHC take your own time and educate yourself. I recall this website having many informative articles that explain CMHC’s function.
    Your comments about the availability of private high-ratio insurance, an “inevitable” mortgage collapse and irresponsible lending are pure fallacy and indicate you have no grasp on this subject matter.

Your email address will not be published. Required fields are marked *

Copy link