When the forerunner of the Canada Mortgage and Housing Corporation opened shop in 1946, its job was to help war veterans find housing. From those humble beginnings, CMHC has emerged as a financial market giant. As this baby-boom behemoth contemplates life after 65, it, like many of us, should consider a more modest public role.
By the 1950s, CMHC was in the affordable (public) housing business; Toronto’s Regent Park was one of its first projects. The agency’s social policy portfolio expanded, with assisted housing and assisted home-ownership programs, on-reserve housing, and green energy and conservation programs.
What has also grown is CMHC’s mortgage loan insurance program. Federal law requires successful mortgage applicants to buy mortgage insurance if their down payments are less than a legal minimum (currently 20 per cent of the home purchase value).
This insurance guarantees lenders are repaid in full, even if borrowers default on their mortgages; this, for good or ill, lifts from financial institutions most of the risks associated with mortgage lending. Those risks are big: Through mortgage insurance, CMHC’s gross loan exposure is now scraping its $600-billion legislated limit. Taxpayers are shielded in part by CMHC’s $13-billion equity buffer, but nonetheless are exposed to the liabilities that will follow on an extended housing market downturn.
Now, while high loan-to-value-ratio borrowers must buy mortgage insurance, they need not buy it from CMHC. Smaller, private sector providers supply about 30 per cent of the market. They offer products and prices similar to CMHC’s, and are similarly on the hook when mortgages go bust. There is no direct taxpayer exposure to those bad loans. However, if the insurer itself were to go bust, taxpayers are responsible for 90 per cent of the residual exposure.
The reason for the private sector’s federal backstop is to lower financial institutions’ capital costs. If an insurance provider with a federal backstop insures banks’ mortgage lending, under international agreements and domestic regulation, lenders need to reserve little or no capital against their mortgage books. Insured mortgage lending is almost riskless and costless to lenders.
Many questions flow from this situation. Why does the Crown corporation do all of the things it does? Why aren’t social housing and related social programs part of a division of Human Resources and Skills Development Canada, where similar social programs reside? Why aren’t housing market data functions handled and financed by Statistics Canada? Why aren’t green energy programs part of Natural Resources Canada? Why aren’t mortgage bond and securitization programs run by Treasury or Finance?
And that leaves mortgage insurance. This usually is a profitable business – people must buy the product, and to do so at the price CMHC sets. But why does the federal government hustle mortgage insurance, and not auto insurance?
Given such questions, the obvious next step would be to split up CMHC.
Few outside government would notice if Statscan took over housing market data, or if energy-conservation programs migrated to other federal departments. CMHC’s financial market functions are already overseen by Finance and the Office of the Superintendent of Financial Institutions, which also inspects private insurers. And the Canada Mortgage Bond program could be run by Treasury.
The mortgage insurance program, meanwhile, would be an attractive investment for a well-capitalized domestic financial institution, such as a pension fund (the Ontario Teachers’ Pension Plan already owns half of one of the private insurers). In private hands, the current insurance book could be grandfathered, and new contracts underwritten by a reconfigured agency called, say, the CMHC.
Again, few would notice the shift; the key difference would be the new layer of taxpayer protection afforded by a 90-per-cent (or lower) guarantee of residual housing market liabilities, rather than the 100-per-cent exposure within the current CMHC. In a market occupied by private competitors, a broader range of portable insurance products and prices seems a likely outcome.
Mortgages and mortgage insurance would still be regulated by federal and provincial rules, exactly as now. Regulation of conduct and oversight with respect to financial stability would still be federal responsibilities. Consumers and most market participants would be unaffected by the change.
CMHC, as it exists, has outlived its mandate.
Finn Poschmann is vice-president of research at the C.D. Howe Institute.