Almost “Riskless and Costless” Lending

“Insured mortgage lending is almost riskless and costless to lenders.”—Finn Poschmann (Source)

Really?

This statement implies that lenders are getting a free lunch off the taxpayer’s back…that lenders reap all the profits and offload almost all their risk to unsuspecting Joe Sixpack and Grandma Millie.

Let’s examine that for a brief moment.

cost-analysis-mortgage-managementIn the first place, describing insured lending as “costless” is as amusing as it is perplexing. It’s quite difficult to launch and operate a successful underwriting and mortgage funding operation without:

  • A multi-million dollar upfront investment (sourced by people who expect to see their money back).
  • Significant capital (to be an insurer-approved lenderMBS/CMB participant, etc.).
  • Highly experienced personnel (with good reputations).
  • Ongoing expenses.

Such expenses become prohibitive if your arrears are abnormal and you get banned from securitizing (selling) your mortgages.

And riskless? Finn, if you want to see how riskless insured lending is, try:

a) starting a lender

b) underwriting poorly

c) incurring excess defaults

d) getting shut off by the insurers

e) going out of business and losing all or most of your capital.

Then write another column about how riskless your lender experience was.

Lenders have no shortage of incentive to manage exposure, keep lending and stay solvent—mortgage insurance or not.


See related: Skin in the Game


Rob McLister, CMT

  1. Not your best article. Obviously Finn is comparing the costs of insured lending to uninsured lending with that statement. It seems you are wilfully misinterpreting his statement to mean that lenders don’t have costs.
    Clearly the costs and risks involved in an insured loan are far less than those of an uninsured loan. Pointing to the cost of setting up a lending business as proof Finn is wrong is a red herring.

  2. Rob, Finn did say “almost” so I don’t think it’s fair to take him so thoroughly literally — think “relative to doing the same business without the benefit of insurance.”
    Don’t you think CMHC insurance heavily affected lending in the last decade, and potentially for the worse from a risk management perspective? Do you think major lenders would’ve competed so hard in rate wars in the past few years, while simultaneously begging the government for intervention, without easy access to bulk insurance? Now that the bulk insurance game has changed, wouldn’t you agree that behavior has already stopped?

  3. Hi LS,
    Housing finance critics don’t hand out “best article” awards to those who argue against their position. So I’m not surprised by your response.
    That said, your wilful misinterpretation comment is far off-base. Poschman’s comment, as written, was not limited or qualified and the response above was on point. I couldn’t disagree more on the conclusion that “costs and risks involved in an insured loan are far less than those of an uninsured loan.” They are obviously somewhat less on a per mortgage funding cost basis, but there are many other initial and ongoing expenses in the mortgage business. To say that insured lending is “far less” costly is an overstatement that misleads the public and ignores what lenders have on the line if they’re not prudent.
    On that last point, let’s not forget the context here. Poschman’s underlying and highly debatable argument is that a moral hazard exists (since lenders can offload risk on the hapless public and enjoy “almost…costless” lending). He misuses that “almost riskless and costless” argument to make his point.
    All the best…

  4. Hi MF,
    It’s easy to argue that “almost” is inaccurate, and it certainly doesn’t reduce the impact of his statement when read by a highly impressionable public in a national newspaper.
    To your second paragraph, the question is, did mortgage insurance encourage lenders to take unreasonable risks? The answer in general is no, and loan performance data backs that up.

  5. Do you mean the low arrears rate? That’s a lagging indicator and I think it’s several years too early to declare an outcome. Alternately, a renewal crisis (or regulatory changes to prevent one, such as continued artificially low interest rates) would support the moral hazard hypothesis without requiring high arrears.
    Without having to wait for that evidence, maybe we can agree on this: the lending business has changed character since spring 2012. The magnitude of the change appears qualitative, not just quantitative, meaning that its underpinnings are no longer the same as they were. I’m suggesting that the CMHC bulk insurance restrictions are a main cause; this idea is supported by the market changes seen *before* the oft-blamed 25-year amort limit.

  6. Poschmann is a researcher and media addict with no lending experience. He spouts off about CMHC every chance he gets, yet he has little understanding of how lenders actually lend.

  7. I am as far to the right on fiscal policy issues as it gets, I would legislate decertification of all government workers, teachers, nurses, the whole thing, I would ammend the charter to kick out all the labour gaurantees. So I have my right wing crazy bonefides in place but Rob is right on this CMHC issue.
    It would take me hours to teach all the elements of why the federal government should indirectly and profitably stay in the mortgage insurance business; cut to the chase: its just true. Poschmann is wrong, end of story.

  8. Prior to CMHC
    -Canadians had to have about 50% equity/downpayment to even get a mortgage…MAYBE.
    We all love history and Mr. Finn Poschmann, may consider a rewrite once he goes back and looks at the mortgage industry beginning in the 1900s and prior to CMHC.
    Taxes are collected for the common good of all, and CMHC helps Canadians.

  9. Say Rob;
    LS’s comment is a classic example of why I do not think that you should allow anonymous postings by those who would hide their name.
    Opinions ar eliike belly-buttons; everone has one. But if they don’t have the courage of their convictions to state their name, we should not have to read them..

  10. And the cost of a house would be incredibly lower under those circumstances. Great for FTBs and future generations.
    CMHC doesn’t provide affordable housing, they provide affordable financing. (paraphrased Ben Rabidoux comment)

  11. Yeah and while people save up that 50% down payment, no one would own til they’re 45.
    If people like you want to be perma-renters, knock yourselves out. But wake up and realize that your opinions on ownership do not match the Canadian population’s.

  12. My folks benefited from a CMHC insured mortgage back in the early 1960’s.
    $25,000 mortgage, payments $125 per month
    6% fixed rate for the whole 25 years. My dad worked at the Prison and made $5,000 a year.
    Mom was a teacher, and says that was a Big mortgage payment. Had CMHC not been around, they could Not have been homeowners.
    All food for thought. Eric Kingston Broker.

  13. Where did I give you my opinion on home ownership? It was an economic opinion. Jumping to conclusions is not a sign of intelligence.

  14. Hello,
    My name is Walter I am mortgage agent. I would like to learn more about sale and securitisation of mortgages.
    Kindly appreciate if someone can refer books or any other way of learning mortgage business.
    Walter

  15. Why play word games? Everyone knows what you meant by “Great for FTBs and future generations.” Your “economic” opinion is based on your home ownership opinion. Even someone without intelligence like me can see through your agenda.

  16. Everyone in their criticism of CMHC wants to throw out the baby with the bath water. CMHC is an entity that has made Canada a more stable residential real estate market than most in the developed world. People in all parts of Canada have access to default insurance, not just the major population centres serviced by the “for profit” insurers. CMHC does a lot more than insure mortgages. It helps export Canadian housing technologies, thereby creating jobs. It helps support social housing for those who need it. CMHC has stabilized & stimulated real estate & lending, and ultimately the whole the economy, during tough times (1980-81 & again 1991-92).
    Is CMHC flawless? Not a chance. Does it need major revamping? For sure. Have lenders abused CMHC? Damn straight they have. If you are broker/agent in business for the last ten years, you know there have been FIs that if they could slide a deal by CMHC they would do fund it. Did the FIs do a reasonable job of due diligence? Not a chance in hell. They were pounding the deals through as fast as CMHC could insure them. As a result of a lack of due diligence, CMHC & ultimately Canadian tax payers are on the hook for more money than they need to be. Read the attached link & tell me that all FI’s did the appropriate due diligence, yet CMHC paid out more than $1 million as a result of the actions of just these two fraudsters.
    http://www.canlii.org/eliisa/highlight.do?text=law+of+agency+and+mortgage+brokers&language=en&searchTitle=Search+all+CanLII+Databases&path=/en/on/onsc/doc/2012/2012onsc3511/2012onsc3511.html
    Our east coast brethren have a term, “A high tide floats all boats”. That economic tide is now ebbing & we are seeing systemic flaws throughout the mortgage system that need significant repairs. CMHC because of its federal government ownership is an easy target. However the brokerage community, & most importantly, the FIs have a responsibility to adequately fulfill their roles in the system.

  17. There have been stories of bank reps gaming CMHC’s emili system, but that is no way an epidemic problem. Whenever you have money involved, a small number of unscrupulous people will cheat the system. That doesn’t mean the overall system is broken.

  18. Oh snap, Rob! While I think that this can be analyzed a thousand ways, I agree that for the average reader that would simply read that and move on, it is very misleading, and does give the insinuation that insurance provides the banks to get profits with absolutley no risk to them whatsoever. I think your article was right on point, even though one sentence can always be beat to death.

  19. Ok you got me. My homeowner opinion is that all FTBs and future generations should be able to own a home without going into excessive debt. Oh, the horror.
    BTW – I bought in 1997 using MICC.

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