Finance Minister Jim Flaherty says the Canadian Mortgage and Housing Corp "Has become a significant risk to taxpayers," and now publicly muses about privatizing the Crown corporation.
Over the last year, he has tried to engineer a soft landing by reversing changes to mortgage rules he made in his 2006 budget. To many, a home is their largest, single most important asset with the belief it should not be tinkered with by the whims of politicians.
Former Bank of Canada director David Dodge was blunter, "This was a mistake; lower mortgage standards caused already frothy house-prices to inflate. It has encouraged some to borrow too much or jump into the market before they were ready."
CMHC was a sleepy Crown corporation nobody paid much attention to. In 1996, it insured $131 billion worth of mortgages, doubling to $291 billion by 2006 and doubling again to $576 billion in 2011. Profit soared from $375 million in 2000 to $1.3 billion in 2006. CMHC had grown large and profitable.
Private insurers lobbied the previous Liberal government, salivating to gain access to Canada's lucrative mortgage insurance market. In 2006, they found a willing ally in the Harper Conservatives.
Flaherty's first budget "invited new players" into Canada's mortgage insurance market. Promising easier access to homeownership, he went further relaxing rules so consumers could now refinance up to 95 percent of value, allowed zero down-payment insured mortgages and extended amortization lengths on insured mortgages to 40 years.
In 2006, capitalism looked invincible; these changes further stoked the housing boom some thought would never end. CMHC was put on a trajectory to become the "rock star" of Crown corporations, and with more private insurers in Canada's market, it was believed a future potential buyer of CMHC would be assured. To Conservative policy advisers, the finance minister had hit a home run.Â
Though Canada avoided the 2008 meltdown, other problems appeared. Low interest rates from necessary monetary policies combined with lax mortgage rules led to a frothy housing market after 2008, pushing up house prices faster than incomes.
The American sub-prime crisis showed a rapid rise in house prices, household debt built on low interest and easy lending rules is a toxic combination. Canadians now hold over $1 trillion of mortgage debt, nearly three times the amount they had in 2000. The Globe and Mail states CMHC now backstops $800 billion in mortgages, the equivalent of almost half Canada's annual GDP.
Finance officials often use the Australian experience in discussions about CMHC privatization, but rather than being a good model, events there raise questions.
The First Australian National Mortgage Acceptance Corporation (FANMAC) started in 1987, a hybrid of jointly owned government and private financial institutions to help provide mortgages to Australian borrowers who did not qualify for private-sector loans.
By 1989, a combination of political and private institution pressure, led to FANMAC easing lending standards and credit requirements. The Australian economy went into a recession in 1991, housing prices and interest rates fell, many buyers locked into high-interest loans and unable to pay led to massive foreclosures. In 1993, FANMAC closed and government was forced to pay out hundreds of millions of dollars - eerily similar to the U.S. sub-prime collapse, though on a smaller scale.
The Australian government still kept its hand in the mortgage insurance side with Housing Loan Insurance Company (HLIC), similar to Canada's CMHC. And, like Canada, where 30 per cent of our mortgage insurance market is private, Australia also allowed private insurers into the marketplace.
Australia's private insurer's complained that HLIC distorted the market; finally the government relented in 1997 and sold HILC to Glenworth Financial, a company that is now one of the private insurers that operate in Canada.
Past experience taught the Australian government to maintain strict rules for HILC. When they sold, they insisted Glenworth keep the same high standards. Like Canada, Australia managed to avoid a housing meltdown in 2008.
Since 2008, Glenworth relaxed rules to increase market share. Other private insurers followed suit, and this has led to a frothy marketplace, Australian housing prices are now 30 per cent overvalued.
The OEDC says Canada's housing market is 25 per cent overvalued. If we do experience a bear market or if interest rates rise, both very real possibilities, then Canadian tax payers could take a hit.
The sale of CMHC is no easy task; government would be obliged to break up CMHC which represents 70 per cent of Canada's insurance market to ensure no private buyer would end up with a monopoly. There is no guarantee private insurers would not loosen rules to acquire larger market share, continuing a race to the bottom.
Private insurers would insist and justify the need for government guarantees to keep premiums down and access available to everyone, so Canadians would still be on the hook.
CMHC represents the most effective tool in government's toolbox for protecting the housing market from "excessive exuberance." Flaherty has done the right thing by reversing ill-conceived changes and should leave CMHC well enough alone; there are other areas that require his attention.
Jon Peter Christoff,