USA vs CAN: Different here?

Chip pointed out this article at the Mises Institute on the CMHC. How bad does the author think it is? Pretty bad:

The Canadian mortgage market is dominated by the Canadian Mortgage and Housing Corporation (CMHC) and this government-owned company operates in much the same way as Fannie Mae and Freddie Mac. The CMHC insures and guarantees mortgages as well as buys mortgages from banks in order to issue mortgage-backed securities that trade in the secondary market. In comparison to Fannie Mae though, the prognosis of the CMHC is notably worse. For instance, at the height of the housing boom in 2007 Fannie Mae had guaranteed over $2.3 trillion in mortgages, nearly a quarter of the market. As of 2009 the CMHC guaranteed over $900 billion in mortgages, about 90% of the market. Fannie Mae had approximately $44 billion in net assets to cover those guarantees, giving them a leverage ratio of about 50:1. The CMHC has about $9 billion in net assets to cover theirs, with the ratio working out to a staggering 100:1. To make matters even worse, 74% of the CMHC’s assets are invested in those very same mortgage-backed securities. If the Canadian housing market ever took a dive the CMHC would be bankrupt in the blink of an eye.

Are the new measures to undo the old measures and scale back CMHC exposure too little too late? Check out the full article here for the analysis.

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Anonymouse
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Anonymouse

Check out the Wikipedia article on the Mises Institute, especially the "criticisms" section. They think democracy is "pretty bad" too.

Boombust
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Boombust

What? Another "Institute"?

Yalie
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Yalie

@Anonymouse:

Don't confuse the message with the messenger. Of course they have a political agenda – all think tanks do. That doesn't make them wrong about the CMHC or any other specific issue.

Anonymous
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Anonymous

Guess that's why the government is everything it can to prevent a housing crash

patriotz
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@Anonymous:

Guess that’s why the government is everything it can to prevent delay a housing crash

That's better. But they're not going to be able to delay it past the next election.

Matt
Member

The Mises institute are a bunch of lunatics, several degrees to the right of the Republican Tea Party. I'm a little disappointed that this article was posted here.

sore loser
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sore loser

If the numbers are correct, they are correct. Saves everyone else gathering data and doing their own research. I don't care about their opinions, but numbers don't lie. Now, if the numbers are bogus, it's a different story…

vanpire
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vanpire
@Anonymous: "Guess that’s why the government is everything it can to prevent a housing crash" I've lived in South Burnaby for a long time now. My neighborhood was not so special – mostly transitional residential bordering with light industrial/warehousing. As an upside there were many, many places across the street that employed people and manufactured things – a neon sign shop, a chocolate factory (for real!) a flower wholesaler, an architectural design firm, an electronic distributor. In the walking distance to my home we had a childcare, a church, a bank, a doctor's office… That was then. But now? The entire area was apparently owned by the city and city has gradually ended all leases with local businesses and sold the land to developers.This created a domino-effect as block by block what was once an actual city neighborhood turned into… Read more »
jesse
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"The CMHC has about $9 billion in net assets to cover theirs, with the ratio working out to a staggering 100:1. " I love a good incompetence story but the $9BB and 100:1 ratio numbers are misused by this article. CMHC does face insolvency with a housing crash but, at least given current holdings, they won't be costing hundreds of billions of dollars. I would like to see a more analytical approach to CMHC's balance sheet through some simple stress tests. The ones I ran based on what limited information we have on CMHC's balance sheets indicate to me they are exposed to a couple of tens of billions of taxpayer money, spread over several years. If they are forced to underwrite more loans through a housing bust, that could end up ballooning higher. I think one question most analysis… Read more »
Jim
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Jim

The CMHC does NOT insure 90% of mortgages-they insure only hi ratio mortgages, which in Canada is about 24% of the market. They are all full recourse if insured by CMHC. Still a shitty deal for taxpayers, but this article is bunk.

Nothing to see here people-move on.

chip
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chip

@Anonymouse:

They criticize democracy because they feel it restricts liberty. Here is what they say:

"Not to be confused with a republic, a democracy is a system in which, theoretically, what the majority says goes. The reality, however, is more complex and much uglier. In a democracy, various political elites struggle for control of the state apparatus by appealing to the material interests of large voting blocks with promises of legalized graft."

The Institute is libertarian. They are averse to statism and do have some kooky ideas but I think the article is a rational take on the CMHC even though I wonder about some of their numbers.

chip
Guest
chip

@Jim:

I wonder about this. MacLeans said this earlier in March about Canada's $1 trillion mortgage market:

"At the end of 2009, the CMHC insured roughly $473 billion worth of mortgages (it expected that figure to rise to $519 billion last year, though updated figures haven’t been released), which is nearly the entire mortgage insurance market in the country."

$519 billion is more than 50%, and the CMHC does buy hundreds of billions worth of mortgages as well, though how many of these are also mortgages they insure and how many they sell on is not clear.

patriotz
Member

@Jim:

The CMHC does NOT insure 90% of mortgages-they insure only hi ratio mortgages, which in Canada is about 24% of the market.

24% high ratio is a huge number, when you realize that the great majority of homeowners with mortgages are people for bought for the first time many years ago.

They are all full recourse if insured by CMHC.

Recourse against what?

Still a shitty deal for taxpayers,

Yep.

patriotz
Member

Canadian homebuyers are showing “a high level of financial literacy,” according to a new Canada Mortgage and Housing Corp. survey that found both high levels of research and a determination to pay off mortgages quickly.

The survey, released Wednesday, said 75 per cent of respondents felt it “very important” to pay off their mortgages as soon as possible and that 39 per cent had set payments higher than the required minimum.

http://www.theglobeandmail.com/globe-investor/per

In other news, a recent survey shows that 83% of cigarette smokers are determined to quit within one year.

crabman
Guest

From 2005 to 2010 Financial Highlights:

Total Liabilities: $263B

Insurance in Force: $472B

MBS Guarantees in Force: $300B

Total: $1,035B

Unfortunately for us, it looks like Mises numbers are correct.

Anonymous
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Anonymous

Looking at CMHC's numbers for 2005:

Total Liabilities: $96B

Insurance in Force: $273B

MBS Guarantees in Force: $103B

Total: $472B

Between 2005 and 2009, CMHC's total obligation has gone up by $563B or 119%! In four years!

Coastal
Guest
Coastal

@Jim: Bunk ? A government agency that doesn't have to open it's books to the public is AOK ? Just another cover up to keep the Canadian system looking clean as a whistle while the risk level is so far beyond what any bank or private insurance company would allow. A house of cards about to topple.

Most average homes have made diddly squat past 2006/07, only the HAM houses and it's the average joe who will start the dominoes falling.

Patiently Waiting
Member
Patiently Waiting
Carney is making the situation worse with his interest rate tease dance. First-time buyers are panicking and become more stupid: "The survey found 45% of Canadians are willing to buy their home independently without a co-signer. Traditionally people wait until they are married to buy that first home but now they want to establish equity early so they can get their foot in the market. More worrisome out of the TD report was the statistic that buyers are doing less research before jumping in. The bank said mortgage pre-approvals are down to 72% from 84% a year ago and home inspections have dropped from 85% to 67% during the same period. The report also shows declining percentages for buyers researching issues like electricity and closing costs." http://www.financialpost.com/opinion/columnists/D… This also from the end of the article: "Queen's University professor John Andrew… Read more »
Devore
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Devore

What does CMHC do with its money? Where does it keep it? Is it something sane like government debt instruments, or something stupid like MBS? Is it possible CMHC could face a liquidity crisis?

registered
Member
registered

@9 jesse Says: "I think one question most analysis hasn’t covered well is following through what actually happens if price do the unthinkable and drop by 20% or more."

Given the evidence staring us in the face from markets across the globe, that's not a worst case scenario, it's 'a horseshoes and angels' stroke of unprecedented luck.

To say it again (and again) all this noise about the CMHC and bubbles in the political sphere is by design. Harper's majority has given them four years to pop this bubble and make good before the next federal election. They used a housing asset bubble to band-aid economic weaknesses until they won it. I expect them to take action quickly.

VanRant
Guest
VanRant

CMHC: Sounds like a ticking time bomb! No wonder its different here. Hope it blows up soon, in the face of Flaherty and Carney. Tick. Tick. Tick…..Boom!

Patiently Waiting
Member
Patiently Waiting

Oh oh, Club Penguin let their domain expire. 350 jobs endangered in Kelowna.

http://www.vancouversun.com/technology/Club+Pengu

Patiently Waiting
Member
Patiently Waiting

@Patiently Waiting: Umm actually, the website seems to be working.

patriotz
Member

@Devore:

What does CMHC do with its money?

CMHC has very little money (i.e. cash) per se. Its assets are the mortgages which it owns. Its liabilities are the bonds which it has sold to buy the mortgages. Its contingent liabilities are the mortgages which it guarantees.

The assets and liabilities go on the balance sheet. The contingent liabilities don't, until they're not contingent (i.e. they default).

patriotz
Member

@Patiently Waiting:

But while he thinks it’s obvious in places like Vancouver there will be a price correction, it doesn’t help you if interest rates go up.

This jackass is a university professor?

A price correction helps you because someone who bought previously at a higher price will be paying the same rates as you as soon as his mortgage comes up for renewal.

Also, a given down payment gives you more relief on monthly payments (i.e. more buying power) the lower the price and higher the rates.

And finally, if I'm an all-cash buyer with $400K in the bank, am I better off with $800K houses and 3% rates or $400K houses and 6% rates? Think real hard Einstein.

Duh.

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