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CMHC withdrawal from the housing business ?

Thomas Beyer

Thomas Beyer

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REIN Member
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Aug 30, 2007
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Please find attached an interesting study and policy proposal by the (conservative) Fraser Institute. It argues that too much government interference, such as we have seen in the US, will yield too negatve consequences in a crisis. It argues for a (gradual) withdrawal of CMHC subsidies.



The article is here: http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/fraserforum-july-august-2011.pdf



I could not agree more.



I think CMHC should allow people to own their first home, once, with a minimum 10% down. The rest can be accomplished well by the banks. This would have a one-time slightly negative effect on the housing market, but very minor. It would create more renters, or more responsible home owners (smaller houses, lower mortgages). It would be good public policy, for existing landlords, existing home owners, real estate investors and first time buyers ! Rents would go up slightly, and more rentals would be economical to build, s.th. which hasn't happened for 20 years in Canada !
 
Taking out CMHC fees would help a lot of people make moves sooner and I think the banks can do a good enough job of screening their applicants. With so much money out there I suspect rates and qualification will remain competative.



I don't agree with the idea of going to 10% down for first time homebuyers. If you make it harder for renters to transition into owners it will have a ripple effect through the rest of the market. The condo/townhouse that someone buys as a first timer means that seller can go buy a small detached house... the seller of that property can then trade up too. You'll see less transactions which will hurt everyone in the industry except landlords!
 
My understanding is that all mortgages get insured... by the home OWNER who pays a premium when low down payment or by the BANKS by buying portfolio mortgage insurance. So CMHC is like another insurance company with the exception (small print) of having the backing from the government (aka Tax Payers).



The backing is the one that needs to be removed.... my one cent...
 
Too many people buy too much house with too high a mortgage too early in their lives ! A 85% LTV mortgage plus CMHC premium is not sound government policy nor does it build equity ! It is essentially a government subsidy to the construction industry and banks, at tax payers expense !



If you cannot afford 10% down, you should not buy or buy a smaller house or save more. It is another entitlement thinking that society owes you s.th. .. s.th that has to change for governments to remain solvent in most Western nations !
 
Do you think CMHC costs the government that much money?



I bet if you looked at the number of defaults vs. the premiums they rake in I think you'd find it to be a pretty profitable venture.



Or perhaps you were suggesting that CMHC insurance makes it too easy for banks to lend money and hence too easy for buyers to get in over their heads?
 
[quote user=RedlineBrett]Do you think CMHC costs the government that much money?



I bet if you looked at the number of defaults vs. the premiums they rake in I think you'd find it to be a pretty profitable venture.



Or perhaps you were suggesting that CMHC insurance makes it too easy for banks to lend money and hence too easy for buyers to get in over their heads?


Mainly the latter. Contrary to popular opinion, CMHC insurance does not insure the home owner, it insures THE BANK !



It is a distortion of the free market .. with catastrophic consequences as evidenced in the US. Far too much mingling in the housing market due to

a) deductability of mortgages from income taxes,

b) FannieMae bailout (the CMHC equivalent)

c) no recourse laws in many states

d) laws to force banks to lend to sub-prime owners, people that should not have been given the mortgages given their credit or income position



I am not saying Canada is in as bad a shape as the US .. far from it .. but I [like the Fraser Institute report] am advocating a gradual retreat of the government out of the mortgage & insurance market ! It would benefit most home owners and most REIN members as homeownership as a % of population would slightly decline and rents would gradually go up .. making for a far healthier, less volatile, far more sustainable housing market.
 
[quote user=RedlineBrett]Do you think CMHC costs the government that much money?



I bet if you looked at the number of defaults vs. the premiums they rake in I think you'd find it to be a pretty profitable venture.



Or perhaps you were suggesting that CMHC insurance makes it too easy for banks to lend money and hence too easy for buyers to get in over their heads?



Mortgage insurance by its very nature is very profitable right up to the time it is scorchingly unprofitable. A rising market means most people who can't pay their mortgages can turn over the keys to someone else and walk away whole, so the mortage insurer never gets hit. Fannie Mae and Freddie Mac (US CMHC equivalents) made buckets of money for decades until a crash they helped cause gave them losses of unfathomable proportions. It would be nice if Canada was able to learn that lesson from observation rather than experience.



Regards,



Michael
 
[quote user=bizaro86]It would be nice if Canada was able to learn that lesson from observation rather than experience.


Indeed ! That was the point of the Fraser Institute and my post .. a gradual exit is in order !



[quote user=bizaro86]people who can't pay their mortgages can turn over the keys to someone else and walk away whole


Btw: the homeowner is NOT able to walk away whole as the insurance does not insure them, but the bank ! So if the homeowner defaults, the bank takes no loss, but CMHC in turn will sue the homeowner for paying any shortfall !! Thus, it really is a bank subsidy allowing banks to make risk free profits !! Borrow at 1% (or free if using your $s in your savings account) and lend out for 3.5% .. a 2.5% spread .. or 150% margin on the money borrowed at 1% !! Wildly profitable for banks .. risk free .. disguised as "helping Canadian homeowners" !!
 
[quote user=ThomasBeyer]Btw: the homeowner is NOT able to walk away whole as the insurance does not insure them,


Sorry, I obviously wasn't clear. I was trying to communicate that in a rising market CMHC isn't usually on the hook for any losses. After all, if the real estate market has gone up 15% since someone purchased their home, they can probably sell it to someone for more than they owe, even if they lose their job/get divorced/get sick and can no longer make their payments.



So people who would face foreclosure (and cause their lenders to file insurance claims) are able to turn their keys over to an an investor/pre-foreclosure specialist and salvage their credit rating, while CMHC doesn't pay anything out.



Regards,



Michael
 
[quote user=bizaro86]if the real estate market has gone up 15% since someone purchased their home,


IF .. certainly in some markets but not all.



Also, frequently first time homeowners buy at a slight premium in new sub-divisions that may actually drop in value due to over-supply or market forces .. like Alberta or many other markets from 2007 to 2010 !
 
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