With the federal government aiming to balance its books by 2015, crown corporations like the Canada Mortgage and Housing Corporation (CMHC) are coming under heavy scrutiny. Ottawa is concerned CMHC is getting too big for its britches and putting Canadians at risk for a U.S.-style housing meltdown by insuring risky mortgages. Whether you’re paying mortgage insurance or you’re a hard-working taxpayer, changes at CMHC will affect all Canadians.
Stricter Regulations Could Be In Store
The Conservatives have a reputation of being fiscally responsible, aiming to run the government efficiently like a business. CMHC has evolved into a major financial player in recent years, insuring over $600-billion worth of mortgages. Ottawa wants to run the CMHC similar to major banks and insurance companies with the stricter reporting and accountability. CMHC has been put under a microscope for risk management by the Office of the Superintendent of Financial Institutions (OSFI). CMHC will also be required to continue reporting its financial results quarterly like clockwork. This will allow the government to keep a closer eye on its financial standing.
Changes Starting at the Top
The Conservatives mentioned government agency restructuring as one of their major goals in the last federal budget to help eliminate the deficit by 2015. Changes have started at the top: Robert Kelly, an experienced Wall Street banker, has assumed the role of chairman. Meanwhile, Karen Kinsley is resigning after 25 years at the helm as chief executive; a successor has yet to be named. This is the first of many expected changes at the crown corporation over the coming months, where it’s anything but the status quo, as a major shakeup is underway.
Veering Off Course
CMHC was created to help advance housing in Canada, but according to financial experts it has lost sight of its mandate, putting taxpayers at risk.
“Looking back over the last decade, I see an unbelievable mandate creep where CMHC was doing things that would infuriate taxpayers and running a massive, potentially public liability in the process,” says Ben Rabidoux, analyst and strategist with U.S.-based Hanson Advisors.
CMHC has been under a magnifying glass since the U.S. housing meltdown due to supposedly-safe mortgage-backed securities. Due to debt stricken western European countries where mortgage default is quickly rising, CMHC has expedited its plans for reform. Although Canada’s banks are often praised as among the most stable in the world, a mass default of mortgages could pose financial hardship for CMHC.
Tighter Mortgage Lending for Consumers
The government has already gone to great lengths to tighten mortgage lending in Canada for insured mortgages. It has cut the maximum amortization four times from a high of 40 years to its current 25 years for high ratio mortgages. Although this makes it harder for first-time home buyers in expensive housing markets like Toronto and Vancouver to save up a minimum down payment, it also puts taxpayers less at risk if housing prices fall and mortgages go underwater en mass.
The Lending Cap
After raising the lending limit year upon year of CMHC, Ottawa has capped it lending at $600 billion (although rival insurers like Genworth look to be picking up the slack). The tightening seems to be working – mortgage insurance was down in 2012 to $566 billion, a sign that banks and consumers are taking notice and being more cautious and fiscally responsible. Although there may be short-term pain, the goal is long-term gain – if we avoid a U.S.-style housing bubble and housing prices moderate, homeowners, taxpayers and Canadians will benefit. If you’re thinking of buying a house that stretches you to the financial limits, now might the time to think twice.
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