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.

The Passion of Karen Kinsley

The boss of the mammoth Canada Mortgage and Housing Corp. is a dynamo, who believes the roof over our heads is a home first, an investment second.

 

By Sheila Brady, The Ottawa Citizen February 5, 2011

‘Home buying is an incredibly important decision. It should be your home first and an investment second.’
.‘It doesn’t matter if mortgage rates are 21 per cent or three per cent. The bottom line is you’ve got to make sure you can afford what are getting into.’


In 1981, Karen Kinsley was fresh out of university and thought she was a pretty tough negotiator after sealing a mortgage on a two-bedroom condo in Ottawa’s east end.
“I negotiated a vendor take-back mortgage and then negotiated a one-per-cent discount on the rate. I thought I got a great deal at 21 per cent,” says the University of Ottawa Commerce grad, who has risen up through the ranks at Canada Mortgage and Housing Corp. and recently signed on for a second term as president and CEO of the crown corporation that oversees financing, new design and research initiatives to promote housing across the country.
“I was in my 20s and thought the condo was a palace,” says Kinsley, who has been named one of Canada’s most powerful women for the past three years by the Financial Post Magazine and Ottawa’s top CEO by theOttawa Business Journal in 2009.
CMHC was also named one of the National Capital Region’s top employers by MediaCorp, a Toronto-based publishing company which collects data on employee benefits.
She calls herself a perfectionist who has a habit of dribbling a bit when sipping water or coffee. Two traits that help explain her dedication to the industry and an impish nature that bubbles up during a wide-ranging interview.
“I probably paid $80,000. It was 1,200 square feet, open concept and absolutely perfect for a young person,” says Kinsley, who stayed in her St. Laurent Boulevard palace for about three years before leaving for Toronto and a senior financial job with Bill Teron and his international development company.
The job and Teron changed her life, planting the seeds that have grown into her passion for the housing and development industry and a career that has her at the head of a complex organization with 2,100 employees at 700 Montreal Rd.
Just as Teron was returning to the private sector after his own stint as president of CMHC in the late ’80s, Kinsley was offered a six-month contract with CMHC in Ottawa. “I said, ‘Great. Something short term and maybe a bit of a break from the pace of working for the private sector.’
“I was wrong on both counts. Twenty years later, I am here and I never did get a break. I have to tell you, I have never regretted a day. It has never been boring and there is always a challenge or two.
“It’s a passion for me,” says Kinsley, who says her enthusiasm for the real estate sector has broadened through her career at CMHC.
Yet her concern for fiscal control and prudent buying has never varied, even as mortgage rates rise and dip.
“It doesn’t matter if mortgage rates are 21 per cent or three per cent. The bottom line is you’ve got to make sure you can afford what are getting into,” Kinsley says.
Interest rates are going to rise, she says, and there is room for concern Canadians will pay too much for a house they really can’t afford. “You only have to look south of the border to see financial horror stories.

“We have seen terrible examples when people have been encouraged to take on debt they couldn’t afford.”
North of the border, it’s vital for consumers to be prudent when buying a home and to keep a wary eye on overall debt loads, says this chartered accountant. CMHC studies show most Canadian households are in fairly good financial shape and are working hard to pay off their mortgages.
On average, Canadians using CMHC-backed mortgages, had built up equity of 45 per cent of the value of their home. These are Canadians who did not have a traditional 20-per-cent down payment, but instead had five or 10 per cent down and legally had to turn to CMHC to be approved for bank financing. CMHC’s mortgage portfolio is huge at $473 billion, covering millions of Canadians, usually buying their first home.
Kinsley welcomed the federal government’s recent changes to borrowing, reducing mortgages to 30-year amortization from 35 years and stricter rules on down-payments when buying real estate as an investment.
“It is important to realize, on one hand, that Canadians are being prudent managing their debt loads and that we are in healthy shape, but, and there is a but, we must remain prudent going forward.
“We cannot be complacent based on the position we are in,” says Kinsley who lives in an older home in Westboro, with her husband, David Cluff, a retired public servant, and their two teenage children. The Kinsley-Cluff family is not shouldering a 21-per-cent mortgage and instead of moving, they decided to renovate and stay in the mature neighbourhood.
“This home is right for us at this time. We converted a garage into a family room, so we have a one-car family room.”
Given the time, Kinsley the mother would encourage her children to buy a home. “My best advice to them is to look at their lifestyle preferences and their total resources available and think hard before making a home-buying decision.
“Home buying is an incredibly important decision. If you are travelling then renting is equally an important housing option,” says Kinsley, who found her self buying a home in Toronto in the ’80s, when prices were high. “Then we also sold when prices were rising,” says Kinsley, who prefers to buy a home to be a home. “It should be your home first and an investment second.”
Which is why it’s important to look beyond the price, look at the design of the house to see if it suits your lifestyle and then at the neighbourhood, she says.
If you are buying as an investment, the rules change and a house is no different than any other investment, including stocks. “It’s got to suit your profile and you have to know what you are doing. Most of all don’t invest on a whim.”
Mostly, Canadians should not use equity in their homes as a bank card, financing a lifestyle, indicates Kinsley.
And while individuals should remain financially prudent, Kinsley would like to see the housing industry grow more adventurous, adopting stringent green standards when building.

It also makes sense for Canadians to investigate the benefits of buying green, putting money into added insulation and upgraded windows, instead of shiny granite.
“I am convinced if you show people the benefits, they will do the comparison and do the right thing,” she says optimistically.
She is also convinced builders should take a new look at building more affordable housing, mixing units into communities with higher, market-based prices.
The idea of subsidized communities doesn’t work, says the woman who gives no thought to retiring. “I am happy when I am working and busy,” she says.
And if Karen Kinsley ever gets tired of days at CMHC, then Bill Teron has a standing job offer.
“I would give her a job tomorrow. She would not sit at home. I assure you of that.”

© Copyright (c) The Ottawa Citizen

Read more: http://www.ottawacitizen.com/business/Passion+Karen+Kinsley/4224767/story.html#ixzz1EiERdaSn

Housing market will be stable next two years: RBC

STEVE LADURANTAYE

Globe and Mail Update

Published Thursday, Feb. 10, 2011 6:00AM EST

Last updated Thursday, Feb. 10, 2011 8:45AM EST

A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada.

In a market update that has the bank forecasting price gains of 0.5 per cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Canadian housing market is likely to be a much less interesting place for the next several years.

The Bank of Canada will likely raise interest rates by 100 basis points this year and another 150 basis points in 2012, he said, making mortgage payments more expensive for the majority of homeowners. But real gross domestic product is expected to increase to 3.2 per cent in 2011 from 2.9 per cent in 2010.“Going forward, we see nearly perfectly offsetting forces driving Canada’s housing market,” he said. “On the upside, the economic recovery will gather strength in 2011, continuing to boost employment and family incomes. On the downside, interest rates are expected to rise.”

“The net effect of these forces is expected to be close to nil, thereby leaving resale activity largely flat,” he said.

There have been a flurry of forecasts issued in the last week, as the market starts the year stronger than expected. Capital Economics issued a cautious report that suggested higher interest rates could drive prices down as much as 25 per cent over the next three years, while the Canadian Real Estate Association raised its sales forecast for the next two years as it suggested that a stronger economic recovery and continued low interest rates would keep the market balanced.

“Even though mortgage rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity,” CREA chief economist Gregory Klump said. “Strengthening economic fundamentals will keep the housing market in balance, which will keep prices stable.”

Capital Economics economist David Madani said too many optimistic forecasts are based on too short a time frame to be useful, because many mortgages won’t reset until rates rise much higher than they are today.

“Let’s balance this discussion a bit and think longer term,” he said in a recent interview. “As far as housing prices are concerned, we think they’re overvalued and we don’t see income growth closing that gap.
”

Mortgage rates to remain stable

 BY MARTY HOPE, CALGARY HERALD FEBRUARY 5, 2011

 

 No movement is expected this year on mortgage rates, says a federal agency.

Backtracking on earlier suggestions that rates could move in the second half of this year, Canada Mortgage and Housing Corp. is now saying they will remain stable.

It's good news for consumers, as well as for the resale and new housing industries.

"From the mortgage rate perspective, housing affordability in Calgary will not be hurt," says senior analyst Richard Cho of CMHC.

The posted five-year rate -- the one at which homebuyers must qualify to get a mortgage -- will likely hold at about 5.2 per cent, he says.

In its fourth-quarter housing market outlook, CMHC looked back at what happened with rates in late 2010, as well as the outlook for this year.

The Bank of Canada boosted the target Sept. 8 for the overnight rate, increasing it to one per cent, up from the previous 0.75 per cent.

It marked the third increase of 25 basis points since last April, when the rate was at a historical low of 0.25 per cent. A basis point is equal to one hundredth of a per cent.

With the overnight rate expected to remain flat, mortgage rates -- particularly short-term and variable mortgage rates -- are also expected to remain steady at current levels.

Posted mortgage rates will likely remain flat in 2011, says CMHC's base case scenario.

For this year, it is assumed the one-year posted mortgage rate will likely be in the 2.7 to 3.7 per cent range, while three-and five-year posted mortgage rates are forecast to be from 3.5 to six per cent.

However, rates could increase at a faster pace if the economy ends up recovering more quickly than currently anticipated. Conversely, rate increases could be more muted if the economic recovery is more modest.

In his inaugural address to some 700 members of the Calgary Real Estate Board, president Sano Stante said affordability will be a key element in the expected increase in resale home activity this year.

© Copyright (c) The Calgary Herald