Flaherty – “For some time now I’ve had concerns about the role that CMHC now plays. Historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that. I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada.”

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. 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.” [Finance Minister Jim Flaherty]

In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.
“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”
The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.
The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.
By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.
But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”

Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.
As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”

– from ‘CMHC could be pulled out of mortgage insurance business, Flaherty says’, Garry Marr, Financial Post 27 Apr 2012 [hat-tip allen]

If it ain’t broke, don’t fix it.
Ergo, I think we can very fairly say that these announcements of change are an admission that something is ‘broke’, or is going to be. Just as many of us have opined for some time. The problem has been that the CMHC has mispriced risk and created a form of moral hazard, fuelling speculation with the same “cheap money” that Flaherty here blames on the bankers.
Interesting to note Flaherty playing hot-potato with Carney: “Cheap money is his problem!”; “..no, his!”; “..no, HIS!”; etc.
We’re not sure what he means when he says: “The key in housing from my point of view is to get the best information on housing.” Translation, anyone? Does he mean we shouldn’t consider things deemed extraneous to the market?
– vreaa

42 responses to “Flaherty – “For some time now I’ve had concerns about the role that CMHC now plays. Historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that. I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada.”

  1. Situationroom

    Isn’t it the roll of government t protect its citizens? The fact that he doesn’t take concern to the amount of foreign investment taking place is discouraging and disgraceful.
    If anything start tracking it! Start following the paper trail.

  2. placation nation … talk is cheap … cheaper than the credit – no understatement – eg. uncles ben and al … the american experience has been well-dissected by excellent minds … there are no real mysteries left in the canadian predicament …

    • Made in Canada dirigisme.
      I doubt Flaherty realises how many houses for which Her Majesty’s Government is going to be liable.

      • Her Majesty has been receiving payments from CMHC to compensate for risk. If anyone didn’t know that, it’s true.

      • @CW. that is not in dispute. pt of contention is whether the comp will prove to have been fairly-priced. and if not, why should the public be backstopping private enterprise. the record of public success such endeavors is a pity – because it’s really –tty.

  3. vreaa that last paragraph in the article is nonsensical. Does the Globe edit for readability or just gramatical correctness?

    I know CMHC is seen as a giant bugbear that needs to be overhauled. But I see it as a symptom of the problem. That is, high prices allow nearly-perfect hedges to be made regardless insurance availability. The problem is high prices and a mistaken belief that price rises can be permanent, made real by appraisal and risk management practices that are not concerned with the big picture. CMHC is only a player in a larger troupe that now extends well beyond its influence.

    • I second that. The CMHC rise in importance in Canada’s financial markets is more a symptom that a source of the problem.

      Would further argue the situation with CMHC is far from dire.

      What we’re seeing here is Flaherty taking action to strengthen Canada’s financial system and putting a small speed bump in banks’ mortgage business. Placing them under the care of Canada’s finance department instead of the human resources department and restricting them from gauranteeing Canada’s coveted covered bonds is a brilliant measured move.

      • Measured is the Conservative mantra 🙂

        I’m getting a sneaking suspicion that the govt is throwing a salvo of policy moves against the lending bubble, from OSFI to CRA to CIC . No doubt a few meetings were held to brainstorm what to do.

        I see two giant red turtle shells being fired at Vancouver and Toronto; I think the risks of another year of debt growth are too great to take any chances, and that means kitchen sink policy directives. The biggest one IMO is regional controls on loan issuances; getting a mortgage in Vancouver is likely going to be significantlymore difficult than say Calgary. Removing the insurance hedging strategy is a designed move to force regional risk weighting on loans (alongwith OSFI proposals in draft).

      • Quite right. This was a win-win maneuver that delicately targets Vancouver and Toronto more so than the rest of Canada. It’s not perfect because it still puts real Canadians with real jobs at a disadvantage to lowly leveraged foreign buyers. Still a good move to protect the most vulnerable Canadians from making a life changing mistake.

        Like you said, there must be a number if discussions happening at the highest levels behind the scenes.

  4. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”

    Here’s one way to read into it:

    The pause after the ‘no’ was more likely to buy him time to think through his choice of words rather than to emphasize his point.

    His following comment was just political speak to avoid fully answering a sensitive question.

    Foreign money’s influence on local housing data is extremely difficult to track. Even the greatest economic cities like London and New York can’t pinpoint the true effect of foreign money on their real estate prices. Carefully managed economies like China can’t either.

    What Flaherty is advocating for is more transparency on housing data from true domestic demand to foreign money’s influence – like every other government in the world. Something really difficult to do as it is like following a raindrop’s journey.

    • Australia instituted a foreign investment review board. It can be done but not easily when departments are in ax mode.

      Australia had over $10BB in “restricted” foreign investments in residential in ’10-11. Apparently investors are still drawn to Australian property even if there are limited capital gains… Oh well!

      • Definitely foreign ownership restriction is one way to go albeit a heavy dose. IMHO, it would be the wrong move but too long to explain here.

        Higher property transfer taxes for first two years of ownership would much more effective and balanced.

        However that can only be implemented on a provincial/local level and there isn’t that much political will here to push something like that through. Business lobbyists are quite influential and we would in effect be handing out economic gains to Alberta and Ontario on a silver platter!

      • There’s no property transfer tax in Alberta so an increase in BC’s property transfer tax would likely have no impact on immigration to either province given the already very wide affordability differential between the two provinces. Direct foreign ownership restrictions would be much more effective but at this late stage of the bubble, meaningful restrictions would likely result in a collapse of the Vancouver RE market in just a few short years. Probably better to just let the Vancouver market naturally deflate 10% per year over the next decade.

      • Thanks for that. I was not aware there isn’t a PTT in Alberta.

        I share the same view that To naturally marginally deflate or stall Vancouver’s RE prices would be the most ideal outcome.

        However, if there are unfavorable RE policies put in place in Vancouver, the foreign capital here still has to go somewhere. It won’t just disappear. Enough of that capital (not immigration) might just make its way over to Alberta’s real estate as an investment where a hot economy and low taxes support fundamentals.

    • “Foreign money’s influence on local housing data is extremely difficult to track.”

      Nope. Any OpenSourceMonkey can do it.

      Just imagine what Dr.J and the Chubster could accomplish with a StoneGhost LogIn.


  5. For Flaherty, CMHC is a flaming paper bag full of dog poop he has dropped at the neighbour’s house.
    Flaherty has created it and has left it on the doorstep of Canadian taxpayers… He knows it is there and what is going to happen.
    Flaherty has rang the doorbell and he can’t distance himself from it fast enough…
    Run, Flaherty, Run!

    • Why would you say that? He has actually taken CMHC away from the department of human resources and put it under his supervision in the department of finance.

      There seems to be a lot of apprehension with the CMHC. But why? Not saying its not justified but from what I can tell, they are insuring only a maximum of 20%-5% (not the entire amount) of highly leveraged mortgages which they have hedges against. Their other business of insuring covered bonds, which Flagherty is pushing a law to shut down, is also quite conservative as the Canadian banks issuing them would have to go bankrupt before CMHC steps in.

      • FHA was just 2% of the market going into the US subprime mortgage crisis and could end up costing tax payers billions. Perhaps even $100 billion. I don’t know why the CMHC would be immune to similar size losses once the Canadian RE bubble pops.


      • Yes we could draw similarities between CMHC and FHA but the tax, legal, political and banking systems between the two countries are so different that you can’t compare them as apples to apples.

        Yes, there should be concern and a dose of cynicism whenever an institution is ultimately backed by taxpayers.

        CMHC’s balance sheet is large but we need to break down into the data to really see how great the risks are. If most of their balance sheet is used to insure 5% buyers then we need to dive into their risk management/hedge positions.

        If their blance sheet is inflated, as I suspect, by insuring covered bonds then taxpayers are very safe. In effect, Canadian banks would have to fail in order for tax payers to be on the hook – unless the government bails the banks in an Armageddon scenario.

        Covered bonds are beautifully structured and have been used by Europeans for hundreds of years. They make the banks who issue the mortgages liable if the mortgagees fail to pay.

        With Canadian banks some of the strongest in the world, it is highly unlikely taxpayers will be on the hook as it stands. I would sleep well as a Canadian tax payer.

      • Why would I say that? Logic and evidence.

        Flaherty is now musing about the possibility the federal government may no longer wish to be involved to be in the business of insuring mortgages. (Why they ever were is beyond my comprehension). Where Flaherty once saw the CMHC as the instrument of his mighty monetary fiscal stimulus (although an indirect conduit), he now sees it as a potential liability. There is a reason he sees it thus… it is now a potential albatross which he will jetty without a second thought.

      • Slightly outside my area of expertise but I don’t believe mortgage debt is hedgeable particularly for a “lender of last resort” ie. CMHC. I mean, it’s not like a corporate where you can sell the equity or an agency where you can buy CDS. Insurers can buy insurance from reinsurers but this is more about risk spreading and diversification. It’s seems to me that CMHC is a very concentrated risk. The only hedge would be short CDO structure that someone else wants to take the long side of. If Canadian banks don’t want to hold the risk then I doubt there’s a willing buyer after the two+ trillion dollars of debt securities that was flushed after the financial crisis.

      • There’s no complete hedge for CMHC much like banks can’t completely hedge either. They can manage their risk and funding profiles though rather effectively. They can manage how much they get get their funding at by issuing bonds, which they do for cheap because they are perceived to be as credit worthy as the Canadian government itself. They also no doubt manage their risks accordingly to Basel regulations which are observed by all banks in the developed world – they have been further strengthened since 2008 and Canadian banks go above and beyond the minimum requirements.

        In this world there’s no bulletproof hedge as it will always only be as strong as the counterparty.

        Maybe someone who knows CHMC’s books very well could give an analysis. As for me I perceive CHMC to be an accelerant that is still well within manageable limits.

        Our memories of 2008 have made us much more cynical of financial institutions than at any point in history. We’ve seen an alcoholic uncle ruin his life and have developed overblown fears of what alcohol can do to us. In reality, dead beat alcoholics are a minority in the grand scheme of things.

      • BLM: I’m relieved to read your commentary. It sounds like we’re in for a soft landing.

      • ” It’s seems to me that CMHC is a very concentrated risk”

        Of course it is, but it’s on the government’s books and that makes all the difference because they also control the money supply. Banks can 100% hedge their insured mortgage portfolios; in the case of CMHC insured loans I believe they are 100% hedged due to the government guarantee. In the case of private insurers the counterparty hedge is 90% so banks need to provision capital for this. As far as I understand it banks will typically spread their insurance between Genworth et al and CMHC, and CMHC gets about 70% of the business. It’s a quid pro quo with banks to produce a quasi-competitive environment.

        In terms of counterparty risk for mortgage insurers, in the US mortgage insurance is typically limited to the first, say, 30% loss and the rest needs to be hedged some other way. So the privates can make a good business case for their investors by limiting their payouts. In Canada the whole shebang is insured. That means in the case of a big downturn the insurer is on the hook for the entire loan. Of course it’s unlikely a property will lose 100% of its value so the losses are limited to some degree.

        I agree and disagree with the assertion that CMHC is adequately capitalized. Doing some rough stress tests I think their capital reserves are light for a 20% national drop, to the point where they will need refinancing, but that’s not the end of the world; the same would be true with a private insurer as well. The big problem CMHC would have with a national crash is bridge financing if the market turns illiquid and that could be on the order of many tens of billions of dollars. Most would be repaid but my estimate is that in such a scenario the government will have sunk about $10BB of capital into CMHC that will never be recovered. That’s not as dire as the hundreds of billions being bandied about on some blogs — it still sucks of course but not the end of the world.

        To me the biggest problem that the government will face is that when CMHC is turned into the free market waters it may be at just the time when the market will need a government backstop. In effect CMHC will be insuring slime that no private insurer would touch with a barge pole. Not sure what premiums they will force upon borrowers — my bet is hefty ones — but this will be at a time when the probability of defaulting on recently-insured loans will be acute and much more probable than normal. In these situs there is likely no amount of insurance premiums that can protect an insurer, hence the government taking the burden. We shall see!

      • So CMHC is hedged because the BoC can print money is your argument Jesse? This is reasonable but it’s just a form of inflation / savings tax and still supports my point. The Canadian government can also take more income tax directly but no matter how you look at it, it’s the Canadian public that is CMHC’s hedge despite a household sector that’s already drowing in debt.

        I say Vancouver should insure it’s own mortgages instead of dumping the inevitable fall out on all Canadians. Canada has the exact same common property / moral hazard mess as Ireland, Spain and the US and it’s just a matter of time until the rest of the world figures it out.

    • Time and again, it has been demonstrated that governments are not good judges or evaluators of what is an appropriate amount of compensation to receive in exchange for a certain amoun of risk. Fannie Mae and Freddie Mac were able to exist as shareholder owned “quasi-governmental” agencies and yet still gained all the benefits of governmental “implicit” backing and yet managed to massively underprice risk associated with mortgages. What makes anyone think the CMHC is any more competent? Unless one wants to trot out our “special” and “singular” abilities, one is left naked in the face of rational arguments.

      • Reality works in funny ways. Even if we try to recreate the conditions of 2008 today and in Canada, things will fail differently.

        We can keep referring to 2008 or the great depression but every scenario is unique. We have hindsight now which is both a blessing and a hindrance. We can make better judgements but also be paralyzed by fear.

        Not directing this at you but to the broader views of many that we’re only going to head for economic disaster.

  6. Flaherty is acting concerned so that when the boat sinks, he can say he tried to turn the rudder. This is merely a preemptive strike to make the government look like they are not to blame for the low interest rates and the massive amount of debt that Canadians hold. A sort of “Well, we tried to warn you”. Too little too late!!!!!!!

  7. It’s his fault, no his, no his, no its actually the buyers fault. In the end, it’s the person that signed on the dotted line. You just fucked yourself. 😭

    • Have you considered a career as a CPC official?? Life is meant to be driven in a Porsche. Sure you can open ‘er up on those flat lonely stretches and enjoy driving as God intended, but watch the speed on those windy sections; those yellow diamond signs are suggestions, but carefully considered suggestions.

      Fair warning, though: your estate will be billed for cleaning the spatula used to clean your remains off the pavement.

  8. Just clicked through one of their recent financial statements. No red flags here. Flaherty, through his carefully chosen words, is more concerned about the size and influence of CHMC rather than its finance.

    Consider their insurance loan portfolio:

    2% in >95.01%
    7% in >90.01%-95%
    18% in >80.01%-90%
    73% in <80%

    Average equity in their insured loans portfolio (above) is 45%. (Healthy)

    They continue to get insurance premiums from these loans each month.

    The thing that might cause a bit of a double take is their expansion into the very profitable business of insuring covered bonds which is pushing them to their government-imposed insurance limit of 6bn.

    A lot has to go wrong for CHMC to be in trouble. Canadian banks, some of the most prudent in the world, would have to fail. We've got bigger issues than CHMC to worry about if it ever comes to that.

    • On the portfolio stuff they get rolling premiums; on the high ratio stuff it’s a one-time payment on loan origination I think and they’re on the hook for the duration of the loan.

      • That’s interesting but still looks manageable to me. Anything else above numbers are not telling us?

        Any idea on the rate/lump sum?

  9. “For some time now I’ve had concerns about the role that CMHC now plays.”

    It took me a while to figure out why he said that because it’s so patently false. He is the person responsible for the role that CMHC now plays.

    But I finally figured it out. “For some time now” has no quantifiable meaning. Taking it literally, “5 minutes” qualifies as “some time”. So they are just meaningless weasel-words. Sneaky.

  10. Has BLM ever been on this blog? 12 posts on CMHC, repeating himself several times that CMHC is no problem and “Canadian banks, some of the most prudent in the world”. Attack on bear blog? Suspicious?

    • 🙂 a grove -> only the paranoid survive … yay paranoia! … “do these prodigious emissions seem desperately prodigious – like the elaborations of a bad liar?”

  11. Read my guest post yesterday.

    Just saying, CHMC ain’t Kryptonite.

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