Yesterday, November 27th, 2013, the International Monetary Fund suggested in a report that the Canadian government should at least reduce its participation in and consider eventually withdrawing altogether from the mortgage insurance industry. The IMF suggested that the government’s involvement in mortgage insurance, primarily via the Canada Mortgage and Housing Corporation (CMHC) “exposes the fiscal budget to financial system risks and might distort the allocation of resources in favour of mortgages and away from more productive uses of capital.?
So, what the heck does that mean? A few things.
First, a couple of important things to understand:
1. The Canada Mortgage and Housing Corporation (CMHC) has a mandate to participate “a wide spectrum of activities, from helping low-income families, persons with disabilities, seniors and Aboriginal Canadians access affordable housing, to ensuring housing markets function efficiently to help Canadians access a range of housing options.” Essentially, CMHC facilitates entry into the market for Canadians who need help. Its mandate is about people, not about helping large financial institutions get lower costs and increase profit.
2. CMHC had a reported profit of $1.53 billion (CAD) in 2011, and approximately $16 billion from 2002 to 2011. This isn’t exactly costing us. Virtually all of that money goes into the general coffers and thus government budget to help Canada operate.
3. Due to its “coast to coast to coast” mandate, CMHC will go into areas that other private companies may not. They understand that while in some individual instances there’s more risk there, that it’s important to help ALL Canadians, as much as reasonably possible, and not simply worry about a bottom line.
4. Mortgage insurance is the primary service which allows Canadians to purchase a home with less than a 20% down payment. I do a lot of mortgages for first time homebuyers, and there are very few of them that are putting down anything near that without significant help from family. According to a previous CMHC market survey, approximately 73% of first-time homebuyers using CMHC used some sort of saved down payment, whether it be their own savings or RRSPs. That means these individuals are invested in their homes. They aren’t deadbeats, they aren’t asking for handouts. But when the average home in Canada in October, 2013 was $391,820, is it reasonable to expect first-time homebuyers to save $78,364 for a down payment?
CMHC can go into Labrador, Nunavut, Northern British Columbia, or all sorts of other remote places, whereas private corporations without such a mandate would be able to restrict their backing, focusing instead on safer, more major markets. While that can be great in Vancouver, Calgary, Toronto, Ottawa and perhaps Montreal, it can be disastrous in smaller centres. There’s already tremendous disparity in financial services available between large and small markets, particularly when considering financial institutions which are not chartered banks. Exacerbating this is a bad idea, and would do a huge disservice to many Canadians.
Further, every province in Canada has huge challenges in dealing with servicing and preserving smaller population centres and more rural areas. Keeping younger people and families in those communities is difficult things are now. If we were now to change our systems so that they couldn’t get reasonable access to mortgages in those areas, but would have much better opportunities by moving to larger communities, we’d only make the problem worse. That’s the last thing we need to do.
The IMF has also acknowledged that “the structure of the Canadian housing market is not as in the U.S. ? the balance is very healthy. The risk of boom-bust similar to what happened in the U.S. is not very high.” If there isn’t a significant risk here, then why pull back? According to Roberto Cardarelli, the IMF’s mission chief for Canada, ?we think banks lend too much to mortgages and too little to small and medium enterprises.” Great. Let’s stop helping Canadians from coast to coast to coast buy homes and invest their hard-earned money therein, but let’s let banks focus on lending to small and medium-sized businesses. Most of which are in major centres, as rates of entrepreneurial activity are higher (and on average more successful) in urban areas.
Seeing a pattern?
The federal government has over the last couple of years been attempting to move the CMHC away from bulk-insuring low-ratio mortgages (which would otherwise be conventional) in large blocks, which has essentially just been a vessel for them to re-liquidate themselves at a very low cost, in a manner that doesn’t go toward the heart of the CMHC’s mandate. I’m not opposed to restriction or re-structuring there. I accept that something has to give.
But, IMF, please don’t suggest the something that has to give is our ability to gain entry to the housing market in the first place.
If you’ve got any questions or comments and want to chat about any of this, please don’t hesitate to touch base with me here.
A few links:CMHC Mandate