Friday Mortgage Round Up: October 26th, 2012

The latest lowdown on the mortgage market

Another (Possible) Change to CMHC – But This Time it’s Not to Lending Guidelines

CMHC is a Crown Corporation (aka government owned), who marked the first social housing assistance program in Canada.  The inauguration, which took place in 1946, was aimed to assist WWII veterans who were returning back from war and couldn’t afford housing.  CMHC continues to support affordable housing and also plays a large role in the commercial industry as they are the only insurer for large multi-unit properties – including nursing and retirement homes.

CMHC is a $1.5-billion-a-year business which controls roughly 70 per cent of the market share in the mortgage insurance industry.  The largest component of what CMHC does (44 per cent) is reaching out to the communities that the private sector will not touch.  This includes rural, remote access and multi-unit properties.

Less Government Intervention in the Mortgage Market… huh!?

Some are wondering what has happened to the real Jim Flaherty who has meddled in the mortgage market four times in the last four years.  The so called real Jim has intervened by changing Crown Corporation CMHC’s lending guidelines to restrict the availability of mortgage insurance in an attempt to steer the market away from the extremes that rocked the economies of the U.S. and Spain.  Mr. Flaherty has aimed to keep mortgage debt under control during this tempting, low interest rate period.

But he proposes to give this all up.

Privatizing CMHC

As mentioned above, CMHC is a public sector (government owned and controlled) entity.  The process of privatizing would essentially mean transferring the ownership to the private sector.  So why would Jim want to privatize and give up control?

Oddly enough, since the conservatives came to power in 2006 they have been saying that housing is a provincial mandate and they want out!  Flaherty claims that CMHC has come and gone and is “yesterday’s solution for yesterday’s problems”.  He’s looking to limit Canadian’s exposure and if CMHC privatizes, Canadians wouldn’t be on the hook for insured mortgages.

However, during an interview with Matt Galloway from CBC Radio, Armine Yalnizyan, Senior Economist from the Canadian Centre for Policy Alternatives, pointed out that “even if you privatize CMHC, that doesn’t take tax payers off the hook because private sector mortgage insurers are guaranteed up to 90 per cent by the taxpayer.  So unless you take them off the hook too, there is absolutely no public support for mortgage insurance.”

What Would Privatizing CMHC Mean for Borrowers?

When you take the government out of backing “risky” loans, lenders will be less willing to finance mortgages to consumers, meaning that mortgages will become even less accessible and quite possibly more expensive (calling on Econ101 here… a decrease in supply triggers prices to increase).

So without CMHC insurance, there will be fewer lenders to serve mortgage-hunters.  This could have crippling effects on rural-area properties since they have a tough time as it is finding mortgage insurance as the majority of private insurers do not handle these types of deals.

But don’t think that you’re untouchable in the urban market either.  Fewer lenders along with increased pricing (in the form of interest rates) implies that there will be fewer first time borrowers in the market.  Fewer borrowers would signal a slowing housing market which would echo in all markets that are associated with home ownership… everything from less décor and furnishing purchases to fewer renovations and even a slowdown in construction.  Construction was a major source of job creation since 2008, so shrinking this sector would surely attribute to a slowdown, higher unemployment, more expensive mortgages and, in the end, a slower economy.

Is It Time That Flaherty Relinquishes Control?

Some argue that the effects of the recent changes that have been enforced by CMHC (puppeteered by Jim Flaherty) are a solution to short term problems and may not fare well  in the long term when coupled with persistent rock bottom interest rates.  These enticing rates have fueled a mortgage spending spree which could continue until another prompted move needs to be made. TD Bank Economist Craig Alexander believes that after the short term shocks have been absorbed, we may be in an environment where we require further tightening on mortgage insurance rules.

The good news is that this is a 5-10 year plan and the Feds say that at this time they have no plans to privatize CMHC. Week in Review

Although the Bank of Canada yet again maintained the overnight lending rate at 1 (see Penelope’s blog for details) per cent, the 3 year variable rate has moved back up to its 2.90 per cent level after increasing 25 basis points.  There were a handful of small movers over the last week on the best mortgage rates page as well with both the 3 year fixed and 5 year fixed dropping a mere 2 basis points, while the 10 year fixed dropped 5 and sits at 3.74 per cent.

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