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New Light on Mortgage Exposure

Evan Siddall_CMHC CEOIf the housing market blows up, how much are we on the hook for as taxpayers?

That’s a question that housing skeptics have asked since the peak of the financial crisis. And in a speech yesterday, CMHC CEO Evan Siddall provided the closest thing we’ve seen to an answer.

CMHC has heavily invested in stress testing its default insurance business, he said. The agency has considered virtually all plausible doomsday scenarios (global deflation, lingering $35 oil, a 9.0-magnitude earthquake in Vancouver, etc.), and even non-plausible ones including a “zombie apocalypse,” Siddall jested.

The hypothetical disaster scenario CMHC settled on was a U.S.-style housing bust with a 30% national home price crash and a 500-basis-point surge in joblessness.

“Such an event would result in almost an eight-fold increase in insurance claim losses, from $1.7 billion to $13.2 billion over our five-year planning horizon,” Siddall outlined. “Our cumulative net income would go from a $7.5-billion profit to a $2.8-billion loss, again over the five-year planning horizon.”

Despite such a disaster, Siddall assured that CMHC’s remaining capital “would be well above our minimum capital target of 100 per cent…” as measured by the regulator’s Minimum Capital Test (MCT). It’s capital is currently at 337% MCT.

“…Since the government’s fiscal position has benefited from [CMHC’s] historic progress — $15 billion [of profit] over the past decade — it would have to absorb our losses in a stressed scenario…,” he added. But going forward, he hinted that lenders may have to shoulder some of that burden. “…We are exploring ways to share these risks (and profits and losses) more equitably in the financial system.” That could mean lender deductibles or perhaps something else.

[bctt tweet=”‘We’re exploring ways to share..risks (and profits/losses) more equitably in the financial system’—CMHC’s CEO” via=”no”]

The above data should comfort the market somewhat, albeit the devil is in CMHC’s assumptions. And, no doubt, CMHC’s biggest critics would probably rather hear stress test results from an independent auditor. But suffice it to say, Siddall seems like a straight shooter who is genuinely interested in keeping the dialog open about CMHC’s risk. He goes so far as to “invite criticism” from commentators on how the insurer can improve. That’s refreshing, and something his predecessor rarely did, at least not publicly.