Thursday, February 01, 2007

Gong Show #4 - CMHC

The Canada Mortgage and Housing Corporation (CMHC) is getting brought to the gong show this week to see what you say about whether they should get the gong.

Who is the CMHC (according to the CMHC spin)?

"Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC is Canada’s premier provider of mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research."

What do they do (according to the CMHC spin)?

"CMHC works to enhance Canada's housing finance options, assist Canadians who cannot afford housing in the private market, improve building standards and housing construction, and provide policymakers with the information and analysis they need to sustain a vibrant housing market in Canada."

Why they get the gong (according to me without the spin)?

The CMHC gets the gong from me because I don't think 90% of what they do matters anymore and could be taken care of by the private sector. This would include insuring mortgages and offering those mortgage products to the investing public via mortgage backed securities. Why does a monopolistic government corporation need to do this in a free country like Canada?
We have financial institutions that would gladly make a profit by competitively offering this same service while not risking taxpayers money via government gaurantees on the mortgage backed securities of the CMHC. This would likely result in greater product diversity, lower prices, and more flexibility to the public.
Additionally, as a taxpayer, I am not comfortable risking my hard earned tax dollars to insure these type of lending practices and these silly mortgages loans. These silly mortgages that CMHC insures include interest only, stated income, 100% financed, and second homes. I fail to understand how any of this is in our national interest or why it should be government backed. Why do my tax dollars support the buyers of Canadian Mortgage Backed Securities? Why can't Bay Street and Wall Street take those risks instead of the Canadian public?
Finally, the CMHC's programs have actually made housing more expensive by reducing the barrier to entry (downpayment) to zero. These people, without a downpayment, have bid up prices of real estate in the past few years and made some Canadian real estate markets unnaffordable.
What do you think?

10 comments:

mohican said...

I don't want the comments to become political so please keep your comments on topic and related to the questions at hand. Should a government monopoly be involved in this business? Should our taxdollars be backing these MBS for investors? Have CMHC policies actually hurt potential homeowners?

Van Housing Blogger said...

What do I think? I think you nailed it.

mk-kids said...

agreed!

Uncertain Buyer said...

I second that!! I am not very impressed with 0 down mortgages.

solipsist said...

Should a government monopoly be involved in this business?

No

Should our taxdollars be backing these MBS for investors?

Emphatic no.

Have CMHC policies actually hurt potential homeowners?

Most probably. I think that a lot more than that will be hurt in the coming years too - when things go sideways, as they always do.

Something that I wonder too - how much is that insurance? 3%? 5%? It would seem to be a much higher rate (with interest) than saving a down payment.Four percent on a 300K loan would be 12K per year more in payments. Why not just save for two and a half years and have at least some equity?

It reminds me of freako's "demand borrowed from the future". And the suckers who take it are that much the poorer - in addition to bidding up the prices for themselves.

It's crazy IMO.

Give 'em a gong, and take away their bong. They are smoking way too much of that whacky tobaccy.

Freako said...

Double gonger.

mohican said...

Give 'em a gong, and take away their bong.

Cool! That was the funniest thing I've seen all day!

BTW - For a $0 down mortgage the CMHC insurance is 3.10% of the entire loan. So for a $400,000 loan that is $12,400 plus the carrying costs of tacking that on to the mortgage. Sick.

Pondering said...

Nice post. Well done analysis

Jesse said...

What does CMHC really try to accomplish? It tries to rein in the stratification between the poor and the rich. Unfortunately the subset increases from "poor" to include "incompetent" and "dishonest."

CMHC is there to fulfil a government directive. You are disagreeing with CMHC's directive ergo this is a political discussion. Sorry to violate your directive, mohican.

dingus said...

Agreed.

Why does housing need demand stimulus? What does that accomplish? "Helping" folks into riskier loans is not "helping" anyone. And it chooses to benefit those that willingly or stupidly take on too much risk at the expense of the prudent who squirrel away their pennies and wait until it is prudent to own.

Why does there need to be a government program that protects lenders from the risky loans that they issue and profit from? If there's risk in the loan, then the pricing should provide for it.

I don't get it at all. What would happen if CMHC didn't exist? High ratio loans would be scarcer, and would be more expensive. Well, good! That's as it should be. But it's not like high ratio borrowers would be shut out. You could have a "normal" ratio mortgage plus a high ratio (and appropriately priced) second, or an unsecured term loan to make up the DP. If you're within the debt service criteria, fine. My sense is, if folks had to pay 9% on a 5 year loan comprising 15% of their mortgage, they might be a tad more reluctant.

If more borrowers had to come up with decent downpayments (or paid a LOT more if they didn't have it) likely there'd be less demand pressure and a greater focus on value in real estate prices. Instead, well, add a few grand on to my huge mortgage for the CMHC fee? Who cares! Let 'er ride!

Feh. Off the stage. Bring on Gene Gene the Dancing Machine.