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.

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

Property Values Could Plummet If the Canadian Real Estate Bubble Bursts

The real estate market in Canada has performed well over the last few years but it could have resulted in a bubble that is ready to burst.
The Canadian residential sector has continued healthy despite the economic mortgage crisis that affected the US, and the forecasted nationwide real estate market bubble has yet to materialize. The Canada Mortgage and Housing Corporation's (CMHC) program to stimulate credit by approving high-risk mortgages had concerned experts because it pushed the ratio of housing values to a 7.4:1 ratio, which was over 50% more than American consumers experienced prior to their housing bubble collapse. As a consequence of the CMHC's policy shift, the average Canadian family debt experienced a 9.3 percent increase in only one year.

Some analysts, like the 84-year-old investment advisor Stephen Jarislowsky -- who has an estimated worth $1.85 billion -- said earlier this year that he believed that the strategy used by the CMHC would backfire. Jarislowsky flatly contradicted the statements made by Finance Minister Jim Flaherty claiming that the indications did not point to a future real estate bubble. Jarislowsky firmly believed that the government's programs were not going to strengthen the economy. During a phone conversation, he said that the CMHC "..has created the reverse effect of what was acceptable. " They have basically persuaded people to buy houses based on cheap mortgages. Evidence can be witnessed in the City of Toronto where the value of Toronto properties as increased by quite a bit over the years as purchasers rushed into the market.

An in-depth study of the Canadian real estate sector performed by the Wall Street Journal in February 2010 pointed out that the 2008 failure of the Lehman Brothers in the U.S. could have built a housing bubble backfire if the Canadian government did not change their lending tactics. But as early as January 2010, a representative of the Bank of Canada explained that "if the Bank were to increase interest rates to cool the housing market" that the result would be like "dousing the entire Canadian economy with cold water, just as it comes out from recession".

The Canadian Real Estate Association numbers that were released for the first half of 2010 does show that the start of the recession in 2008 translated into a sharp decline in residential real estate sales. But this did not last long, and the recovery has not been as dramatic as anticipated. Even though the May 2010 sales figures indicated a 9.5% drop, the year-over-year price increases actually balanced it to 8.4 percent. This stabilization in the housing market is a normal result of buyers not being quite as anxious to invest as the supply of properties increases and prices climb slowly, but proportionately.

Pascal Gauthier of the Toronto-Dominion Bank mentioned that the bubble scenario "made a lot of people nervous," fearing a huge crash comparable to the 30% decline in U.S. housing values. This summer, however, he is observing that the short-term elements that elevated property values resulted in only a modest decline in a clearly overpriced market and the attitude is a "180-degree change from six months ago". Gauthier believes that the national average may feel a 7 percent drop, but that the areas such as Toronto and Vancouver will bear the brunt of that decrease, and some areas such as The Prairies and Maritimes could even begin to realize gains by the end of the year.
By Stefan Hyross
Published: 7/13/2010

First Time Home Buyers Do Their Homework

Canada NewsWire
Toronto
- TD Canada Trust releases 2010 Home Buyers Report -

TORONTO, July 5 /CNW/ - Researching mortgage options. Getting pre-approved. Estimating utility costs. First time home buyers are savvy when it comes to shopping for a home - but are their aspirations too high? The majority of home buyers say they expect to pay less than the asking price and they prefer newer and detached homes to older and semi-detached homes or condos. This is according to the first TD Canada Trust Home Buyers Report which surveyed Canadians who have purchased their first home in the past 2 years or who intend to purchase a home in the next 2 years.
Nearly all home buyers are making informed financial decisions before buying their home by learning about mortgage options (93%), getting pre-approved (91%), calculating closing costs (88%) and estimating utility costs (85%). However, land transfer tax, closing costs and legal fees were the top three costs that buyers felt unprepared for (48%, 47% and 47% respectively).
Six-in-ten first time home buyers bought or intend to buy a fully detached home and three-quarters want a new home, but can they afford it? Nine-in-ten first time buyers took out or expect to take out a mortgage for their home and of these buyers, only 30% plan to or have more than a 20% down payment. The remaining 70% will require their mortgage to be insured by organizations like the Canada Mortgage and Housing Corporation (CMHC). Seventy per cent are making a down payment of less than 20%. Six-in-ten are worried about being able to afford their home if interest rates rise.
"It's only natural to want your first home to be the home of your dreams, but it is important to be realistic about what you can afford as a down payment and what that will mean for both the type of home you buy and for your mortgage payments over time," says Farhaneh Haque, Regional Sales Manager, Mobile Mortgage Specialists, TD Canada Trust. "I advise first time home owners to consider a larger down payment because a 10% or greater down payment will make a big difference. It may mean that you need to save longer before buying your first home, but it will pay off in the end. Speak with a representative at your bank about setting up an automatic savings plan to help you save."
Home financing:
Most buyers report putting down as much as they can afford for a down payment (88%) and fifty-seven per cent say they saved or plan on saving for two years or less for their home purchase. Two-thirds say they expected or expect to pay less than the asking price for their home. Only 6% expect to pay more, while 29% expect to pay the asking price.
Nearly three-quarters of those surveyed have or plan to have a fixed-rate mortgage. "Historically you are more likely to save interest costs with a variable rate or short-term mortgage option, so if they can handle some volatility then I recommend buyers choose a variable rate. If people are adverse to interest rate fluctuations than a fixed-rate is best," says Haque.
What kind of home do Canadians want?
If two homes were at the same price point, three-quarters of first time home buyers would prefer a newer home over an older home, but they are evenly split on location. Fifty-five per cent would prefer a smaller home closer to work and 45% would prefer a larger home with a longer commute. While the majority prefer detached homes, 21% chose a condo, 12% prefer town homes and 10% seek a semi-detached home.
Not surprisingly, price is the most important factor when considering what kind of home to buy and where (99%). The second and third most popular were features of the home (96%) and layout of the home (95%).
About the TD Canada Trust Home Buyers Report:
Results for the TD Canada Trust Home Buyers Report were collected through a custom online survey conducted by Environics Research Group. A total of 1,000 completed surveys were collected between June 8-21, 2010. All participants either purchased their first home within the past 24 months, or intend to purchase their first home within the next 24 months.