The CMHC: Canada's mortgage monster -

The CMHC: Canada’s mortgage monster

The CMHC is a driving force in the housing market. But critics warn its policies could fuel a U.S.-style meltdown.


David LePoidevin isn’t the first person to suggest Canada’s roaring housing market is headed for a U.S.-style crash. But he is a rare breed of money manager for daring to point a finger at the Canada Mortgage and Housing Corporation, the country’s biggest mortgage insurer. In a fall 2009 note to his clients, LePoidevin questioned what was underpinning the country’s skyrocketing home prices, aside from rock-bottom interest rates. “The stock market was sure not providing huge capital gains to the masses,” he wrote. “Did the banks all of a sudden open up the lending spigots? In fact banks have actually reduced the number of their mortgages held from the peak of third quarter of 2008. The smoking gun is the CMHC and its securitization policies.”

As mainstream economic commentary in Canada goes, it was damning stuff. And it provided ammunition to critics who argue the Crown corporation’s policies have inflated a housing bubble. The CMHC is arguably the most influential player in Canada’s $1-trillion housing market. Its main function is to provide mortgage insurance for prospective homeowners who put less than 20 per cent down on their houses, protecting the banks in the event of defaults. The CMHC also helps to spread risk by finding investors to buy CMHC-insured mortgages that have been pooled together into so-called mortgage-backed securities. All of this is guaranteed by the government.

Almost immediately, LePoidevin’s bosses at National Bank leapt to the CMHC’s defence. In a letter to an Ottawa newspaper that had referred to the commentary, co-chief executive Ricardo Pascoe said the Vancouver portfolio manager’s views were “personal” and “do not reflect the views of National Bank Financial Group.” When reached by Maclean’s, LePoidevin declined to talk about the public rebuke or the CMHC in general. A National Bank spokesperson justified its actions, saying the company “felt that the commentary was treading on social and political issues.”

The apparent unwillingness of the country’s sixth-largest bank to challenge the CMHC is curious given the role similar U.S. institutions Fannie Mae and Freddie Mac—quasi-government agencies that securitized mortgages—played in the U.S. housing crash. But it’s far from unusual. Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack. One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.

Even worse, the public knows next to nothing about what lurks inside the CMHC’s books, aside from the smattering of details it releases in its annual report. And, unlike every other major insurance provider in the country, the CMHC doesn’t answer to Canada’s top financial services regulator. It falls under an amalgam of government acts and departments, including Finance and Human Resources, while also working with the Bank of Canada. Yet on specific decisions that dramatically loosened mortgage lending rules last decade, CMHC officials have testified they did so on their own with the approval and oversight of the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional.

It all raises troubling questions about the agency, its oversight and, ultimately, the health of the country’s frothy housing market, a key driver of the Canadian economy. And, as LePoidevin found out the hard way, asking hard questions seldom yields satisfactory answers.

Since taxpayers, through the CMHC, and not the banks are ultimately on the hook in the event of a housing crash, a growing chorus of critics has been calling for more transparency and oversight, if not outright reform. Stephen Jarislowsky, a billionaire Montreal investor, says home prices are likely overvalued by as much as 20 per cent in some Canadian markets thanks to CMHC policies that encouraged banks to lend far too much money to people to whom they shouldn’t have. The core problem, he argues, is that promoting home ownership makes for good politics in Canada, if not always sound economic policy.

“The CMHC is influenced by the political process, just like [Fannie Mae and Freddie Mac] were in the United States,” says Jarislowsky. He notes the average debt-to-income ratio of Canadian households recently surpassed that of the U.S. for the first time in 12 years. “The political folks are guaranteeing mortgages that the banks might never have made if they had to keep them on their own books,” he says.

At the end of 2009, the CMHC insured roughly $473 billion worth of mortgages (it expected that figure to rise to $519 billion last year, though updated figures haven’t been released), which is nearly the entire mortgage insurance market in the country. The CMHC also assists the financial sector by buying pooled mortgages and reselling them to investors as bonds, giving banks and other institutions an immediate source of cash that they can re-lend. As of 2009, the CMHC had securitized $300 billion worth of mortgages. So critical is this function that Ottawa relied on the agency to prop up the country’s big banks during the financial crisis, giving the CMHC permission to buy $66 billion worth of mortgages.

A mortgage monster

Chris Sorensen And Jason Kirby

It’s a familiar-sounding story to American ears. “The Canadian government mortgage apparatus echoes uncannily our experiences down here with Fannie and Freddie” says Jim Grant, author of the widely read Grant’s Interest Rate Observer newsletter. “CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”

Grant and other critics argue the CMHC’s balance sheet looks strikingly similar to both Fannie and Freddie if you compare the mortgages the agency insures against its equity. Using the CMHC’s 2010 forecasts, it insures $519.1 billion in mortgages against $9.9 billion in equity, which works out to around 1.9 per cent (although the CMHC says it has another $6.7 billion in “unearned” premiums that could be used toward future claims). By comparison, in 2007, at the peak of the bubble, Fannie Mae backed up US$2.7 trillion of mortgage-backed securities with US$40 billion of capital, or 1.5 per cent equity against its overall exposure. But the CMHC says its capital levels are double what the Office of the Superintendent of Financial Institutions requires of mortgage insurers (though the CMHC is not regulated by the OFSI). But such assurances in the absence of transparent disclosure offer limited comfort. As C.D. Howe researcher Finn Poschmann wrote in a recent report: “Parliament and the voters to whom it answers have no formal documentation of the way these exposures are calculated or managed.”

What bothers Grant is that the CMHC’s government-backed guarantees encourage banks to feel they have less to lose if loans go bad. “The risk has been shifted, rather than reduced, from the stockholders and depositors of the big Canadian banks to the Canadian taxpayer,” he says. And if house prices fall and borrowers get into trouble, the ripples would run far and wide. “A sharp break in Canadian house prices would inflict terrific damage to consumer confidence, would hurt the Canadian labour market, and ultimately produce a lot of the unpleasant results that have been America’s burden to bear since 2007.”

The CMHC argues such concerns are overblown. It points out that the Canadian mortgage system is fundamentally different than in the U.S. That’s because mortgage interest is not tax-deductible, a relatively small number of mortgages are securitized, and lenders can generally go after homeowners who don’t make their payments. The CMHC also points to Canada’s low rate of mortgage arrears, currently less than one per cent. Finally, the industry never got swept up in the subprime lending trend, the CMHC says. “We don’t have those products in Canada,” says Pierre Serré, the CMHC’s vice-president of insurance product and business development. “And if we did, CMHC certainly did not insure them.” Lending weight to the CMHC’s claims, a 2009 IMF report called Canada’s residential mortgage markets “boring but effective.”

Canadian lenders didn’t go overboard with the sorts of gimmicky mortgage products—loans with low initial “teaser” rates or so-called NINJA loans (no income, no job or assets)—that got Americans into so much trouble. But it’s not like they shied away from taking risks. For two years beginning in 2006, the CMHC offered insurance on mortgages with amortization periods of up to 40 years, nearly double the traditional 25-year period, and loans with zero down payments. The products were later reined in by Ottawa after the U.S. housing market tanked.

A mortgage monster

Don Healy/Regina Leader-Post/CP

The CMHC dove into such high-risk products largely without supervision. While the government had previously relaxed conditions for guaranteeing mortgage insurance as part of a plan to introduce more private sector competition, it was the CMHC’s management and board that ultimately made the decision to go to 40-year amortization periods. In the same way, in 2007, the CMHC introduced a program for self-employed Canadians who have difficulty documenting their earnings to nonetheless obtain mortgage insurance by “stating” their income. While the program was restricted to borrowers with good credit ratings, one mortgage broker told Maclean’s self-employed Canadians were able to get much larger mortgages than those in the same field who had documented incomes. Then, a year ago, the CMHC backtracked and significantly tightened its rules on stated-income mortgages.

“We’re allowed to operate and make decisions with regards to mortgage insurance products and policies within the [government’s] guarantee, and when we do so we advise the government of any changes,” says Peter De Barros, a spokesperson for the CMHC. Still, the move to riskier mortgage products drew the ire of then-Bank of Canada governor David Dodge, who sent a letter to CMHC chief executive Karen Kinsley in 2006 warning about the dangers of throwing fuel on a hot housing market. “A home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that mortgage,” Dodge said during an interview earlier this year on Business News Network. “So it’s not at all unreasonable for us as taxpayers to say, ‘Look, Mr. Borrower, you’ve got to have an equity stake in this as well, so if things go really bad it’s not all on the Canadian taxpayer—part of it is on you.” (Dodge declined to be interviewed for this story.)

Critics say that, given what happened in the U.S., it’s irresponsible to not have someone watching over the CMHC. “They are the only major financial institution in Canada not regulated by OSFI,” says Ian Lee, an assistant professor at Carleton University’s Sprott School of Business and a former bank manager. “Housing is so huge and the consequences are just so large. It’s not like they’re deciding what to do about the price of ballpoint pens.”

So how much risk have taxpayers been exposed to? The CMHC doesn’t reveal specific data about the credit exposure that it has taken on, other than to say it is manageable and in line with internal guidelines. As for the question of whether the CMHC’s policies could contribute to a housing crash, the agency says there’s no reason for Canadians to lose sleep. It says more than half of CMHC-insured mortgages have a loan-to-value ratio of less than 80 per cent based on the value of the original loan, and that the average equity in a CMHC-insured property is 45 per cent. “The mortgages are getting paid down—as a matter of fact, we see that about half of our folks made extra payments, more than just the minimum required principal payments,” says Serré, adding that rising home prices have also helped improve the debt picture.

But such aggregate figures don’t necessarily provide an accurate snapshot of how homeowners are faring, according to Poschmann at C.D. Howe. Important questions remain unanswered—like what is the geographic breakdown of its mortgages? Of those people with lower equity in their homes, what is the size of their mortgages? What classes of loans are they? What are their terms? “You can’t come up with an independent assessment of exposures based on the information they publish,” says Poschmann. “You can manage risks better with oversight and daylight, but right now we have pretty opaque books.”

While the CMHC says it has a sophisticated automated system to check creditworthiness of borrowers and property values, its biggest private sector competitor (which also has its mortgage insurance guaranteed by taxpayers, albeit only up to 90 per cent) nevertheless suggested during a 2007 hearing of the Senate banking committee that more than a third of all mortgages insured by the CMHC could be considered risky. Winsor Macdonell, the vice-president and general counsel of Genworth Financial, told the committee he assumed the CMHC’s portfolio looks similar to Genworth’s given that both provide mortgage insurance for the entire Canadian market. “When I talked about our portfolio, 36 per cent are people with low or poor credit,” he said. “Those are the people who are at risk.” Genworth declined to talk to Maclean’s for this story.

Serré declined to comment directly on Macdonell’s remarks. “I’m not exactly sure what low or poor credit is,” he says. “But I want to make clear that our mandate is not to get people into home ownership, our mandate is to provide the housing of choice. The last thing we want, as a government insurer, is to get people in a position where they can’t manage their debt.” For the sake of Canada and its fragile economic recovery, let’s hope he’s right.


The CMHC: Canada’s mortgage monster

  1. Interesting article, does anyone know if the Liberals were as guilty of putting the foxes in charge of the egg production facility?

    • Who do you think allowed this to be set up the way it is currently? People of all political leanings have a short memory of the things ALL politicians have created. Is there anyone to fix it? I doubt it.

      • Clearly it was set up poorly, initially by the Liberals (It was the crazy guy, King that did it). However, with the proper board of directors that represents the stakeholders it could still be functional, although not transparent or accountable. My question was whether anyone knew if the Liberals also appointed a majority of the board from the real estate industry.

        • What a ridiculous comment. Last I checked, the Liberals haven't been in power since 2006.

          Both parties are guilty on this one.

          • True, the Liberals have not been in power since 2006, however my first point was that they were in power in 1946 when the CMHC was set up to assist returning war vets find housing. Of course, since 1946, both parties have had ample opportunity to modernize the governance structure. My question was whether anyone knew if the Liberals also appointed a majority of the board from the real estate industry or if that was an innovation started when Monte was the responsible minister.

    • If you look at the high proportion of CMHC-insured mortgages over the past few years, and the degree of pressure from the government to keep the housing market alive, you would have a pretty solid attack line against Harper… if Canada is in a housing bubble, and if that bubble pops between now and May 2nd.

      • Why would it pop between now and May 2nd? I realize your hypothetical is somewhat tongue in cheek, but what systemic risk is on the horizon that would lead you to think that?

        • To be honest, I don't know (if I did, I'd probably be busy shorting something right about now). I could see interest rate hikes exposing problems with the real estate market, and I'm skeptical that gold is worth as much as people seem to think (if its a hedge against inflation – where's the inflation) but I'm not sure that they represent a systemic risk. It is more likely that a housing bust would cause a recession than a system-wide financial crisis, particularly since the CMHC has deep pockets relative to say, AIG. Then again, ordinary recessions can be more severe than financial crises (US unemployment was higher in the 1982 recession than after the 2008 crisis), so that isn't too reassuring to me.

  2. As a tax payer I am concerned about the risk that CMHC is allowed to take, I would think it is time that CMHC be added to the list of financial institutions supervised by OSFI. Canadian Tax payers federation should be pushing for this.

    • This is about the only conclusion in the article I agree with. The counter arguments to the authors' thesis were under-evaluated or at least under-represented in the article.

    • Looks to me like Macleans is out to get the CMHC and as a result, has shirked their duty in properly researching this very important story from all sides.

  3. Great read, I think I have a better grasp of the issue.

    So it seems to me that nobody really knows what's going on in terms of the mortgage insurance other than CMHC, and they're not talking.

    I remember a story about the CPC allowing a new kind of morgtage (I really don't know much about mortgages) but the way this article is written it seems to indicate that this has been going on for a long time (how else do you rack those very impressively large numbers?).

    I appreciate the need for secrecy but when the stakes are this high there needs to be opennes. Especially when there's nothing to gain by hiding… I don't see why the CMHc doesn't want to disclose this information, what do they have to lose by doing so?

    • I just do not agree with the aspersion that CMHC is going about being all secretive. You can find all kinds of reports on their website that let you know exactly what they are up to. I do not think this is a case of the information not being available. It is more like it is not easily digestable and there are a number of information sources and pieces of legislation that affect each other. It is, as a result, cumbersom to keep track of who is who & what they are doing.

      Oddly enough, keeping track of what is going on is a very major role of the CMHC. To produce an equivalent degree of reportage and statistical analysis, you'd have to duplicate the CMHC. That hardly sounds efficient.

      So, it boils down to: Are their reports and actions trust worthy? Maclean's has attempted to suggest that there is reason to suspect CMHC's credibility. From what I have seen so far, I believe that, in-so-far as one can ever trust the MAN, there is a credible degree of soundness at the CMHC.

      If anything, Maclean's is to be credited for stimulating greater awareness of this very important PUBLIC institution.

  4. If we are going to have recurrent bubbles, can't they at least be in something with some positive long-run effects? The dot-com bust may have been unsustainable, but at least it spurred on some useful innovation and paid for the infrastructure that undergirds the information economy. I'm not sure abandoned pre-fab homes and reruns of Property Virgins are much of a legacy.

    • The legacy is housing, but anything built during a bubble is of dubious quality. I would not even consider anything built in the last five years. During a building boom, standards are lowered and every corner is cut.

      Also, housing bubbles take people away from more productive activities. Here in Vancouver, we must have thousands of real estate agents who should've stayed at their old jobs making lattes or driving buses. The crash is going to be epic here because so many people depend on real estate for their income. At least it will be entertaining.

      • Other than the fact that the legacy is indeed added housing, the rest of this opinion is totally worthless. The writer brings no intelligent insight to the questions at hand and obviously has nothing of positive value to add, prefering to disparage others and anticipate their possible downfall as entertaining. There remains only a profound ignorance, the stench of covetousness and an obvious inferiority complex.

  5. Here is a CMHC doc on there mortgage backed security program:

    The difference between the US mortgage collapse and our over-inflated housing market is that, in Canada, there isn't the layer after layer of derivative linked to the continued viability of mortgages. This is what really caused such problem for the institutions: there is a very high degree of correlation between the rating on these derivatives and the word bogus.

    That isn't to say that there might be some particularly Canadian species of accounting irregularity, but I do not think, should a crash come, it will have as wide ranging an effect or that it will follow the same infection vector.

  6. "It says more than half of CMHC-insured mortgages have a loan-to-value ratio of less than 80 per cent based on the value of the original loan, and that the average equity in a CMHC-insured property is 45 per cent."

    In other words LESS than half of CMHC-insured mortgages have a loan-to-value ratio of GREATER than 80 per cent based on the value of the original loan. Is that supposed to be reassuring?

    [youtube Xk3j6g50Krs youtube]

    "Canadian lenders didn't go overboard with the sorts of gimmicky mortgage products—loans with low initial “teaser” rates…"
    Perhaps not, but who needs teasers or gimmicks with Canadian mortgage rates at emergency-low levels as it piggy-backs the Fed's policies. How many buyers are really thinking about their mortgages at "normalized" levels?

  7. I suppose that, as all of these mortgages that they are bundling need insurance, they must be considered to be, in varying degrees, higher risk than mortgages with greater than 20% down. What is not clear is the degree to which a systemic shock can set the entire Canadian financial system into cardiac arrest. Would the legalization of pot cause a crash in Vancouver real estate prices leading to a general downward trend across Canada? Would the damage just be local with everybody across Canada facing higher mortgage insurance rates as a result?

    It shouldn't be as hard as it is to figure this out. It seems to me that the question as to our risk levels is answered in finding out how the balance sheets of the market participants are inter-related. There really are not a whole lot of variables to consider.

    • It sounds like your angle on this thing is one of contagion vectors – if something crashes in one sector, it needs linkages with others in order to do some real damage. I'm not sure that balance sheets are the only relevant kind of linkage however. Similarity in business practices might be just as powerful. If we learned that some way of appraising things used across multiple fields was essentially wrong, for instance, you'd have a critical linkage.

      Governmental responses to the failure of one firm may also be relevant to many other firms whose valuations reflect the assumption that the government is willing to act as a lender of last resort. For instance, Paulson's decision to hang Lehman out to dry had implications for a lot of firms that had bet on their getting bailouts. Imagine that you have a collapse in the mortgage market, overloading the CMHC's capacity to honour its commitments, and a politically motivated refusal on the part of the government to infuse the CMHC with the necessary cash. What might that tell you about the viability of similar insurance schemes like deposit insurance?

      So, I think linkages are important, but they are not always obvious.

      • Your observation is correct. I am thinking about this in terms of a domino effect or a spreading infection. It seems a reasonable framework to attempt to assess the risks. I say balance sheets because, all businesses being dependent on cash flow, if the money really starts to dry up, then lots of businesses go under, and in really bad times, finacial institutions too. You know how it works.

        I have been spending some time over at the CMHC site reading their publications. Doing so has considerably antidoted the fear mongering of the above article. It basically boils down to the answer to this question: "Is CMHC doing it's due diligence?" Well, it looks like they are (but who am I to judge?). Unless some investigative source can uncover evidence of systemically faulty practices on the part of CMHC, I see little reason to distrust this public institution or to suspect that they are misreporting the actual levels of risks they are carrying.

    • systemic shock is the key – any shock to consumer confidence will either slow down or reverse the trend. That is what happened in 2008 even when media/govt/academics were purporting Canadian housing as safe and sound, it was really consumer confidence that reversed the trend…

      i know there is no 1 measure of intrinsic house price but if we compare some of the analytical measures like price/rent, price/income, only some Canadian cities are out of whack which might keep a local shock within the local boundaries… after all, some cities (houston, dallas) in US are relatively unscathed, the sunshine regions got whacked

  8. I can envision a scenerio similar to the one that occured in the US in 2008.
    Obama takes over as President in 2008.
    Here in Canada we have a coalition government after the May 2011 election.
    The economy collapses and the housing bubble bursts right after Obama takes over. The opposition blames the whole affair on Obama.
    Here in Canada, shortly after the election and the forming of a coalition government, the housing bubble bursts, the real deficit is exposed and taxpayers are on the hook for $Billion of bail-out money.
    And the opposition blames it all on the coalition.

    • But Americans don't blame Obama for the financial crisis, they blame him for the unusual slowness of the recovery. Maybe that isn't his fault, but it is a very different kettle of fish than the one you propose.

    • Nice try, Obama only became President in January 2009.

  9. I don't know why the authors are suggesting that the CMHC isn't supervised by OFSI. CMHC says it complies with what rules OFSI sets out that are relevant to CMHC's activities.

    • Voluntary compliance isn't as reassuring as enforced compliance would be.

      • I think it’s pretty assuring. I would find a total disregard, unless forced, to follow OFSI policies a problem.

  10. People will buy houses regardless of whether or not there is a CMHC – so it should be dismantled.

    The market can determine what a house is worth and who has saved enough money to buy one, then buyers, lenders and homeowners will know where they stand – and no bubbles.

  11. Look at the problem from growth perspective. Housing is one of the largets industry in Canada. CMHC should be overseen peoperly by the government.

  12. The fact that the Canadian housing market didn't crash as bad as US should give CMHC some credit. Ownership for most Canadians can't be realized without some sort of Insurance like CMHC. Fannie and Freddie were privately owned, government sponsored organizations. That is why government takeover was necessary.

    CMHC is a government body. who should we get to watch over our government. OSFI? who is going to oversee OFSI? Where does it end? If CMHC is assuming more risk than the they should, how about spreading the risk among the lenders. Canadian banks are benefiting from high ratio insured mortgages, they should either pay some insurance premium or assume some of CMHC'S losses.

    • Well said. The banks are skating on this. And look how much they are profiting.

    • The customers pay. That's how insurance works. It's pretty straight forward.

      The system is actually working quite well which is why I find this article so disappointing. It really only looked at one side of the argument and glazed over the other.

      • YYZ, I totally agree with you. I don't understand where these sentiments about CMHC are coming from, not backed by any facts at all.

    • ah yes, the old "if we were going to have a recession, we would have had it by now" defense.

  13. Calgary Realtor, the fact most people can't buy a house is in large part because of CMHC. As one poster said, their mandate of supposedly creating affordable housing by boosting demand, thereby increases prices, is self-defeating. Prices are artificially high because of CMHC. Creating supply would be a better mandate to encourage affordability.

    The fact that CMHC data is not available is a sham and simply unacceptable. They fact they won't show it, also makes you wonder the real story and how many mortgages have been issued to people that had no business ever owning a house.

    CMHC should not exist, let the market decide how can afford a house. Further, it's crazy that they can say they are in a prudent position. If only a few percent of owners go bankrupt, CMHC is in trouble. Don't tell me that won't happen because lots of things over the last few years should not have happened … there needs to be a worst case scenario plan and CMHC blew that away a few hundred billions dollars of mortages ago.

  14. How's this for subprime in Canada … too stupid to learn anything from the US experience:

    "You currently live in Non Profit housing and are on a low income with no savings. You are ready to make the commitment to own a home, but need a structured plan to help you."

    "A two part loan:

    Interest-free loan, payable over 10 years, for a 20% down payment
    10-year fixed mortgage, with interest payments only on the mortgage, payable over 25 years"

    • The crack cocaine of mortgages – we'll lend you the down paymant. Should be called the reverse second mortgage.

    • I'll note VanCity is not under federal jurisdiction(Its regulated by BC FICOM) thats why they can get away with stuff like this. Having said that one reason no one wants to due anything about CMHC is housing and residential construction is big business in Vancouver and the 905 where everyone wants to win seats. I would argue for all the talk of the unfairness of equalization Ontario and BC get huge economic benefits through CMHC at unknown cost to the federal government.

      • How?

  15. Great article.

    One policy development that this article omits to mention was the Harper governments decision to bring in 'competition' to the mortgage securities market in 2006.

    One of Harpers first decisions upon being elected in 2006 was to allow alternate mortgage insurers into the securitization market on the grounds that it would spur greater innovation. AIG (yes that company) was brought into Canada and it began to aggressively issue mortgage securities challenging the CMHC stranglehold. CMHC then felt compelled to drastically up its risk portfolio to keep these competitors to their operations at bay. When CMHC was the sole provider granting securities they could mange the risk portfolio easily because they did not need to engage in a 'race to the bottom' of predatory lending with competing firms.

    This decision to spur mortgage securities innovation has had a significant role in the eventual gerrymandering of the housing market for political purposes. Often forgotten is that back in 2006 there was a stated belief in the conservative government/caucus that the CMHC was too risk adverse. The Tories were even complaining in commons committees that the CMHC needed to modernize its operations to make the Canadian mortgage market as innovative , or so they thought at the time, as the one south of the border . There are reports even listed on the government website which demonstrate these facts.

    The decision to leverage up CMHC was political not bureaucratic. The tories forced CMHC to increase it leverage. David Dodge raised parsed words about his concerns about the governments policies surrounding CMHC at that time. However this is Ottawa. People never say things outright. If something bad happens in policy formulation they quietly resign rather than alerting people.

    • The other thing I'll bring up is does anyone remember when that slime Ernie Eves wanted to let Ontario homeowners deduct mortgage interest.

  16. well researched article…

    i think the government/cmhc has realized its mistake of extending amoritzation to 40 yrs and has learnt from housing crashes in other developed nations… hence the recent reduction from 40 to 35 to 30 yrs…

    perhaps they do expect a crash but want a 'soft' landing?

  17. This article successfully glazes over or ignore an array of factors that would lead to an opposite conclusion:

    – CMHC functions as an insurer with actuaries. They charge customers a premium. Doesn't mean they are foolproof but they do have rules.
    – In almost all scenarios, a minimum downpayment is required, and despite what the article implies, banks actually do try to lend people money only when they can afford to pay the bank back.
    – Insuring mortgages cannot cause a bubble – other supply and demand factors have to be present also none of which are present in Canada (loosening of credit restrictions, consumer speculation on price increases and others)
    – Even if there were a major housing price adjustment (bubble burst) the implicit assumption is that it would cripple the economy – it likely wouldn't – because Canadians by and large can actually afford their homes, they'd still be able to afford their mortgages even in a negative equity position. This was not true in America.

    Looks to me like Macleans is out to get the CMHC and as a result, has shirked their duty in properly researching this very important story from all sides.

    • My thoughts on your thoughts:

      You say: CMHC functions as an insurer with actuaries. They charge customers a premium. Doesn't mean they are foolproof but they do have rules.
      I say: Banks make mistakes too, but I'd rather have "many" entities that answer to market forces pricing the risk – not "one" entity making that assessment. Especially if that one entity is a crown corporation.

      You say: "In almost all scenarios, a minimum downpayment is required, and despite what the article implies, banks actually do try to lend people money only when they can afford to pay the bank back."
      I say: Really? If the CMHC is willing to guarantee the mortgage you don't think the bank will lend?

      You say: Insuring mortgages cannot cause a bubble – other supply and demand factors have to be present also none of which are present in Canada (loosening of credit restrictions, consumer speculation on price increases and others)
      I say: You don't think the 25-to-40 year amortization change was a loosening? You don't think allowing 0% down payments was a loosening? You don't think historically low interest rates is a loosening?

      You say: Even if there were a major housing price adjustment (bubble burst) the implicit assumption is that it would cripple the economy – it likely wouldn't – because Canadians by and large can actually afford their homes, they'd still be able to afford their mortgages even in a negative equity position. This was not true in America.
      I say: Even if they could still afford their homes, there will still be a negative wealth effect. Consider bank lending – what happens to new loan size when prices are falling?

      • I appreciate your arguments. Some very good ones. A few further thoughts:

        – We'll have to disagree on banks. Remember, they ARE supervised by OSFI and despite the CMHC backstop, OSFI tends not to tolerate cowboy activities. Further, banks continue to be consrained in their lending by capital ratios which do not change because of insurance.

        – There are actually 3 insurers in the market – CMHC, Genworth and a company now owned by an OTPP consortium. Yes CMHC has the bulk of the market (I believe it's around 65 or 70) but there is some competition.

        – I agree 0% down and 40 year AMs are factors, both of which have since been disallowed. Historically low interest rates are definitely a factor that could contribute to a bubble I agree.

  18. It's about time the media catches on to the CMHC scam. I sent a letter to my MP about this over a year ago (naturally I got no response). Maybe she'll pay attention now that you've picked it up.

    My biggest question is why haven't any of the opposition parties started to nail the Conservatives for their mismanagement on this one?

  19. Voting competent people into parliament who then oversee the process is the only way, fraught with hazards as that is.

  20. Very informative article. Great blog!

    Derek H.

  21. Macleans is getting pretty desperate to push this Canada is just as bad as the US line.

    We had a housing bubble burst – in the early 90's. The housing market was dead for most of the rest of the decade because of it.

  22. Free market capitalism is a myth. The housing market is huge and is the most manipulated market in the world.

    •Home Renovation Tax Credit
    •First-Time Home Buyers' Tax Credit
    •GST/HST new housing rebate
    •Home Buyers' Plan
    •Provincial credits and grants
    •CMHC insures mortgages to transfer risk from the banks
    •Self-Directed RRSP mortgages

    You, taxpayers, non-homeowners, children and un-born Canadians have been fuelling our housing bubble.

    Let's say you're a politician. You know that:
    •You'll get re-elected if you:
    ogrow the economy, or
    omake your voters feel wealthier
    •Economy will grow and your voters will feel wealthier, if you:
    oboost housing sales and prices
    •Housing sales and prices will go up if more people buy houses
    •More people, even if they can't afford it, will buy houses if they can borrow and leverage more
    •People can borrow and leverage more if you:
    oreduce down payment
    oextend amortization
    oreduce interest rate
    oenable banks to lend to risky borrowers
    •Banks will lend more, if you remove their risk
    •CMHC can remove the risk from the banks
    •As long as you get re-elected, that's all that matters. This built up of un-sustainable debt and fake wealth is the next politician's problem.

    What would you do? Is this why my MPP justified taking my money to give to GM's by saying that he wanted to support home prices?

    Besides, most politicians are home-owners. So, if they can boost the price of their own homes, at the expense of tax-payers, non-homeowners, children and un-born Canadians, why not?

  23. I am not getting involved in the argument but here is an interesting article that ws brought to myt attention recently on how "the structure of the Canadian mortgage market greatly reduces the probability of a US style housing melt-down.”

    • Great comments on the article, enjoyed it, thx.

  24. The Housing market in Canada is a ticking time bomb. Record debt to income ratios. People are starting to get closer to retirement age with little or no savings, they are house rich and cash poor! Link that up with record low interest rates that will probably go up at some time and BOOM!

  25. What's sad is LePoidevin questions something maybe we should all question, and the Bank he works for, turns out to be a bunch of cowardly idiots. That's sad! He should have been praised for thinking outside the box, and instead he was chastised. Now that's Orwellian thinking leaking into Canada, where right become wrong because it's politically unfashionable.

  26. The article doesn't mention that CMHC loan qualification is rigourous. The value of the property is not rubber stamped. They don't always accept the purchase price as an accurate reflection of value. Average prices in Toronto dropped 30% between 1990 and 1995. There were few defaults. U.S. buyers were qualified at teaser rates and mortgage documents often falsified. With less than a 20% downpayment, buyers must qualify at the higher 5 year rate in Canada.

    I'm more concerned about the Billions in taxpayer money that's being pumped into public sector employee pensions. They "ARE" all underfunded and are currently robbing our social programs and creating debt to provide early retirement at 60 to 70% of income indexed to inflation. Perhaps Pension Reform should be an election issue. Flaherty reduced the pitiful CPP by 6% per year for every year retired prior to 65. The average benefit paid in 2009 was $5000/yr. He brought in income splitting for government employee pensions allowing most to collect another $10,000/yr. OAS.

  27. If I had only read this thread I would be thinking that Canada had experienced a US style housing market melt down.

    But we didn't so the CHMC and the government must be doing something right.

    • The man who falls off the roof of a 40 floor building as he approaches the 5th floor is heard saying…

      "So far so good…"

      Why don't you go read comments on US real estate bubble blogs in 2007… Fannie Mae and Freddie Mac were doing great numbers and the market looked really healthy…

  28. If you , the mortgage holder , put 20% + down, you do not have the mortgage insured by CMHC. It will still be insured however. The lending institution will insure the mortgage and pay the yearly fees. The end result is , just about every mortgage out there is insured by CMHC, which means us , the taxpayer.

  29. Stop blaming and start lopping heads.