Last Friday, it was announced the Department of Finance is implementing further measures to minimize taxpayer risk posed by the Canadian Housing and Mortgage Corporation, the Crown entity that provides high ratio home buyers with mortgage default insurance.
As of January 1, 2014, the CMHC must pay the Canadian government 3.25 per cent of their high-ratio mortgage insurance business, and 10 basis points (0.10 per cent) of their low ratio portfolio. Based on their Q3 results and projected future numbers (the CMHC currently ensures $560 billion in default insurance), it is estimated these new CMHC risk fees will cost $50 million annually.
However, the CMHC assures home buyers that a credit crunch isn’t in the cards, as the fees aren’t expected to cut into their bottom line. “We certainly don’t anticipate it to have any impact on the availability of mortgage funding, so we don’t see it as a material event,” said CMHC Chief FInancial Officer Brian Nash in a statement to reporters.
Reducing The Taxpayer Burden
On the surface this risk fee sounds like good news for taxpayers; currently, the government is on the hook for 100 per cent of the mortgages insured by CMHC. Such insurance is mandatory for all homeowners putting less than 20 per cent down when buying a home, which labels them as high risk buyers. Should such a covered homeowner default on their mortgage payment, it is the government, and ultimately taxpayers, who pay the price.
A Proactive Signal
Last week, the International Monetary Fund released a report that targeted this risk, stating the government is too exposed to the onus of homeowner debt, making the whole nation economically vulnerable.
And it appears Finance Minister Jim Flaherty listened. Dr. Ian Lee, a former mortgage specialist, program director of Carleton University’s Sprott School of Business and member of the RateSupermarket Mortgage Rate Outlook Panel, says the minister was likely trying to signal to markets that the government is taking a proactive approach.
“It is my interpretation – and I’m not privy to what the minister thinks – that he was under political pressure: to the markets, to the critics, to the pundits, and to the opposition parties. He wanted to show, ‘Look, I’m doing something – everything is under control,’” he said in an interview with Money Wise.
“I think he wanted some political cover, so he could respond to the people who ask, ‘Well, what are you doing, Mr. Flaherty?’.”
Smoke And Mirrors?
However, Lee adds, the measures appear to be mostly symbolic – after all, the CMHC is a Crown Corporation; all profits earned are already destined for government coffers. “Who are the shareholders of the CMHC? Well, it’s the government of Canada,” says Lee. “Any money they make goes to the government anyway. What they’re doing is getting the money a little bit early – instead of waiting until the fiscal year end, they’re getting them every quarter as they cut the deals.”
Waiting For The Other Shoe To Drop
So what’s the benefit of the government imposing fees on its own operations? Lee states that the real motivation remains to be seen, as it’s still speculation as to how the CMHC will react. “This is a distinction without a difference,” he says. “If (the government) didn’t own CMHC, it would not be symbolic, it would be real, because it would be falling on somebody else. But they’re only imposing it on CMHC, so I thought it has to be symbolic to the IMF, because the IMF announcement and recommendation did get a lot of attention from the media.”
“It really depends on how the CMHC is going to respond; are they going to reduce the availability of mortgage funding, are they going to just jack up the fees? We don’t yet know, other than their assertion that it’s not going to hurt their bottom line.”
The Effect On Mortgage Rates
While the fees likely won’t affect mortgage rates outright – lenders aren’t affected by the rule – it is possible that the CMHC will cover their new costs by increasing default insurance premiums. This will lead to higher costs for home buyers over the long run, as these insurance premiums are bundled up and amortized over the course of the mortgage, rather than an upfront fee. This will lead to more interest paid over time.
Privatization More Complex Than Meets The Eye
Another of the IMF’s suggestions was to remove the monkey of default mortgages from the government’s back altogether, recommending that private insurers such as Genworth and Canada Guaranty take on a higher market share, or simply sell the entity’s portfolios to an interested buyer.
Lee warns that while this might seem an ideal solution, the logistics of dismantling the CMHC are far more complex. In addition to mortgage default insurance, the corporation has several product lines including subsidized housing, and green building initiatives.
“What do you do of these other entities?” he poses. “Any buyer of CMHC doesn’t want to buy a bunch of green programs or affordable housing, so the government would have to partially dismantle CMHC.”
Lee’s suggestion: move the in-house economists to Statistics Canada, transfer the green living products to the Department of the Environment, and move subsidized housing to the realm of the provincial governments. As for the mortgage default coverage, Lee believes accountability should fall to the Bank of Canada.
Then, there’s the challenge of weaning consumers off the crown corporation’s support.
“Finally, once you’ve gone through those other areas and you’ve gotten to the mortgage insurance, then the issue is – do you just wind it down by freezing it, by not allowing to issue any new mortgages, and you eventually work it out of existence as those old mortgage contracts are renewed, or whatever, or do you simply privatize it outright?” Lee asks. “Those are some difficult issues.”