CMHC fires back at critics

Canada Mortgage and Housing Corp. is taking the unusual step of publicly challenging its critics, defending its reputation and its business model amid mounting calls for change.

On Monday, the Crown corporation e-mailed to the news media copies of letters that its vice-president had sent to three think tanks which recently published research reports critical of the extensive role that CMHC plays in the housing market and the risk that creates for taxpayers.

The move comes as the Obama administration signalled last Friday that it thinks the U.S. government should no longer play a major role in that country’s housing market. In doing so, it rejected adopting a Canadian-style system, which CMHC critics argue bolsters the case for re-examining the role of the Canadian agency.

“While starting from different places, there are interesting similarities between Canada and the U.S., where we have governments explicitly on the hook for large amounts of mortgages,” said Finn Poschmann, vice-president of research at the C.D. Howe Institute, which two weeks ago published a report entitled, “What Government should do in Mortgage Markets.”

CMHC is by far the largest provider in Canada of default insurance on mortgages, which home buyers are legally required to have if their down payment is smaller than 20 per cent. Ottawa created CMHC in 1946 to house returning war veterans and its role in the housing market has steadily expanded in the decades since.

Mr. Poschmann is one of the critics who received a letter from CMHC’s vice-president of policy and planning, Douglas Stewart. In it, CMHC argues that the Canadian model is cost-effective, and has provided the Canadian taxpayer with $12-billion over the last decade in profits and income taxes.

“Most importantly, the Canadian model withstood the test of the economic downturn, when housing markets in the U.S., United Kingdom, and Ireland failed,” Mr. Stewart wrote.

He also shot back at suggestions from Mr. Poschmann and others that CMHC should be subject to formal oversight from Canada’s financial regulator, the Office of the Superintendent of Financial Institutions, noting that CMHC already complies with OSFI guidelines.

Letters also went out to David Madani at Capital Economics and Jane Londerville at the University of Guelph, who published papers about CMHC earlier this month and last November, respectively.

Mr. Stewart’s letters and the decision to make them public is a departure for CMHC, which tends to shy from discussions about itself and rarely makes executives available to news media. “Simply put, CMHC felt it was important to have a discussion based on factual information,” spokesman Charles Sauriol said Monday.

Mr. Poschmann said CMHC’s mandate is being debated now because of the U.S. situation, where taxpayers have been left on the hook for trillions of dollars in mortgages and policy makers are grappling with how to prevent that from occurring again.

CMHC’s critics aren’t swayed by the global recognition and kudos that the Canadian system, and the agency’s role within it, has received in the wake of the financial crisis. “Underwriting practices in Canada have been better than the U.S., and there’s no question we’ve been more stable than the U.S. has,” Mr. Poschmann said. “That said, that doesn’t mean there aren’t risks here.”

The greatest risk stems from the fact that Canadian housing prices are high relative to incomes, and consumers are shouldering large debt loads, he said. Any correlated market shocks could have serious consequences.

Although last week’s report from the U.S. Treasury Department on the mortgage system did not refer to the Canadian model, it essentially rules out the creation of something similar.

“The U.S., in terms of looking at the full range of options that they could pursue, very much decided to look at options that do not create the same taxpayer vulnerability as the Canadian system creates,” said Neil Mohindra. A year ago, he published a report for the Fraser Institute recommending that CMHC’s mortgage insurance business be privatized. Mr. Mohindra said he did not receive a letter or other response from CMHC at the time.

Mr. Mohindra agreed with Mr. Poschmann and other critics that even if CMHC is complying with OSFI rules, oversight by the regulator would force the agency to provide much more information to taxpayers, as private mortgage insurers do. “They say they comply with OSFI guidelines and … I’m sure they do,” he said. “The point is they don’t publish the data to support that compliance.”

Tara Perkins Globe and Mail

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