By Garry Marr, Financial Post November 27, 2013 - Imagine a world without Canada Mortgage and Housing Corp. Today you can walk into a financial institution and try to borrow money for a home with only 5% of the purchase price, provided there’s an agreement between you and the bank that you’ll buy mortgage default insurance.
What happens next if the government is no longer behind that mortgage, making sure the people loaning the money or the investors buying that loan get paid, should you not make your payments?
For starters, you might gently be shown the door because nobody wants your credit risk or you might be told the risk is so high you can forget about interest calculated at 3.25% for the next five years — the rate you can still get in part because of Ottawa’s backing.
The International Monetary Fund waded into Canada’s housing market Wednesday and while it didn’t come right out and suggest that the CMHC should be abolished and the government get out of backing loans, the institution is calling for changes.
“Over the long run, the need for extensive government-backed mortgage insurance should be re-examined,” said the IMF, in its statement.
Anyone with less than a 20% downpayment on a home must get mortgage default insurance if they are borrowing from a financial institution regulated by the Bank Act. The government backs 100% of loans that CMHC insures and 90% for private corporations.
It was unclear if the IMF was calling for the government to reduce its backing of mortgage insurance companies, a move that would it make loans riskier for banks to take on and harder to securitize.
“Looking ahead, further measures should be considered to encourage appropriate risk retention by the private sector and increase the market share of private mortgage insurers. Importantly, any structural change should be made gradually over time to avoid any unintended consequence on financial stability,” the IMF said.
Ottawa backstops close to $1-trillion in Canadian mortgages but the likelihood of all those loans going bad with zero equity in assets seems far-fetched, but the IMF did say the present system exposes the government to risk.
Jim Flaherty, the finance minister, has mused about eventually privatizing CMHC — the Crown corporation which controls about 75% of the mortgage default insurance market — and first told a National Post editorial board in April 2012 that he had considered getting the government out of the mortgage insurance business.
“I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run,” he said at the time.
Peter Routledge, an analyst with National Bank, said if we move to a system where mortgage insurers are all back-stopped to 90%, mortgages rates would be higher but only marginally.
What if we eliminate all government backing? “Mortgage rates would be a lot higher,” said Mr. Routledge.”The great benefit of the system is it has pretty much democratized and equalized credit for the household.”
Finn Poschmann, vice-president of research at the C.D. Howe Institute, noted in Australia the government is not directly involved in backing residential mortgages and credit hasn’t dried up.
“You can put private capital in the first loss position,” said Mr. Poschmann, adding that mitigates the risk that government faces. In such a scenario the private insurer has to go bankrupt before the government is forced to step in.
“There is nothing on the face of it that is wrong with mortgage insurance. What you want to do however is make sure the risks associated with it are understood, priced appropriately and borne by those willing to bear those risks,” said Mr. Poschmann.
Less government involvement could also mean customers with stronger credit would get better rates because they are more desirable. There would also be more regional risk pricing — a stronger local economy making loans a better risk in some provinces.
“Eventually this will happen, it has to, it’s only logical,” says Mr. Poschmann, about the government pulling back from insuring mortgages.
Rob McLister, editor of Canadian Mortgage Trends, said he would like to see more research into the impact of pulling out of the sector on the housing market.
Over the last decade, CMHC says it has contributed more than $17- billion to Ottawa through both its income taxes and net income. Of the $17-billion, the insurance business has contributed $15-billion.
“I’m not saying it’s bad idea, I’m saying somebody has to do some hard core analysis on this and put the numbers out there. I’ve never seen it,” said Mr. McLister.
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