Is CMHC to Blame for Canada’s Housing Bubble?
When it comes to the bubble that Canada’s housing market may or may not be in, there’s a lot of blame to go around. Some are blaming the banks, some are blaming imprudent borrowers, some are blaming foreign investors, and some are blaming the government! This latter is what the Jesse Kline of the National Post is doing, saying that it’s the government’s responsibility to privatize the Canadian Mortgage and Housing Corporation in order to get a grip on our housing situation and start holding the banks accountable to themselves.
It’s not really a bad idea, what Kline is saying. He believes that with CMHC insuring 90% of mortgages, there simply is no responsibility on the banks when they’re handing out Canadian and Ottawa mortgages, and that this is where the real fault of Canada’s housing market lies. With the responsibility currently falling on the government’s shoulders through this Crown corporation, it’s really being left to the taxpayers to pay mortgages that have defaulted, and not the banks.
But, Kline has a solution.
It’s as easy as privatizing CMHC, something that a few have called for before in Canada. By making CMHC a private company, and not a Crown corporation, the responsibility of paying defaulted mortgages would fall on an actual, tangible company – and not the Canadian masses paying taxes. In addition to that, says Kline, the biggest factor in privatizing CMHC would be that it would take away the government’s responsibility of pricing risk – something Kline doesn’t think they can do accurately. A private company on the other hand, would be able to do so much more appropriately, and therefore lessen the amount of risk to themselves, to homebuyers, and to the Canadian housing market. This does seem to be a better alternative than limiting foreign investing, which brings millions of dollars into the country every year; and that is also something others have suggested in order to correct the current housing market.
To say that the government is entirely to blame for our current housing market is a bit of a bold statement. After all, Jim Flaherty has changed mortgage rules several times, touching on everything from shorter amortization periods to new rules on home equity loans. It’s clear that our government is trying to do what they can, without completely limiting our rights to home ownership. But, privatizing a company that does currently hold so much risk, and allows those who are least able to afford it to take out a mortgage, might be a reasonable solution that everyone can live with.
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Talk to the financial isnittution that holds your mortgage first. As a mortgage lender for a major bank I can tell you this is one of the most common requests we receive. A number of Canadian banks have recently brought out new products to help people who may not have perfect credit due to many different circumstances. If your bank isn’t able or willing to do this then I would start shopping around. Unlike a loan most banks expect you to shop around for a mortgage and you may be surprised at what they are willing to do to get your business.References : 12 years as a personal lender, last 4 as a mortgage specialist
Sorry Kate but damage is already done. The bad loans were insured, the worst ones have already gone sour and anything our savior Flaherty does now or has done recently will not prevent the other bad loans from coming out of government coffers. It’s like low interest rates. Our financial gurus think the muppets are not able to spot stimulus hidden in the form of payouts to banks. Since banks can’t make money the way they are supposed to any more by taking a reasonable cut from our savings we have put them on welfare.
Interesting article.
“A private company on the other hand, would be able to do so much more appropriately”
Not sure I follow why a private company would limit future risk for the CMHC “so much more appropriately” when all we’ve seen through the 2008 financial crisis is the exact opposite: government had to bailout private banks because of the irresponsible risks the private companies had been taking.
Hi Rick,
I agree with your point here that risk assessment was poorly handled in the US and many countries.
Canada has always had, and today continues to have a more conservative lending environment than most
other countries even when the lending standards were at their “loosest”.
I think the point that Kate was making here is that with a private company at the help, in theory
at least they have a motivation to make money and as such manage the books better rather than to
promote a social construct.
At the end of the day, the government indirectly backstops ALL mortgage finance (on a macro level)
throughout the economy given the need to step in and bail out a private insurer or public insurer
alike should the failure lead to a collapse of the marketplace.
…. and thus we enter the era of moral hazard. Beware all and live within your means!
CMHC needs to lower it\’s insurance level, I do not like the fact that the Canadian public (you and me) will end up paying if the market tanks.