Abolish the CMHC

[TimG]

In Canada, our incentives may be slightly different, but there is no reason to assume our regulators are any more wise and foresighted than American ones.

I agree that the road to hell is paved with good intentions. However, my assessment of the Canadian system comes from looking at the incentives that exist in the Canadian system:

1) The borrowers are on the hook no matter what. If they fail to repay a loan CHMC will confiscate all of their assets. This is not the case in the US where one can walk away from a loan. This means in Canada borrowers will not default on an underwater mortgage if they can avoid it.

2) The banks keep the mortgages on their books - they can't loan money and absolve themselves of responsibility by creating bundles and selling them off. This gives banks an incentive to avoid loaning money to those that can't afford it even if the CHMC backstops the loan.

There also has to be a constant review of procedures to see if the regulation has created counter productive incentives. That is why I am not against a review of CHMC and possible restriction of its scope given the need to keep the incentives aligned with public objectives.

I'd prefer government just not be in the business of providing any kind of "incentives" in the housing market at all. We don't need any incentives. The housing market can and should be left to work on its own, to come to its own reasonable equilibrium of prices and homeownership ratios.

Given the debacle in the US I don't see why a purely private system would be any better. If anything, a public system discourages "innovative" products like CDOs which accomplish the same thing. Edited April 6, 2013 by TimG

[hitops]

Housing prices would obviously drop but the cost of rentals would also rise (especially since the CHMC also insures rental properties). The rise in rental costs would reduce the ability to save and likely eliminate any benefit in increased affordability that comes from lower home prices.

The rise in rental costs would then lead to increases money spent on direct subsidies of rental housing so you are simply replacing a hypothetical government liability with a real subsidy.

The risk of a mortgage meltdown following a housing bubble can be adequately managed by regulations governing the issuing of mortgages (insured or not).

The converse of this has already been proven wrong. The converse is that when housing prices rise and more people move into homes, rentals should drop. Rentals are at record levels. When housing prices get too high, more people think about renting. This drives rental prices up, supply and demand at its core. The proof is that is exactly what has happened.

I disagree with some of the ideas presented. I got my own mortgage about 15 months ago, and based on the approval process I went through, I'm skeptical that somebody just out of highschool can get a $300k mortgage, or anything close. My bank was willing to lend me up to $200k, and I have a good income, solid employment record, and well-established credit history.

A lot of people believe they were helped by the CMHC. But don't miss the point. If the CMHC did not back loans, the house you needed $200,000 to afford would have only cost $120-130. Therefore you would probably have been able to afford it without mortgage insurance. This is the whole point, the CMHC does not actually make homes more affordable, it just make people go into more debt.

CMHC actually generates revenue though. Why ruin a good thing?

Not when the bubble bursts it won't. See my first post describing the economics of their profit and liabilities.

Edited April 6, 2013 by hitops

[TimG]

If the CMHC did not back loans, the house you needed $200,000 to afford would have only cost $120-130.

Now you are just making stuff up. I think we both agree that housing prices are higher than they otherwise would be because of the CHMC. The question is what effect does this have on the rental market. I would say that in a perfect free market the cost of renting should be higher than the cost of owning since the owner needs to cover the cost of owning plus make a profit. This is generally not the case in Canada and I argue that this is due to the system that allows renters to convert to buyers much earlier than the would be able to do otherwise. Edited April 6, 2013 by TimG

[hitops]

I agree that the road to hell is paved with good intentions. However, my assessment of the Canadian system comes from looking at the incentives that exist in the Canadian system:

1) The borrowers are on the hook no matter what. If they fail to repay a loan CHMC will confiscate all of their assets. This is not the case in the US where one can walk away from a loan. This means in Canada borrowers will not default on an underwater mortgage if they can avoid it.

2) The banks keep the mortgages on their books - they can't loan money and absolve themselves of responsibility by creating bundles and selling them off. This gives banks an incentive to avoid loaning money to those that can't afford it even if the CHMC backstops the loan.

There also has to be a constant review of procedures to see if the regulation has created counter productive incentives. That is why I am not against a review of CHMC and possible restriction of its scope given the need to keep the incentives aligned with public objectives.Given the debacle in the US I don't see why a purely private system would be any better. If anything, a public system discourages "innovative" products like CDOs which accomplish the same thing.

1) The borrowers will not be able to avoid it. Just think through the numbers. $300-400K average home price, purchased on an average household income of 50-55K after taxes, paying at near nothing % interest. When interest rises, defaults kill the price of homes and they owe more than it is worth. Preventing the buyer from walking away from the debt will not make them magically able to pay the debt, it will just make them declare bankruptcy. The taxpayer will be holding the bag.

2) The banks have repeatedly shown they are perfectly willing to loan money to those that cannot afford it. By definition, the reason somebody gets CMHC insurance is because they cannot afford it.

[hitops]

Now you are just making stuff up. I think we both agree that housing prices are higher than they otherwise would be because of the CHMC. The question is what effect does this have on the rental market. I would say that in a perfect free market the cost of renting should be higher than the cost of owning since the owner needs to cover the cost of owning plus make a profit. This is generally not the case in Canada and I argue that this is due to the system that allows renters to convert to buyers much earlier than the would be able to do otherwise.

Those numbers are based on historical data, not made up. When the CMHC rules were tighter and interest rates were average, that was the reality. Or, just check prices 5 years ago and 10 years ago. They are rising WAY faster than normal. Traditionally they parallel wages. Today they parallel borrowing. This is unsustainable.

Look at the graph. We are not just carrying on with our usual financial responsibility. Things have changed. The new situation is highly dangerous.

Just to give you an idea of how the CHMC economics do not work. Just a few years ago they were profiting about 2B per year. Last year, with a tiny uptick in foreclosures, that was slashed to 250M. It is a totally unstable model. Not just because they cannot even come close to covering the losses, but because they actually create the problem.

The reality of right now has already proven that renting becomes more expensive, not less, when housing prices go up. Rentals costs are at all-time highs.

Edited April 6, 2013 by hitops

[TimG]

Those numbers are based on historical data, not made up.

But you are completely ignoring the various compounding factors that have nothing to with the CHMC. The increase in housing prices since the 80s is largely because of a switch from single income to dual income households and would have occurred no matter what the CHMC did. The rise from 2000 on was largely interest rate driven - a drop from 6% to 3% means people can borrow 25% more with the same payments. Edited April 6, 2013 by TimG

[hitops]

But you are completely ignoring the various compounding factors that have nothing to with the CHMC. The increase in housing prices since the 80s is largely because of a switch from single income to dual income households and would have occurred no matter what the CHMC did. The rise from 2000 on was largely interest rate driven - a drop from 6% to 3% means people can borrow 25% more with the same payments.

Look at the graphs again. If the increase was because of dual incomes, then increases in prices would reflect increases in income per household. They do not. They reflect increases in debt burden. It's not because people are making more money. It's because they are borrowing more money. And they are not borrowing more because they are making more. They are just borrowing more.

Interest rates are important as you point out. This is exactly why its so dangerous to subsidize housing insurance. When interest rates go up, it will push hundreds of thousand out of their homes.

I saw a good graph awhile ago showing just how much of an impact the CMHC has. In fact they have the biggest impact of anything. The reality of other factors playing a role does not make the CMHC a good idea.

Edit: This isn't the graph but helps to tell the story. The 40 yr mortgage was introduced in 2006:

The difference between the blue and purple line is totally because of change in CMHC policy. And that is just going from 25yr to 40yr. Just imagine where it would be if the CMHC did not guarantee loans. That is the impact it has. The impact it has it probably close to doubling the cost of homes.

This doesn't mean people are getting more house. They are just able to borrow more for a house that is now much more expensive. It's wasteful and hazardous. It is exactly what pushed up home prices in the US until they crashed.

Edited April 6, 2013 by hitops

[shortlived]

Not when the bubble bursts it won't. See my first post describing the economics of their profit and liabilities.

When is the bubble bursting?

[hitops]

When is the bubble bursting?

If I knew exactly I could make a lot of money. US did in 2007. How high can we go?

[Moonbox]

I see people complain about money all the time, yet they blow it on needless things. But you jumped to a conclusion, I never said if I am against or for the CMHC.

I didn't jump to conclusions. August brought a very strong and intelligent point up in favour of CMHC, and then you quoted him and replied with a bunch of nonsense and then explained how you didn't want/need the banks because you were going to ask your parents to help you out.

But being in control of ones finances is pitiful? I have no problems with people getting loans for a home. Just buy what you can afford

Brilliant. Don't spend too much money. That IS a good idea, but I'm not sure what you thought that was adding to the discussion, nor how it pertains to CMHC. CMHC is a Crown corporation and the government has taken fairly significant steps recently to curb consumer spending on the back of their homes.

I want to buy a home and start a family. I can't do that if I cannot afford it. I also have not approached my parents about this yet, so I may still have to get a loan from the bank. I want to minimize the amount I owe and the time frame to pay it off.

So for those people who CAN afford a mortgage payment, but don't yet have $60-75,000 saved up in a bank account, is it better to force them to toss rent $$$ down the toilet (thereby making a probably wealthy person wealthier), or is it better to facilitate them taking control of their financial destiny and exchange their rent payment with essentially an investment plan into home equity?

As a not so good example .. watch those property virgin shows or whatever.

I work in finance, and spent the beginning of my career doing mortgage and secured financing. I know a lot more about how things stand than most. Edited April 7, 2013 by Moonbox

[jbg]

Here's a mini-rant.

The CMHC no longer serves any productive purpose in Canada. It was founded because the influx of soldiers returning from war and the difficulties in finding housing as a result. Worthy goal, perhaps. Today it basically serves one purpose.....to enable people who should never receive loans, to receive hundreds of thousands of dollars in home loans.

I think the minimum downpayment should be about 10-15% but other than that I have no problem lending a helping hand to aspiring, upwardly mobile people.

One does have to watch for the obvious temptation to inflate the price in order to magically create the down payment from borrowed sources. People who buy homes need to have some "skin in the game."

[hitops]

I think the minimum downpayment should be about 10-15% but other than that I have no problem lending a helping hand to aspiring, upwardly mobile people.

One does have to watch for the obvious temptation to inflate the price in order to magically create the down payment from borrowed sources. People who buy homes need to have some "skin in the game."

You may have misunderstood what the CMHC does. It does not provide a loan to you to make your down payment, it provides insurance for your loan if you cannot make a 20% down payment. It therefore allows for the bank to lend you money even if you are a bad risk, because it promises to cover the bank in the event of a loss. Perhaps you are talking about borrowing money from some other source. In that case yes that would be incredibly foolish thing to do to come up with a down payment, but I doubt anyone would lend for that purpose.

Skin in the game is indeed important. The CMHC facilitates the ability to buy a house with no skin in the game. It makes it possible to put very little down, because you can get CMHC insurance anyway. It has not lent a hand to aspiring people, it has created a situation where those people need to take on a lifetime of debt to own a house. The long term result will be that interest rates will rise, people's payments may double or worse, and they will not be able to pay. They will lose their homes and the home will be sold. Because the market will be down with higher rates, the price of the home will drop, and the sale will not cover the loss. Because this is Canada, the buyer will still be responsible for that loss, and now without a home either. The choice then becomes bankruptcy, after which there is basically no chance of getting another loan for a house, or figuring some other place to live, probably renting, and also having to pay your debts. This is not giving people a helping hand at all, it's a temporary handout that feels good to some people now and will destroy them later. It's truly foolishness.

In other words, the helping hand is hurting more that it is helping. And in the meantime it's making home-ownership more expensive for everyone else, including those who are lower risks.

I neglected to mention what I think the solution might be however. Obviously you can't suddenly abandon the program or raise interest rates. I would propose a gradual continued tightening of the lending rules. Enough that it cools the market and allows prices to fall a bit but does not tempt to many people to declare bankruptcy. Unfortunately the people who borrowed at the 40yr no down period of time are on the hook, but at least the situation could be improved for young people and those with less money.

Edited April 7, 2013 by hitops

[jbg]

You may have misunderstood what the CMHC does. It does not provide a loan to you to make your down payment, it provides insurance for your loan if you cannot make a 20% down payment.

Thanks. I would support the program if some significant down payment were required. Not for no downpayment though.

[hitops]

Thanks. I would support the program if some significant down payment were required. Not for no downpayment though.

They require 5%. The problem is such a low down payment is not insurable in the real market, because it is more risky. This has created a huge problem.

[jacee]

TimG, on 06 Apr 2013 - 17:36, said:

But you are completely ignoring the various compounding factors that have nothing to with the CHMC. The increase in housing prices since the 80s is largely because of a switch from single income to dual income households and would have occurred no matter what the CHMC did. The rise from 2000 on was largely interest rate driven - a drop from 6% to 3% means people can borrow 25% more with the same payments.

Look at the graphs again. If the increase was because of dual incomes, then increases in prices would reflect increases in income per household. They do not. They reflect increases in debt burden. It's not because people are making more money. It's because they are borrowing more money. And they are not borrowing more because they are making more. They are just borrowing more.

I'm not convinced you've established that, hitops. I think TimG is right: Your graph on the previous page appears to reflect individual income, not (dual) household income.

Here's a graph that also shows individual income and household debt, and it looks like yours.

http://3.bp.blogspot.com/-Wx8kJs2lIGI/T4Wf2WgwB5I/AAAAAAAADQ0/psnUjKmyuR8/s1600/Ratio+of+household+debt+to+income+bank+of+canada.jpg

Seems to me this whole issue is a tempest in a teapot because it fails to acknowledge the increase in household income due to dual incomes.

In fact, I wonder who's trying to dupe us and why!

Edited April 8, 2013 by jacee

[cybercoma]

I'm not really sure what the argument is here. More and more people are renting for exactly the reasons presented. Wages have stayed the same (and in some cases declined), while housing prices continue to rise. Home ownership is all but a thing of the past. Especially with the burden of student loans, which in many cases are not being cleared until a person is in their late 30s.

[hitops]

I'm not convinced you've established that, hitops. I think TimG is right: Your graph on the previous page appears to reflect individual income, not (dual) household income.

Here's a graph that also shows individual income and household debt, and it looks like yours.

http://3.bp.blogspot.com/-Wx8kJs2lIGI/T4Wf2WgwB5I/AAAAAAAADQ0/psnUjKmyuR8/s1600/Ratio+of+household+debt+to+income+bank+of+canada.jpg

Seems to me this whole issue is a tempest in a teapot because it fails to acknowledge the increase in household income due to dual incomes.

In fact, I wonder who's trying to dupe us and why!

I'm a little confused, that graph confirms exactly what I'm saying - that debt is far outpacing incomes.

Notice the Canadian red line on your graph always going up......that means the ratio of debt/income is always going up. And if you check the most recent numbers (your graph only goes to 2011), we are actually far above that now, at about 165%. The US was at about 130% when they had their crash.

But anyway I'll re-post the graph that shows the household and compared to PDI. Notice how long it lasted in the US. How long can we last?

And here is household debt compared to incomes

It's very clear that debt relative to household income (whether 1 or 2 incomes in the household) is going up, and is at never before seen levels. I realize historically we have been safe. Historically, we have never had this much debt. That's why it's different now. When the factors are way different, you can't assume the game will be the same.

Edited April 8, 2013 by hitops

[jacee]

I'm a little confused, that graph confirms exactly what I'm saying - that debt is far outpacing incomes.

It's saying that household debt is outpacing individual income.

It's not saying that household debt is outpacing household income.

Over the last few decades, unlike previous decades, household income often consists of two incomes.

Thus, household debt reflects household income.

Comparing household debt to single income is nonsensical.

[hitops]

It's saying that household debt is outpacing individual income.

It's not saying that household debt is outpacing household income.

Over the last few decades, unlike previous decades, household income often consists of two incomes.

Thus, household debt reflects household income.

Comparing household debt to single income is nonsensical.

Tue, and I have not done that. You are not understanding the data which has been presented. The debt to PDI ratio is a standard metric used by banks, economists, reporters, the CMHC, everyone, and it takes into account the household income and debt.

Let me try a different approach. From the Bank of Canada:

"Canadian household debt has been rising steadily in recent years—to a record high"

"An aggregate debt-to-income ratio of, say, 160 per

cent tells us that the accumulated debt of an average

Canadian household significantly exceeds one year’s

worth of its income. Put another way, a debt-to-income

ratio of 160 says that it would take more than one and a

half times the annual income of an average household to

fully pay off its debt."

Here's another way to look at it:

So when the mortgage rates grow by 150% over 10 years, and the incomes grow by only 50%.......do the math.

Edited April 8, 2013 by hitops

[hitops]

Another note, after some hunting around I was happy to find that the finance minister also sees the light. From last year:

http://business.financialpost.com/2012/04/27/cmhc-could-be-pulled-out-of-mortgage-insurance-business-flaherty-says/

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada,” he told the FP’s editorial board.

Edited April 8, 2013 by hitops