Federal government should end insuring high-risk mortgages through CMHC: IMF


TORONTO – The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.

The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 per cent for the country next year.

Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.

Some analysts have credited the system for providing much needed confidence in Canada’s housing sector during the 2008-09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.

The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

Meanwhile, the IMF cautions that if any structural changes are made, they should be gradual to avoid unintended consequences.

The report, released Wednesday morning, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.

In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 per cent level to 2.3 next year.

A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, with is projecting Canadian real GDP will grow 1.8 per cent in 2013, 2.4 per cent in 2014 and 2.6 per cent in 2015 — assuming strong growth in the United States.

The Bank of Canada, in its forecast, holds that the risks are balanced — meaning there is as much chance the projected growth rate will be higher as lower.

But the Washington-based IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.

“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster than expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.

“Protracted weakness in the euro area economic recovery and lower than anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added

On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.

Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.

And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.

That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.

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Federal government should end insuring high-risk mortgages through CMHC: IMF

  1. Why yes, take something that has been successful….and end it.

    • Sub-prime mortgages were very successful.. until they weren’t.

      • Jumping off the cliff into the water was successful, until it wasn’t.

        Going for a spacewalk was successful, until it wasn’t.

        The difference here is the expected risk before the behavior occurs. CMHC mortgages have been successfully putting Canadians in homes for a very long time….it is very low risk to begin with.

        So let’s not get carried away.

    • Has it though?

      It was used to back 40 year mortgages with 0 down. It was a huge factor in decreasing housing affordability in the last decade. Mind you that was policy driven, but I don’t believe we should be encouraging high-risk mortgage lending. Even private insurers need to be regulated.

      Given the leverage, I would not want to be a shareholder in the CMHC if it were private. But I am a shareholder in it as a taxpayer. Looking at the financials I can’t say that it’s solid as an investment. As a policy tool, it may be propping up home prices at a time when housing is unaffordable.

      • Canada is one of the wealthiest most advanced nations in the world….and we’ve always been home owners.

        It means you have your own place to live.

        It means you can have a PLC

        It means you can borrow on your home to start a business, ‘cut a record’, finance an invention

        It’s something you can sell to finance your old age.

        It gave millions of people their start.

        The stock market isn’t the economy.

        And if you’re from Alberta….you’ve bet your whole future on oil.

        • I don’t know who you think I am, but I think your statements are misplaced.

          We have had higher rates of home ownership, but land is also plentiful and it was cheap. Was.

          I can live in a place I rent and I have been able to rent places for less than the interest on a mortgage in many cases.

          People can only borrow against equity. People can put money into lots of things, including businesses, which they could then lend against. You don’t need a home to have equity.

          And it’s something that baby boomers all think they can sell at the same time to finance their old age, which could put downward pressure on the market and wipe out their savings plan.

          It gave millions of people their start more than a decade ago. Now it doesn’t matter. My generation is hooped because prices are still overvalued.

          I don’t believe the stock market is the economy. It’s just the price people are willing to pay to buy shares. Sometimes it’s too high, sometimes too low.

          The risk that taxpayers’ bear has been used to heat up the housing market. Now the feds are trying to unwind it and it’s proving difficult. It’s precarious because it could pop.

          Again, this is part policy and part CMHC. I don’t know if the IMF is right, but we should probably be paying attention.

          • Scotty ab….Scotty from Alberta probably….I dunno. Lots of people do that with their name.

            Most people want to own a home, not rent.

            Boomers won’t all sell at the same time….Boomers range from 48 to 67 years old.

          • Initials.

            Most people want to own, but at what cost?

            And boomers will have a profound affect on markets as they always have.

          • Ahhh

            Well if people want to own, it’s up to them. Personally I don’t like apartments or any other kind of rental unit.

            As to boomers….there were never enough schools, then jobs then houses….and there have always been recessions and strikes and layoffs and slowdowns and everything else.

            Freedom 55 has long since turned into Freedom 85-maybe.

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