The Canadian Mortgage and Housing Corporation (CMHC) has helped millions of Canadian homeowners obtain a mortgage. But now the International Monetary Fund (IMF) has issued a report that suggests a review of the CMHC practices may be necessary, and that there may be a better way of doing things.
The IMF is a global organization made up of 187 countries, to help foster global monetary cooperation and stability. When the IMF releases a report, it takes into consideration the global financial practices of all 187 countries and compares them with one another to see what’s working and what’s not. In the report the IMF points out “CMHC is now one of the largest financial institutions in Canada and the largest federal Crown enterprise. Given elevated house prices and household debt and the potential fiscal risks associated with its balance sheet in a stress scenario, a review of CMHC’s governance structure and supervision would be timely.”
The review, according to the IMF, would analyze how many mortgages the CMHC is now insuring. Of course, this insurance is necessary for mortgages in Canada that have a down payment of 20% or less, according to Canadian law. Up until 2006 CMHC controlled all of the mortgage insurance market in Canada, but that same year two private mortgage insurance companies started competing with them. But even with that competition, CMHC still holds 70% of the mortgages backed by mortgage insurance. Even with those stats though, CMHC still needs to cover 90% of mortgages in Canada that are privately insured. The remaining 10% is there in order for CMHC to comply with their own public policy mandate, but the IMF says that it’s still a policy set in place simply to give CMHC the edge over their competitors, and cause them to take on more risk than actually necessary.
The most alarming news, according to the IMF, is that the total amount of mortgages covered through CMHC insurance increased by 72% between the years 2005 and 2009. During those years, private mortgage insurance decreased by 33%. Part of the reason for the increase on CMHC’s part was due to a government program that came into place during the recession when the government organization took on $125 billion worth of mortgage-backed securities.
The problem is that CMHC is taking on far too much risk, and that this risk directly translates to how much taxpayers will have to make up the costs. Some have suggested that following in Australia’s footsteps might be the way to lower the risk, and lower the burden placed on Canadian taxpayers. And it’s not really all that hard to see why. Australia once had an organization much like CMHC, called the Housing Loan Insurance Co. While this used to be a government organization, that all changed in 1997 when the company became private insurer. This model has put the rate of home ownership in Australia higher than that of the Canada or the United States and, unlike the States especially, private mortgage insurers in Australia remained much more profitable when the global financial crisis hit in 2008.
So should CMHC be privatized? It’s hard to say, because the current model isn’t in any trouble and the organization is after all, providing mortgages for millions that would otherwise not be eligible for one. But, with the high risk the CMHC is currently taking on, a review of the organization and how it insurers mortgages (and mostly, how many mortgages it insures,) might be something worth taking a second look at.
