Tag Archives: insurance

Should banks take on more risk?

There’s an article over at the CBC on the CMHC and CEO Evan Siddall.

Mr. Siddall is of the opinion that the CMHC should not be privatized as it acted as a ‘shock absorber’ during the last correction, but does think the banks should take on a share of the risk for insured mortgages.

“That ultimately will be a decision for government to make and we’re in the process of looking at different options that will take a few years to evaluate, but the idea is that people should have skin in the game,”

“In the insured mortgage businesses, the banks offload all that risk to the government through CMHC, The government’s interested in taking a reduced role in the housing market … so we’ll look at different ways to share risks with lenders.

What do you think, should the CMHC force banks to take on more responsibility for the insured loans they hand out or would the banks just use that as an excuse to charge more?

Read the full article here.

New CMHC rules: How much impact?

At first glance the new CMHC rules sounds like a minor tweak rather than a major change, and it might be just that.

When the CMHC announced the change they specified that the products being eliminated made up less than 3% of their insured mortgage products by number of mortgages.  What we haven’t seen anywhere are numbers in mortgage value, and BOM pointed this out yesterday:

Read this:

“The Crown corporation has been offering insurance on second homes since 2005. It has been offering insurance to self-employed people without strong income validation since 2007.”

And then read this:

“CMHC says its second home program and its self-employed-without-third-party-income-validation programs combined account for less than 3 per cent of its insurance business volumes in term of the numbers of mortgages insured.”

CHMC has a pool of mortgages insured accumulated over the last 25 years. They have only offered the products they are cancelling for 7 to 9 years but they make up 3% of that pool. Simple math indicates over the last 7 years about 10% of mortgages would have been part of the program they are cancelling otherwise it could never reach 3% of the total pool which was already significant prior to the program starting.

So how much demand was there for insured mortgages on second homes and mortgages for the self employed without income verification?  The numbers may be higher than we first thought.

Should bank CEOs be worried about housing market?

Who should worry most about an overheated housing market?

Overstretched owners with big debt? Renters who want to buy? Government?

What about Bank CEOs?

TD CEO Ed Clark says that bank CEOs ‘should be worried’ about the Canadian housing market.

While he isn’t worried about a full-blown bust, Mr. Clark believes chief executives simply can’t ignore warning signs in the market – particularly the sudden run up in prices for real estate of all stripes. “If you run a bank, you should be worried about it,” he told the audience at a bank conference in Toronto.

Now if banks start to worry about insured mortgages, maybe the taxpayers insuring them should be worrying a bit too.

Of course other bank CEOs have said that there is no problem and lending has been prudent and restrained.

That article ends up with possibly the weirdest last paragraph of the year so far:

Mr. Clark’s comments Tuesday weren’t the first he’s made on the topic, but this time he went into more detail on how his bank is changing its behaviour.

“We’re saying ‘no’ lots of times” to potential real estate borrowers,” he said, some of whom are big, lucrative clients. Mr. Clark wouldn’t name names, but he noted that in one instance, Tim Hockey, the bank’s head of Canadian retail and commercial banking, was “virtually in tears” for having to turn the client down.

The austerity! it hurts!

IMF says Canada should end CMHC insurance

In a surprising recommendation, the International Monetary Fund has suggested that Ottawa should do away with mortgage insurance offered by the CMHC (Canadian Mortgage and Housing Corporation).

The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

Huh, would any of you taxpayers miss insuring high risk mortgages?  By which we mean would you miss insuring MORE higher-risk mortgages, since there’s no way you can drop responsibility for the ones we already insure.

Read the full article here.

800 Billion dollar housing problem

Think home prices are a touch high in Canada?

Concerned about falling house prices and the spin-off effects on the larger economy?

If you’re looking for an outline of the way the federally run Canadian Mortgage and Housing Corporation (CMHC) took part in a reckless race to bottom against US competition and put the Canadian economy at risk you could do a lot worse than this Globe and Mail article .

Created in 1946 to help returning Second World War veterans find homes, CMHC had morphed over the years into a multibillion-dollar goliath that fuels bank lending and housing demand by insuring riskier mortgages, especially those in which the buyer has only a small down payment. Without that insurance, many more people would be shut out of the real estate market, unable to get a mortgage from a chartered bank.

It has also been a lucrative venture for the government. But that business was now being eroded as a result of the arrival of aggressive U.S. insurers into Canada.

The American companies were willing to do things CMHC had never done. Some were even backing “zero-down” mortgages in which the buyer borrowed every dollar needed to pay for the home.

Fortunately as fiscally responsible Canadians, we didn’t follow the US example and start backing ‘zero-down’ mortgages.. Oh wait, actually we did.  In fact the CMHC was a little late in its turn around, only starting to pull back the changes after it was obvious the US economy was tanking due to the bursting of a housing bubble.

So how much did the CMHC influence the rise of Canadian house prices?  That’s the source of much debate, but as the G&M puts it:

What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.

“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”

But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.

I’m going to stop myself now, because I could just keep quoting from this article.  If you have any questions about the role the CMHC has played in the Canadian housing bubble do yourself a favour and read the full article.