Getting the Canadian government out of the mortgage insurance business at the top of the housing market sounds like a good idea. But it's not going to happen.
Calls for the privatization of Canada Mortgage and Housing Corp. are ringing out – recently from the C.D. Howe Institute's Finn Poschmann, writing in this space. Finance Minister Jim Flaherty mused late last year that the Crown corporation should be sold off. His timeline, however, is telling, suggesting it could take as long as a decade.
Offloading CMHC is an appealing idea in the here and now. Housing is starting to look dodgy as prices come down from record highs, so as a taxpayer, shedding risk on something approaching $600-billion in insured mortgages is certainly appealing.
And for conservative-leaning folks who believe government should have a limited role in business, the notion fits neatly.
The same logic led to Ottawa's sale of Air Canada and Canadian National Railway Co. They were not viable enterprises in their early years, but were important to national development, so the government got involved in what ought to have been a private business. But once those businesses were at the point where they could stand on their own (perhaps that's still debatable for Air Canada), they were set free from government ownership.
CMHC's mortgage insurance was brought into being when the view was that no private company would be interested. Today there are private insurers and they argue that on a level playing field with CMHC, they would be even more competitive than they already are.
Yet there are key differences that make this very different from selling Air Canada or CN, where potential risks and rewards can simply and easily pass into private hands. Some housing risk may have to remain the taxpayers', and the nub of the issue is deciding how much.
That's where it begins to get tough, because reducing the risk for taxpayers very likely means increasing the cost for home buyers.
Does the government want to further tighten the screws on housing? Probably not, at least not until policy makers see the full effect of the moves they have made already in their bid to slow the housing market without crashing it.
The higher costs for borrowers would result from any decrease in the backstop given by the government to mortgage insurers.
CMHC dominates the mortgage insurance business because it gets a 100-per-cent guarantee from Ottawa. Any losses on insured mortgages that CMHC does not cover are the federal government's problem. Competitors get only a 90-per-cent backstop.
Banks like dealing with CMHC because loans insured by the federally owned company are cheaper for the lender, which is allowed under banking rules to hold no capital against the loans because there is no real risk of loss. Regulators won't give such relief for loans that aren't fully backed by Ottawa.
Reduce the guarantee to a newly private CMHC, and it will cost banks more to make home loans. Some or all of that additional expense will get passed on to consumers.
There is another potential added cost. CMHC operates a business that sells bonds backed by home loans. Banks use the service to sell mortgages to investors, raising cash to make new loans.
CMHC guarantees timely payment of principal and interest on those securities, meaning banks get top dollar for them.
At the moment, that guarantee is relatively easy to make. The underlying assets are already largely risk-free because of the federal backstop. If the backstop shrinks, that guarantee gets more risky. CMHC ought to charge more, or scale back the timely payment promise. Either way, banks will get pinched on mortgage sales and they are not going to simply eat the cost.
The alternative is more troublesome: set the backstop for everybody, including a newly private CMHC, at 100 per cent. That would ensure that mortgage costs don't rise at a time when the housing market is challenged. But it also means taking all the risk for private insurers. The optics would be terrible.
The logical move is to set the backstop low enough for all players so Ottawa could truthfully say that it is privatizing not only the potential rewards from mortgage insurance but all of the real risk. Where is that level? That requires some study.
Reducing the backstop would have to happen well in advance of a sale of CMHC to enable potential buyers to see the effect. Take away CMHC's built-in advantage and it is anybody's guess where its market share would settle, or what it would be able to charge.
Making the change is not advisable until the housing market can easily withstand higher-cost home finance.With the housing market in flux, that may be a while off.
So when Mr. Flaherty says this could take a decade, he is right.