Inside the CMHC and interest rates rising
Canadian Mortgage Trends has an interesting interview with Pierre Serre, the Vice President of Insurance Products and Business Development at CMHC. The upshot of the interview is that the CMHC has plenty of dough in reserve and poses no threat to the Canadian taxpayer in the event of a housing market crash. There are some other interesting figures in that interview: currently 9% of Canadian mortgage holders have less than 10% equity in their home. They also remark on default rates during previous rate increase periods, which seems topical since Carney is planning on raising the benchmark rate by 500% in 2010 (from a rock bottom .25% to a still low 1.5%)
CMT: Can you tell us, what were default rates in past periods of large rate increases (like 1980-81 or 88-89)?
Pierre: According to the Canadian Bankers Association, the highest rate of mortgage arrears—which is, greater than 90 days–occurred in 1982 and in 1983. The rates were 0.96% and 1.02% respectively, compared to today’s rate of 0.43%.
CMT: Mortgage arrears are currently around 0.4% in Canada—exceptionally low, especially for a recession. I assume CMHC’s risk analysts have calculated what would happen in a worst-case scenario of mass defaults?
Pierre: CMHC internal analysis supports CMHC being able to cope with a variety of economic scenarios, including some rather severe ones.
By ‘rather severe ones’ I assume he means a US-style cliff diving real estate market. Speaking of cliff-diving and on a whole different topic, check out this graph of US commercial real estate.
Thanks to Don for the links!
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July 20th, 2010 at 6:59 pm
bull
July 20th, 2010 at 6:57 pm
Time to get rid of Carney,all he cares about are banks. The common joe doesn’t have a chance. Let’s raise the interest rate so the fat f…. banks can get fatter.They talk of all this bs but really it’s about,WE,the banks are missing all this money.
Do we,the people, not own the BOC, listen to us, not the banks.
December 24th, 2009 at 10:39 am
“I still think the CMHC is keeping prices above what is dictated by prudent supply and demand.”
Observer,
CMHCs government guarantee is also keeping mortgage rates at least 1/2% lower than they otherwise would be. There are significant economic benefits to that.
Supporting the housing market yields economic benefits as well (hundreds of thousands of jobs, equity for people’s retirement, etc.). Housing accounts for $1 out of every $5 of our GDP. That some people can’t afford as much house as they’d like, is an unfortunate but tolerable side effect.
People can criticize CMHC and the government endlessly, but without them Canada could be a much grimmer place to live. If you want a housing market like the UK or US, then remove federal support for housing and you will quickly get there.
Today’s policies are inflating home prices. I don’t argue that. But the alternative far worse.
December 23rd, 2009 at 6:39 pm
Many of my friends and co-workers have either actually bought RE or thinking of buying this year because they are afraid of missing the train. Does that tell you something?
December 23rd, 2009 at 1:22 pm
Story in the SUN http://tinyurl.com/ya64psx
Headline = “Don’t clamp down on home mortgage rules, federal government urged”
Take away = “low mortgage rates are merely coaxing buyers who would have bought in 2010 or later to make their purchases now”
December 23rd, 2009 at 12:57 pm
Most “believers” knew that prices could not be sustained, but they had hoped the “one hundred year mortgage” would soon come to the rescue to support more price appreciation.
When that hope was dashed, sales dropped, prices followed.
The alt lenders quickly moved in with low, low, teaser rates, to recapture the market share which had been eliminated.
The major lenders matched the low rates, and lowered the standards once again.
Will Flaherty come to the rescue with more credit swaps, or will he finally realize the banks won’t comply?
This is not just a RE Bubble, it is also a Credit Bubble
December 23rd, 2009 at 12:28 pm
The RCMP has lost all public support and confidence after the spate of citizen murders across Canada survey shows. Kick these incompentant loser cowards out and bring in people that don’t want to kill when they get up in the morning. These RCM Psychopaths are the shame of this nation.
http://www.chtv.com/ch/cheknew.....id=2372343
December 23rd, 2009 at 10:09 am
#36 @nonymouse: Thanks for the link. As if “just talking about it” will somehow cool the market. More likely it have the opposite effect.
December 23rd, 2009 at 9:24 am
@domus: Interesting article. It’s worst than renting because you are locked in. Once prices correct here, it might take many years before people break even again. The CMHC is a joke. Without it, life would go on and the market would be the better for it because prices would correct to reasonable levels and there would be no need for it. Yes, there will always be some segment of the population who can’t put down 20%-25% down payment, but that segment would diminish once prices drop to fundamental levels. The rest should really be renting. Trying to allow this remaining segment to buy creates systemic risk for the economy and taxpayers. It isn’t necessarily because this segment itself poses default risk (it might or might not) but that the global support of prices above prudent supply and demand that poses the systemic risk. Possibly there could be a solution to help this segment which doesn’t cause a global and artificial price lift, but it would have to be more carefully thought out.
December 23rd, 2009 at 1:00 am
Arit, I guess probably many people had this figured out long ago — and way before me. Not claiming any originality.
What I find interesting, though, is the mechanism: CMHC was introduced with the objective to make homes more affordable. What it achieves, however, is a subsidization of loans (some for investment properties) which pushes up bottom line transaction prices and makes ownership harder (rather than the opposite). I don’t know about slavery: this seems to me the law of unintended consequences.
The problem is that, like most government programs, this will also be hard to get rid of. They tend to linger.
December 23rd, 2009 at 12:07 am
The national had a bit on mortgage concerns.
http://www.cbc.ca/thenational/watch/
at about 8:40
December 22nd, 2009 at 11:35 pm
Domus,
You’ve been thinking a lot about it lately? We saw through this one since day one my friend LOL! It’s called slavery, man. This whole housing bubble is all about the masses becoming the slaves of the PTB. When you owe them for the rest of your life, you are theirs (actually maybe I should go read the article you posted I might be preaching to the converted).
Slaves, sheep, masses, fools…
Regards,
arit the Contrarian (ala Conan the Barbarian)
December 22nd, 2009 at 10:36 pm
Hi Pope, I am posting the link to a VERY interesting article on Calculated Risk. It relates to something I have been thinking about quite a lot lately: the conversion of owenrs into effective renters, by means of subsidised loans which push up the effective price of buying. In practice, make the monthly payment feasible (at least temporarily) for enough people and prices will jump up, meaning that those payments will have to stretch for a 3 decades or more, effectively being equivalent to renting (what is an interest-only mortgage if not a rent of money/housing?)
Here is the article:
“Modifications: The Rentership Society”
http://tinyurl.com/y8h26ua
…modifications essentially turning homeowners into renters…
Read through, you will see the sheer craziness of the current setup.
Abolish the CMHC!!!
December 22nd, 2009 at 9:46 pm
Greed alert!
Greed alert!
Greed alert!
$1000 / 5br – Olympic Rental $1000 a day 5 bedroom HOUSE (richmond)
http://vancouver.en.craigslist.....95691.html
1000 dollars A DAY in Richmond. This too funny!
But it’s worth every penny because they SUPPLY THE PILLOWS!
Bwahahaha!
Regards
arit
December 22nd, 2009 at 9:31 pm
#24, if there was any justice in this world the housing bomb will blow up in Flaherty’s face. What a clown this guy is.
December 22nd, 2009 at 6:58 pm
yes, since about 2005.
December 22nd, 2009 at 6:29 pm
@Homes2012
Lovely…the press calls it a “mess”!
Problem for Flaherty is that he’s probably referring to Canadian averages when he uses the word “if”, as he talks about “irrational” levels.
Problem is the Wet Coast has been irrational for quite some time.
December 22nd, 2009 at 3:13 pm
@28
“realpaul -You are disgustingly profane and no one should be subjected to your comments. ”
Heartily agreed, with the proviso that realpaul does occasionally say something funny. I’m not a prude, but does it always have tend with an insult to someone?
December 22nd, 2009 at 2:47 pm
realpaul
You are disgustingly profane and no one should be subjected to your comments.
December 22nd, 2009 at 1:58 pm
@Amazed: In one (perverse) sense, you are right, by funding specuvestors and flooding the market with condo rentals we have seen that rents have been pushed down. But in another sense, the people you mention who can’t afford to buy, can’t afford to buy because of the loose credit the CMHC has been backstopping, causing prices to go above true market price.
All things considered, I still think the CMHC is keeping prices above what is dictated by prudent supply and demand.
December 22nd, 2009 at 1:38 pm
#24
Nowhere in Ian McGugans article does he mention the fact that the government give away of free money to unqualified buyers has been the crux of the problem. For a ‘financial commentator he is a real dipshit!!!!!!
The entire article says “DUHHHHHHHHHHHHHHHHHHHHHHH”. We have more intelligent commentary on this blog.
This guy is an asshole.
December 22nd, 2009 at 1:30 pm
#23 The CMHC has absolutley skewed the values of real estate by removing prudent competition from the market place. There is no notion of value because the screwball government has reduced everything to a monthly payment structure instead of values gained through supply and demand.
This is why everyone should question the so called ‘price’ of real estate today, it is grossly inflated on any economic measure. The SHITHEADS in government have created a false economy.
When John Law found out that pyramid schemes with government paper can’t work you’d think that the supposedly educated finance department would have learned something.
I would suggest the values may have to fall back to represent the values before the government fuckfaces intervened. Thats some 50% lower then where they are today.
December 22nd, 2009 at 1:26 pm
Interesting story from the Vancouver Sun:
Flaherty bombs on housing bomb
http://www.vancouversun.com/bu.....story.html
December 22nd, 2009 at 12:53 pm
Sorry I meant CMHC has made housing far more expensive than otherwise would have happend woithout them!!!
We need an edit function!
December 22nd, 2009 at 12:52 pm
14 –
welcome to the interwebz
December 22nd, 2009 at 12:50 pm
@Amazed:
“CMHC insures rental properties because it provides rental housing for people who can’t afford to buy”
ROFL. err, ok. Like rental housing on Salt Spring Island? Sorry but that’s lame, true investors don’t need CMHC backing to buy their properties, Donald pretenda Trumps do!
The silly mandate of CMHC ( which is all bullshit anyways) was to make buying a house affordable ( it has done the opposite) CMHC had no mandate for rental housing, they couldn’t give a rats ass, no premiums in it for them.
CMHC has made housing far more affordable than would otherwise have happend without them. All they have done , as Nonymous house pointed out, is extend cheap and easy credit.
Look, if you can’t scrape together a half assed downpayment and ammoratize over 25 years, you shouldn’t be buying RE!
December 22nd, 2009 at 12:01 pm
@DaMann:
Seems to me that the CMHC has been more involved with securing the flow of credit than concerns about affordability. I think it’s “trickle down” thinking and has failed to make housing affordable.
December 22nd, 2009 at 11:57 am
I posted this on a previous thread, but given the topic, I think it bears repeating:
Here is an eye-opening quote from “Canuckkid” commenting on CMHC and their bias in their publications. The quote is found in the comments for http://www.theglobeandmail.com…..le1404311/
“While it is to a far smaller degree on the morality scale, I can assure you all that this is a matter of routine in government/civil servant sectors. I work at CMHC and have been present at a meeting where we were directed as to the language we were to use in upcoming publications. The change was in direct conflict with our mandate to provide unbiased information to the public. When this concern was brought up and a request for written directions made, we were all told very directly that there would never be a written record of the meeting, or the directions.
As this policy remains in place, and we remain in violation of our own priniciples, the higher ups are having to scramble to cover themselves as dissatisfaction grows. The president recently had the director of our function `fall on his sword`over suggestions that it was her that had directed this change in policy.
We all await the next directive that allegedly doesn’t come from her via the PMO.”
December 22nd, 2009 at 11:57 am
Here is a good link with discussion of CHMC. It is the biggest goverment sponsored subprime madness. How long before the truth comes out, time will tell.
http://americacanada.blogspot......nment.html
December 22nd, 2009 at 11:51 am
DaMann, CMHC insures rental properties because it provides rental housing for people who can’t afford to buy.
December 22nd, 2009 at 11:38 am
@observer:
Good point about insuring investment property mortgages. Why on earth they are doing that I will never know. What the hell does that have to do with making homes affordable to joe average. That too was responsible for everyone and their uncle buying investment properties. No one would give them a mortgage if not for the damn CMHC insuring investment properties. What a joke.
Time for this too crumble. Looks like they are all giving sage advice so they can tell everyone I told you so to save their own bacon…
December 22nd, 2009 at 11:26 am
The bankers nod sagely and call for ‘prudence’, but, Canadians, being human, take as much as they think they can get.
Check out this gem -
“I inform buyers of the inevitable ‘market adjustment’ soon to come, and most of them give you a nod of acknowledgment and then ask what maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage.”
http://tinyurl.com/yerbsk5
December 22nd, 2009 at 11:08 am
Was looking at CMHC balance sheet 2008 and they have cash assets of about 3B. I didn’t see the amount they are insuring (which given recent cap lift from 450B to 600B would suggest something in that order). Interesting that the revenue in premiums is only 1.5B. They also have unearned premiums of about 6B, though this is listed as a liability (not sure how much of this can be used towards claims).
Interesting line item of 30B borrowed from the government listed as other. Wonder what that is about.
Also interesting is they still seem to be insuring mortgages for investment properties (from their website).
December 22nd, 2009 at 11:01 am
I have never seen a site with so many incredibly rude commentators.
Dip sh*t, a**hole???????
Do you people really think you gain any credibility with that language?
With all due respect, the operator of this site needs to moderate things a lot better. If people can’t make a point without insulting someone then they don’t deserve airtime.
December 22nd, 2009 at 10:07 am
Oh noes!!! Big mortgages are going to be harder to get! Everybody better buy a tiny solid gold condo right now before it’s TOO LATE and they’ll be priced out FOREVER!
If they do change the minimum down and term length, they’ll probably give a good 6 months warning. So, another 6 months of EASY STREETS! Let’s all get some condos right now and then flip them in 6 months!
December 22nd, 2009 at 10:03 am
I’m surprised by that 9% figure, of all mortgages have 10% equity or less. I was expecting that number to be higher given the amount of people that own multiple units. The fact people can put 5% down, and for a time, less money down.
Or is it that they have over 10% in one home (principal residence) and are using that equity to put down on a 2nd, 3rd, 4th… etc… and counting that as 10% of the homes equity?
I seem to recall the gov’t loosening the borrowing rules on a down payment, back in 2004 or 2005, maybe earlier. I remember they allowed buyers to take out loans for their down payments. I remember a story on the news with people lining up at their banks for the same. Was I dreaming that or did that happen?
If I wasn’t dreaming…that would count as equity from the perspective of CMHC, wouldn’t it? If so, I could see why that 9% figure is as low as it is. But if that’s the case, it’s not telling the true story.
Something just doesn’t add up when I see an article that says everything is hunky dory at CMHC while the BOC is worried about debt loads, mortgage costs and protecting buyers from their own stupidity.
Fluff piece? Perhaps, or maybe I’ve become jaded against anything to do with the CMHC. Time will tell, I suppose.
PS – Good initial post domus, I enjoyed that.
December 22nd, 2009 at 9:50 am
Whoa! The spin on this one is making me want to puke.
The Story:
EI Rolls have been going down since last May. Hmmmmmmmmm
Well, lets think about that. The big wave of layoffs started in November of the previous year right? And how long to people get to collect EI? So does that mean that a huge number of unemployed are not collecting EI because thier weeks have run out?
But does it say anything about that in the article. No, its all jam and treacle, courtesy of the bullshit press in this country.
http://www.vancouversun.com/bu.....story.html
I expect that all of these newly minted ‘self employed’ people are giving the economy a rea; boost. Its a good thing they don’t give you the welfare stats alongside the joy oh goody numbers that this reporter has. What an asshole!
December 22nd, 2009 at 9:21 am
I think all this talk about increasing down payment requirements and reducing amortization terms is just another attempt into scaring people into buying NOW, before it’s too late. Simply another effort to keep the party going. Sorry, but I lost faith in this system long time ago.
December 22nd, 2009 at 1:25 am
@TDot:
Are you high? You are full of non-sense. Look at Fanny Mae and Freddie Mack. Where the hell did you pull 5% dip sht?
How much does CMHC charge on a $1 million mortgage? How much do you think the administrative fees are?
And you tell me 1 in 20 mortgage default will be fine? What are you thinking???
Work on your math!!!!
December 22nd, 2009 at 1:14 am
@TDot:
(1) With all due respect, provide numbers and figures. We will listen to concrete info.
(2) The US Real estate market of 2002-2006 was a market of millions. Were they right to pursue the dream of homeownership? Or abysmally wrong?
(3) It is a sad fact that certain types of mortgages would not be present in this market (at least, not in the numbers we observe today) were it not for the guarantees provided by CMHC. Such guarantees are given through the full faith and credit of the Federal Government. Missing that, a large chunk of loans would not exists.
Question for you: if it were possible to ‘profitably’ insure such risky mortgages by charging the kind of small premia that CMHC is charging, why wouldn’t any private financial institution do it? Why leave such a juicy profit on the table?
Answer (in my humble opinion): in good times those premia are more than enough to cover running costs. However a sudden deterioration of market conditions could wipe out the equity of any private financial firm, and current premia would not be enough to keep the service economically feasible.
Bottom line: what CMHC is doing is allocating resources in a inefficient way. The reason: politics and consensus don’t come cheap, and our politicians (not only in Canada) seem all too eager to spend — or commit — money that is not really theirs.
Curious to see your reply.
December 22nd, 2009 at 1:02 am
I would differ from the first 3 posters in saying it was a fantastic interview. The people above seem completely unaware of how CMHC is backed. CMHC’s cash reserves, credit, and unrecognized premiums are probably enough to handle even a 5% default rate. If you think Canada is headed towards 5% defaults in the prime market then you’re radically insane.
Anti-CMHC sentiment is typically spread by a loud minority of housing bears who think they know where house prices are going, and desperately want to be right. Unfortunately, they’re so caught up in their housing sermons that they fail to recognize that a market of millions just might be smarter than they are.
December 21st, 2009 at 9:54 pm
Regarding Flaerty’s suggestion of reducing amortization and increasing down payment: it doesn’t seem like it will work for the specific problem they are trying to address, namely the ability to handle rate increases. If you reduce amortization and increase down payment, the remaining people who can, will still max out at these low interest rates with new requirements. It only helps in the sense that it could reduce demand and drive prices down and reduces debt load. In the short term, it may even drive some people to buy before the new rules come into effect, but they will regret it because prices will fall immediately afterwards. On the other hand, they will likely only make changes which are more symbolic than anything else.
To address the problem of future rate increases, I think they would also need to ensure the borrowers can handle the historical rate fixed mortgage rate (for instance, 6%) at 30% of the income or so. If not, don’t approve them. Also, there should be some closer vetting of the stability of their employment income.
December 21st, 2009 at 9:37 pm
The default rate is one thing, but mortgages are almost certainly larger by any measure than the 1980′s so a 0.5% default rate with jumbo mortgages twice the size could equate to the same losses.
The interviewer and interviewee seem to dance around the actual tough questions. All they needed to do is give a few key figures: what is the amount of mortgages they insure and how much cash reserve do they have, and historical default rates and average mortgage size of defaults. Then the other question is if they could withstand a crash of the same magnitude as the US?
Supposing we are lucky and CMHC doesn’t go the route of the US counterparts, but their cash reserves are depleted significantly. Do they have to replenish them? How would they do that (raise premiums, cut back on loans, etc)? If they tighten up and the market deteriorates further, then what? If they don’t, and the market takes them down because of insufficient reserves, then what?
December 21st, 2009 at 9:35 pm
I read the whole thing, and “Pierre” sure loves to brag about the amount of “stringent regulation” CMHC complies with – every other sentence is about OSFI compliance! Well, wasn’t the SEC “regulating” Madoff for all those years? And didn’t all the ratings agencies rate subprime MBS’s as AAA for years? Basically, Pierre is trying to impress readers by spouting off a bunch of government agencies that give him two thumbs up. Well, I’m not impressed – a big part of the ongoing crisis is misguided regulation. Sometimes too much (business regulation), sometime too little (derivatives), sometimes just plain stupid (bailouts).
One really scary part is that he said CMHC has twice the OSFI minimum for capital reserves. I read lately CMHC is leveraged up 75:1, so that means the minimum is 150:1? Talk about stringent guidelines! So even at 75:1 CMHC can handle a 1.33% default rate? Excuse me but isn’t the default rate 3.6% for PRIME mortgages in the US? Subprime is around 30% right? Since CMHC is now insuring subprime mortgages, how long can it hold the 0.4% default rate?
The only question worth asking him is this: what would happen to the mortgage market is CMHC stopped insuring mortgages? In other words, what if the banks had to take on the risk themselves?
December 21st, 2009 at 6:42 pm
Second!!!!!
December 21st, 2009 at 6:23 pm
CMHC internal analysis? Reserves? What is this guy talking about?
One simple question: would the premium charged to those buying insurance be sufficient to cover losses associated to mass defaults? if not, where is the money coming from?
Finally, and most importantly: would credit markets extend loans so liberally if CMHC were not underwriting most new mortgages? If not, why?
These guys must be really smoking something hard: do they genuinely believe that their business is anything but a major government-funded subsidization of RE loans?
There is absolutely no justification for CMHC existence, barred the political desire to appease voters by giving them large loans for housing.
The side effect is of course a major increase in prices, which defeats the purpose of CMHC. What happens is that you can make the monthly payments but you are virtually ‘renting’ your own home, as prices adjust on the way yp.
One last thing: even from a political point of view this system is suicide. It buys a lot of consensus as prices have the pbig jumps (say for the first 5 years) and many existing owners or recent buyers feel rich and satisfied. When the affordability ceiling is reached (now!) and projected price increases disappear, the recent buyers stop being happy….and the new , prospective buyers are genuinely pissed-off. Even from a political economy point of view this equilibrium cannot last.
Vancouver’s RE market is doomed. The crash should have happened last year. the government prolonged the boom by supporting the market. The crash of next year will be twice as bad. say thanks to your elected representatives and politicians for not fixing the problem and making it worse.