Time to step up the oversight of CMHC operations

BOYD ERMAN

From Tuesday's Globe and Mail

Posted on Monday, March 21, 2011 7:27PM EDT

More than two years after the financial crisis brought down banks and mortgage insurers in the U.S., it’s hard to believe that there’s still a huge financial institution in this country that’s operating in a regulatory grey zone, with little in the way of oversight.
The federally owned Canada Mortgage and Housing Corp. is bigger than some big banks and its risks are borne by every Canadian. Yet the country’s main financial regulator does not oversee it. Nor does CMHC officially report to the Finance Minister.Whether it is in Tuesday’s budget or after an election, Ottawa should improve the oversight of CMHC by fixing those flaws.

It’s one of the final but very necessary steps the government needs to take to rein in the risk to taxpayers posed by the housing sector. Finance Minister Jim Flaherty’s decision to pull back amortizations for insured mortgages from 40 to 30 years, and to increase down payment requirements for home buyers, were the right first moves, reducing not only CMHC’s risk but the risks to the financial health of everyday Canadians, without squashing the housing market (so far).

But now it’s time for structural changes to ensure that CMHC operates in a low-risk manner for the people who own it. That would, of course, be you and me. That means transferring oversight of the insurance and securitization operations of CMHC to the Office of the Superintendent of Financial Institutions, and making the Minister of Finance formally responsible for it.

CMHC is by any measure one of the biggest financial institutions in the country, and it’s getting bigger every year. It has estimated its own 2010 revenue at $14.7-billion, more than Canadian Imperial Bank of Commerce, the country’s fifth-largest bank. CMHC estimates it had net income of $1-billion last year, in line with that of the No. 6 bank, National Bank of Canada.

CMHC has mortgage insurance in force that will soon exceed half a trillion dollars. Because of that, it’s the very definition of systemically important institution. That insurance safeguards the balance sheets of Canada’s big banks, and is backed explicitly by the federal government.

Who is minding this huge, crucial beast that puts taxpayer money on the line? The answer is Canada’s Minister of Human Resources – not Mr. Flaherty, despite his sway over items such as mortgage rules – and a board of directors that is largely drawn from the real estate and building businesses, with little background in banking or insurance.

That arrangement may have made sense when CMHC was primarily engaged in tasks like providing low-income housing, but now the mortgage insurance side of the business dwarfs other components and requires new gatekeepers.

The insurance and securitization business of CMHC should report to the Finance Minister directly, and it should be explicitly overseen by OSFI. The board of directors overseeing the insurance and securitization business should have a stronger background in those fields.

If that means splitting CMHC’s functions, then that’s what should happen.

CMHC says it hews to the guidelines put forward by OSFI, in some areas like capital going one better, but there’s no watchdog from OSFI ensuring that’s the case. It’s a trust-me story.

Do something dumb, or take too much risk, and OSFI has a reputation for being in your face soon after demanding a fix. CMHC should face the same real-time scrutiny.

To be clear, from the numbers we can see, there is no indication that CMHC is badly run. It has come through the recession largely unscathed.

It’s profitable, funnelling $12.3-billion into government coffers in the past decade.

The balance sheet is sound. There is a big equity cushion ahead of the mortgages that CMHC insures, on average 45 per cent as of the end of 2009, according to the company. Capital levels are at two times the level that OSFI requires, according to CMHC.

In other words, if people start defaulting on their mortgages more often, there’s a lot of home equity and balance sheet capital to take the blow before the costs start falling on taxpayers.

At least, that’s what CMHC tells us. But it doesn’t tell us as much as it probably should. Public disclosure from CMHC is basically limited to financial statements in an annual report that, while audited by the Auditor General and a private firm, tend to lag behind the times. So far, there’s no sign of 2010’s final numbers.

From the point of view of the taxpayer, OSFI regulation of CMHC isn’t perfect. OSFI’s job is not to protect the shareholders of banks and insurers; it’s to protect depositors and policy holders. That means it wouldn’t be looking out for the taxpayers who own CMHC, but rather the people who bought insurance on their mortgages.

But given what’s at stake, more oversight is better than less, and OSFI is the best option.

New mortgage rules take effect

Taken from the Guelph Mercury

GUELPH — Tighter federal mortgage rules intended to stem Canadian household debt kicked in Thursday, but local realty and mortgage specialists said the changes won’t have much impact.

Starting today, the maximum amortization period for a government-backed, insured mortgage drops from 35 to 30 years. It had been at 40 years in 2008.

Also, the maximum amount Canadians can borrow in refinancing their mortgages falls to 85 per cent of the value of their homes, from 95 per cent a little more than a year ago.

One month from today, the government will implement a third measure, eliminating guarantees on home equity lines of credit.

Federal Finance Minister Jim Flaherty announced the changes in January, one month after the debt-to-income ratio in this country reached an all-time high of 148 per cent. The rules are designed to discourage homeowners from dipping into home equity to pay for things such as cars, electronics or second homes.

This week, however, local mortgage and real estate specialists expressed doubt the new rules would impact the market.

“It’s really not going to make much of a difference,” Jennifer Lovsin, president of the Guelph and District Association of Realtors, said. “People are just going to go out and get debt anyway.”

If the government wants to get serious about curbing consumer debt, Lovsin added, it should stop credit card companies from lending at exorbitant interest rates.

While homebuyers will still have to qualify for a 25-year amortization, heavily indebted mortgagees who need help on a short-term basis will have less wiggle room, she said.

Chris Bisson, a broker with the Mortgage Centre in Guelph, said while the new amortization rule will only affect about five per cent of homebuyers, it won’t hurt, either.

“Generally the shorter the amortization, the faster people pay off their mortgages. Any time someone can pay off debt faster, it’s a good thing,” he said.

He also welcomed the refinancing rule, which he hopes will discourage people from “using their house as an ATM machine.”

Local real estate agent Don Huggins also welcomed the stricter mortgage rules, adding household debt “needs to be reined in.”

When he bought his own house, mortgage rates were at 14 per cent, he said. “Now, money is really, really cheap. Our interest rates are really low.”

But the new rules won’t have much impact on the local housing market, he said, which he predicted will remain hot due to a tight housing supply, and good weather.

To address the lack of financial discipline in this country, Huggins suggested the feds regulate lines of credit, another source of consumer debt.

Bisson agreed lines of credit are a problem, and also suggested the government scale back the maximum gross debt service ratio from its current ceiling of 44 per cent. “You’re setting people up to get into credit problems when you’re allowing them that extra amount,” he said.

Many predicted a buying frenzy ahead of the changes, as happened a year ago before Ottawa raised the minimum down payment on rental properties and Ontario and B.C. implemented the Harmonized Sales Tax.

However, after a strong start to the year, national home sales edged down in February, according to the Canadian Real Estate Association. “The reality is that we’ve had a good spring,” Bisson said. “But I don’t think it’s nearly as strong as it was last year as a result of the changes.”

The New Mortgage Rules

Take from Ratesupermarket.ca

A need for change

Since 2008, the recession has hit some areas of the economy hard, among them business investment and exports. But, thanks to record low interest rates, Canada’s housing market has helped drive the economy through the worst of it. The problem: Canadian’s household debt has risen to record levels and this has many economists worried about the future of the economy.

According to some experts, for the past 20 years Canadian’s debt-to-income ratio has been climbing steadily – much faster than disposable income. Since the start of the recession, the number of households that have fallen behind on their mortgage payments by three months or more is up by nearly 50 per cent. In order to manage high-interest debt, like that found on credit cards, some homeowners find themselves refinancing to free up money.

Financial experts advise homeowners, warning that total housing expenses should not swallow up more than one-third of the total household income. Yet, according to a BMO mortgage survey, even though two in three homeowners say that they would be able to handle it if interest rates were to rise, some 18 per cent say that they might be in trouble. The consequences for the homeowner are serious and could result in loss of home, or even bankruptcy.

As a result of these concerns, Finance Minister Jim Flaherty announced a series of mortgage rule changes in January of this year. He said that the amendments are meant to address the growing concern about the substantial increase in household debt in Canada, but more specifically they are meant to reduce the total interest payments people end up paying with longer amortization periods.

What are the new rules?

After the new rules were announced, the government gave the industry 60 days to adapt.  The new system will take place this week on March 18.

The rule changes are as follow:

1. Ottawa will no longer insure home equity lines of credit.
2. For homes purchased with less than 20 per cent down, the maximum amortization period will be cut to 30 years from 35 years.
3. A tightening of mortgage-backed lines of credit mean that Canadians will only be able to borrow up to 85 per cent of the value of their homes. This is down from 90 per cent.

What do they mean for homeowners?

A shorter amortization period has its pros and cons. Some homeowners are attracted to lower monthly payments, but might not realize that they are paying substantially more in interest over time.  For those who put a down payment of less that 20 per cent, this also means higher monthly payments. Under the current rules a $300,000 mortgage at 5 per cent, with a 35-year amortization would total $1,514 monthly. Under the new rules, the monthly total comes to $1,610, a difference of $96. Doesn’t seem like a big deal, does it? Calculate the total savings over the lifetime of the mortgage and the average homeowner saves $56,139.

The reason behind tightening mortgage-backed lines of credit is understandable as well. Many homeowners are refinancing, using home equity to get out of credit card debt. Although the practice of using lower interest debt to pay off higher interest debt is a reasonable solution, it only works if you are able to maintain a certain amount of equity in your home.  Some homeowners refinance every couple of years and actually end up owing money when they sell.

For future homeowners, the new mortgage rules could have the effect of pricing them out of the market altogether, but it’s likely that they aren’t as financially ready for homeownership as they could be.

Some experts, however, don’t see the future as quite so bleak. Many first-time homeowners choose 25-year amortization periods, rather than paying the extra interest over the years and are prepared to pay down payments over 20 per cent in order to avoid mortgage insurance payments as well. In Canada, those who purchase a home with a down payment of less than 20 per cent of that home’s value are required to purchase government-backed mortgage insurance through companies such as Canada Mortgage and Housing Corporation. This can add to the monthly cost of owning a home.

While the government believes that the new rules will have the effect of lessening Canadians’ financial burdens in the long run, some economists believe that rising mortgage rates are a deeper threat to the market. Rising interest rates would make monthly mortgage payments more expensive, leaving those who took on too much “cheap debt” in trouble.

Although there’s no easy way of preparing for every financial hiccup one might experience in the future, it’s always good advise to spend within your means. The new mortgage rules, in particular the refinancing rule, will help keep Canadians on track with their finances.

Housing gains have Canadians saving less: CIBC

Taken from MortgageBrokerNews.ca Wednesday, 2 March 2011
Canadians are spending 96% of their after tax income and are now saving less than Americans, according to a report out this week.

Much of this buying spree has been inspired by a real estate boom in Canada, said the Canadian Imperial Bank of Commerce report, authored by Deputy Chief Economist Benjamin Tal.

Canada’s savings rate is now 4.2%, below the U.S. rate of 5.8%, the largest gap on record. Canadians used to save more than their neighbors to the south, but that’s changed in the past couple of years as the housing markets have gone in opposite directions.

“With the average house price in Canada more than doubling since 1997, many households have been saving indirectly or passively via the increase in their home equity, and thus felt less pressured to save from their current income,” said Tal in his report.

Unlike stock market gains, gains in housing equity feel secure to owners, he said, thus eliminating the urge to save. That will change if housing prices stop rising, however

“While we do not see a major correction, the projected flat housing market will strip households of their primary means of passive savings,” said Tal. “And as is currently the case in the U.S., this process will bring back old-fashioned active savings by way of actually putting money aside.”

But Tal said it doesn’t take much to return the savings rate to 6% in Canada. Achieving that would take just a 10% cut in the annual average of $11,000 spent individually in Canada on clothing, personal care, recreation, games of chance, tobacco, and alcohol.