The federal government has a very close eye on mortgages in Ottawa again. While Canadians have known for some time now that the Canada Mortgage and Housing Corporation is near reaching its $6 billion cap for insuring mortgages, Jim Flaherty promised he’d do something about it in his federal budget back in late March. Today, he will.
It was on Tuesday that Finance Minister Jim Flaherty said that it would be on Thursday that the government would meet “to implement certain provisions of the budget.” It’s being widely reported that this will be through a document known as the “Notice Paper,” although this is really just an agenda for the Senate of Canada. The revisions to the Crown corporation will be listed, and then decided upon. So just what are they going to be deciding?
Mainly, how to control and regulate CMHC in a way that’s better for the organization, the government, and the Canadian people. Jim Flaherty has two main ideas on how to do that: turn them over to OSFI, and to disallow them from using insuring conventional mortgages.
Currently, nearly 75% of the Canadian and Toronto mortgages that CMHC insures are conventional, meaning that the buyers had put down a 20% down payment and therefore, there was little risk to the bank. But why is this so, when CMHC insurance is only necessary when buyers have less than 20%? It’s banking business.
Banks know that even though there is little risk on those conventional mortgages, there is still risk and the borrower could still default. So in order to keep their capital and cover themselves, they sell mortgages to investors and to protect the investor and make their (the bank’s) investment look even more attractive, they insure it by CMHC – even though it’s not necessary. It doesn’t seem to make a whole lot of sense, especially at a time when the Crown corporation is so close to reaching its cap, and Jim Flaherty doesn’t think it does, either.
Back in February the Finance Minister said, “The issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low-ratio mortgages. That’s not the way most people think of CMHC.”
There has also been speculation that in order to correct the CMHC situation, the Office of the Superintendent of Financial Institutions (OSFI) may take over the governance of the corporation, in place of the federal government. However when asked about this particular change, all the Finance Minister had to say was, “I’ll talk to you about that tomorrow. Tomorrow’s Thursday, right?”
