Is it finally time to privatize CMHC? Finance Minister Jim Flaherty recently announced that he would like to see the default insurer privatized in the next five to 10 years.
"We've taken four steps over the last four years to reduce the exposure there for taxpayers, so I don't think there's a lot more to do with CMHC or mortgage insurance, certainly not in the foreseeable future," Mr. Flaherty said in an interview with the Globe and Mail.
Canada Mortgage and Housing Corporation
For years, lenders have known that Canada Mortgage and Housing Corporation (CMHC) has had an unfair competitive advantage over private mortgage insurers since its policies are backed 100 per cent by the feds, unlike the 90 per cent guarantee given to private insurers.
In a report written last year by Jane Londerville , Associate professor and Interim Chair of the Department of Marketing and Consumer Studies at the University of Guelph, who also teaches real estate finance and appraisal, has recommended privatizing the CMHC to level the playing the playing field.
"I'm not saying it's the right answer," Londerville said in a telephone interview a year ago. "But if we want mortgage insurance that benefits the consumer, then we have to look at ways to make the insurance market more competitive. This would likely lead to lower mortgage insurance fees."
Taxpayers have often raised concerns that backing mortgage insurers is risky business and can end up costing them as it did in 1997 when CMHC didn't have enough in reserve to cover claims and needed government assistance. But since then, CMHC increased premiums and have been more cautious about maintaining its reserves.
"Because the federal government guarantees the mortgage loan, there is some risk for taxpayers, however it is minimal," Londerville said. "Only 0.4 per cent of all mortgages go into default. When the government is guaranteeing the insurers, it can dictate the criteria to minimize any risk."
Here are some facts:
- The government determines the level of risk-based capital mortgage lenders need to keep on its balance sheets.
- CMHC loans are 100 per cent guaranteed, thus lenders require zero capital allocation
- Private loan insurers are 90 per guaranteed and funds must be set aside in the event of default
- Thus CMHC loans offer a higher rate of return for lenders
Having a competitive market for mortgage insurance greatly benefits homebuyers. Today there are two private insurers in the market: Genworth Financial Canada and Canada Guaranty. Here are few benefits:
- Insured mortgages are portable saving home-owners new insurance fees
- Lowered insurance fees
Canada has the second largest mortgage insurance market on the world and is attracting more private insurers. However, CMHC's status as a Crown Corporation means the 100 per cent guarantee cannot be reduced. To foster a more competitive environment Londerville recommends the following:
- Reposition CMHC as an affiliated non-Crown public entity
- Ensure the government backing for this new company is equal to those terms available to private insurers.
- Have the federal government set lending criteria
Canada's mortgage insurance has allowed more consumers to own their own homes with minimal risk to taxpayers. Having an even playing field for all insurers will benefit consumers and home-owners and further grow our housing market.
Thursday, October 25, 2012