Reduce CMHC role in mortgage insurance: CD Howe

The federal government should limit taxpayer exposure to potential problems in the housing market by reducing the role of the Canada Mortgage and Housing Corp. in the provision of mortgage insurance, CD Howe Institute said in a report Monday.

The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, according to the report.

Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.

According to the report by Finn Poschmann, vice-president of research at the CD Howe Institute, the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product.

That’s left Canadians exposed to “large, ill-defined risks,” said the document, which argues that Ottawa should crank back the CMHC’s presence in mortgage insurance and allow more room for private sector insurers.

Originally conceived as a vehicle for executing public policy, CHMC insurance levels have expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to hike lending by allowing them to securitize more home loans.

Critics worry that the unintended consequence of government policy was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels.

“Beyond the presumed benefits of promoting home ownership, [activities of the CMHC] have had some clearly harmful and well-understood consequences, as well as other less well-understood but also harmful consequences in world financial markets,” Mr. Poschmann said.

The CD Howe recommendation comes on the heels repeated warnings from the Bank of Canada that Canadians have become over leveraged and need to start paying down debt.

One of the main concerns about the CMHC is the lack of disclosure about the quality of its mortgages and details of the types of loans it insures. For instance, when the government announced earlier this month that home equity lines of credit, or HELOCs, would no longer qualify for CMHC insurance, many analysts expressed surprised that such loans were ever allowed to be part of the CMHC program in the first place.

Canada is hardly alone in its policy of boosting home ownership as the United States and many other countries have adopted similar initiatives. But Canada is one of the few western nations that have not so far been hit with a steep decline in real estate prices in the wake of the financial crisis.

The report also makes the case for beefed up oversight of CMHC as right now its relationship with the Office of the Superintendent of Financial Institutions is primarily a courtesy arrangement under which the crown corporation is not compelled to follow OSFI directives.

According to Mr. Poschmann, Ottawa should adopt new legislation to remove the ambiguity from the relationship by legally requiring the CMHC to comply with guidelines laid down by the federal regulator.

John Greenwood, Financial Post · Monday, Jan. 31, 2011

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