Thursday, December 18, 2008

Head in the Sand at the CMHC

From the Globe and Mail:

Canada Mortgage and Housing Corp. officials ignored warnings from senior Finance Department and Bank of Canada officials during the past two years that its active business in high-risk mortgage insurance could overburden consumers.

According to sources familiar with the discussions, CMHC executives did not heed the warnings and continued to underwrite larger volumes of insurance policies for risky home loans with 40-year amortizations and minimal down payments.

The sources said the federal agency's executives disagreed about the potential risks and defended the creditworthiness of borrowers who were granted insurance for the riskier mortgage products.

One senior Ottawa official said CMHC was such a significant underwriter of 40-year mortgage insurance polices that it currently accounts for two-thirds of the nearly $56-billion of 40-year mortgages that were approved by banks, trust companies, credit unions and other lenders during the first six months of 2008.

Unlike the United States, Canada does not publicly release data about different classes of mortgage debt. CMHC does track mortgage data, but its officials have declined requests by The Globe and Mail for information about the volume of 40-year and low-down-payment mortgages. In a statement issued last night, CMHC said it discussed mortgage risks with central bank officials in 2006 after former bank governor David Dodge raised concerns about the new breed of long-term home loans.

"CMHC officials took the governor and senior bank officials through the materials and discussed how the product was administered. The Bank of Canada was reassured by the fact that CMHC's product includes no change in mortgage qualification criteria and as such would not be of significant concern to the Bank. We know of no other concerns that the Bank of Canada or the Department of Finance had with our activities that in their view would threaten financial stability," the statement said.

The agency said only a "relatively small" proportion of the $334-billion in mortgages it insures are either 40-year or zero-down-payment mortgages. A spokeswoman declined to put a figure to "relatively small."

Finance Minister Jim Flaherty announced in July that the federal government was cancelling its policy of guaranteeing 40-year mortgages as of Oct. 15 in order to shield Canada from the kind of housing crash that has devastated the U.S. economy. However, according to sources, bank executives had been warning Mr. Flaherty and central bank officials since the beginning of 2008 about a dramatic and unexpected increase in demand from consumers for 40-year mortgages with small down payments.

Lenders, insurers and government officials interviewed by The Globe characterized the first half of 2008 as a period of apparent paralysis by federal decision makers. These sources said bank and insurance executives and finance officials disagreed over how to pull the plug on popular and risky mortgage products. One of the few things they did agree about, according to sources, was that there was insufficient monitoring of CMHC, which accounts for about 70 per cent of the total value of mortgage insurance underwritten in Canada.

"There is an accountability issue at CMHC," said one senior Ottawa official, who declined to be identified.

CMHC is a federal agency that has been supplying mortgage insurance since 1954, and is currently overseen by Human Resources and Social Development Canada. In response to a question about its accountability, CMHC said in its statement: "The lines of accountability are very clear, like all Crown corporations CMHC is accountable to Parliament through its minister."

When The Globe contacted Human Resources Minister Diane Finley, her spokeswoman replied: "We will have to decline and allow CMHC to respond to the questions applicable." According to people familiar with CMHC, the agency imported U.S.-style mortgage products to protect its dominant market position from large U.S. insurers who were allowed into the Canadian market in 2006. Canadian laws require borrowers with less than a 20-per-cent down payment to obtain insurance for their mortgages.

"They felt they were pushed into to this because of the new competition," said a person familiar with CMHC.

Underlying these concerns, sources said, was a federal internal study launched by the new Conservative government in 2006 to review the possible privatization of a number of agencies, including CMHC. The prospect of privatization, one source said, fuelled concerns that the agency needed to be seen as an effective competitor.

CMHC said in its statement that its decision to insure longer-term and lower-down-payment loans in 2006 "reflected the market trends for the period." Until 2006, the agency and its only rival, Genworth Financial Inc., did not insure mortgages that were amortized beyond 25 years. In February of 2006, several months before four U.S. insurance giants were allowed into Canada, CMHC introduced the country's first 30-year mortgage insurance product. What followed was a ferocious battle for market share between CMHC, Genworth and American International Group, the first of the new insurance entrants.


mohican said...

I'm ticked off about this and you should be too. A taxpayer owned corporation with weak taxpayer accountability, closed books, and rampant risk-taking behaviour. It is an outrage.

tulip-Mania2 said...

CMHC should be shut down. Their mission was to help Canadians get into homes.

They have failed in their mission by becoming a marketing arm of the speculators.

Their last attempt at fuelling the madness of the crowds was the 40 year mortgage which pumped the bubble American Style.

macho slob said...

"CMHC should be shut down"

And if keel hauling is out of the question, Robyn Adamache should be at least fired without severance compensation for misleading the public by shamelessly pumping the market.

Maggie Chipman said...

Macho, don't you go talking smack about my friends.

condohype said...

I never understood the logic of CMHC introducing products like 40-year mortgages to "improve" affordability. All it did was bring more buyers to the market, which had the effect of driving up prices.

Roberto said...

Human Resources Minister Diane Finley should be taken to task over this. Was it not her duty to represent taxpayer's interest in overseeing CMHC's activities?

tulip-Mania2 said...

“I never understood the logic of CMHC introducing products like 40-year mortgages to "improve" affordability.”

It’s about greed. The bigger the portfolio they manage the greater the bonu$e$ the bastards at CMHC can give themselves.

They know too well if someone has to take a 40year mortgage it’s high risk, and downright immoral as it borders on usury, considering the amount of interest the victim will end up paying, if they don’t default.

wizardofozziejurock said...

I really think the CMHC has exposed themselves (and thus taxpayers) to considerable risk and they have left themselves open to class action lawsuits. Most notably because they breached their fiduciary duty as an underwriter of mortgages while providing erroneous or misleading information about the potential value of housing assets...and failing to advise of risks.

The missing ingredient for a class action lawsuit has been enough homeowners who could prove damages (i.e. financial losses). I think that ingredient will soon be plentiful.

patriotz said...

they breached their fiduciary duty as an underwriter of mortgages while providing erroneous or misleading information about the potential value of housing assets...and failing to advise of risks.

Er what?

The fiduciary duty of an insurer is to the insured, i.e. from CMHC to the lenders. Neither the lenders nor CMHC are fiduciaries to the borrowers.

Neither CMHC, the lender, the seller, nor the agent have any duty whatsoever to advise the buyer as to the value or market risk of the property being bought. That is solely the responsibility of the buyer.

alexcanuck said...

I agree as to where their fiduciary duty lies.
They do appear to have breached it, though, by by pumping the market. Not to the borrower, but to the banks and the backstopper, AKA you and I, the taxpayer. The banks will eat SOME losses, I think there is a 20% deductible, isn't there? And all kinds of administrative, incidental and reputational losses as well.

Also, exactly why where they pumping the market so? Can they be sued for over-stepping their authority?

jesse said...

I am outraged that a government corporation has such poor understanding of what improving affordability means. But their balance sheet seems OK, for what we have access to, that is.

It is time for Canadians to grow up and be more skeptical of their government and this includes the misguided propaganda coming out of CMHC oft quoted as fact.

John Collison said...

Amazing. How in case after case, every time Canadian socialists set up another "public" corporation or enterprise, outfits like CMHC prove to be just as bad as the privates.

Ultimately, CMHC, CBC, and all the countless crown corporations exist for the benefit of their managers, political masters, and their political masters' backers.

It was a socialist fantasy -- big in the US, too -- to turn the nation into a 'homeowner society'. Well, socialism doesn't work, neither does socialism for the rich, and the BANKS own most of the homes, in more ways than one.

wizardofozziejurock said...

Patriotz said:
"The fiduciary duty of an insurer is to the insured, i.e. from CMHC to the lenders. Neither the lenders nor CMHC are fiduciaries to the borrowers."

I disagree. Fiduciary duty is a matter of interpretation and I would argue that your claim that the CMHC has a fiduciary duty only to lenders is a far too narrow interpretation.

The issuing of a CMHC-approved mortgage is a business transaction involving 2 parties, whereby part of the risk is underwritten by a third party, the CMHC. In underwriting the risk, the CMHC makes the transaction possible. If that were all there was too it...they'd be no different than a typical insurance company. But they're not. They are actively promoting and encouraging purchasers to enter into mortgages which they underwrite. If they were just a straight insurer, they would only need to market their services to lenders. But they actively market their services to buyers...just visit their website.

From their own website, look how they're clearly backing both sides of the transaction:

"Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with as little as 5% down payment — with interest rates comparable to those with a 20% down payment."

They say they're enabling consumers to purchase homes. Well you can't claim that without implying a fiducicary duty to consumers in my books.

Right under their "What's in it for you?" heading they have the following:

"You could become a homeowner sooner, even if you have difficulty saving for a down payment. If your lender obtains CMHC Mortgage Loan Insurance for your loan, you could purchase a home with as little as 5% down payment."

So I would argue that the CMHC has a fiduciary duty in the business transaction...a transaction that involves both the lender and the borrower.

Patriotz also said:
"Neither CMHC, the lender, the seller, nor the agent have any duty whatsoever to advise the buyer as to the value or market risk of the property being bought. That is solely the responsibility of the buyer."

Is that your assertion or your philosophy? I'm no expert on business law...but in my business dealings I've never found any business transaction that clear cut. Anyone involved in a business transaction must not mislead buyers or fail to warn them of reasonable risks. Brokerage firms and public companies are reguarly sued over claims of investors having been misled. I welcome someone with a legal background to wade in on this one.

My major beef is that the CMHC regularly advises buyers (in the aggregate) on the conditions of the housing market and regularly makes predictions about prices. But as I've pointed out in several other forums...they fail to warn consumers of the potential for their forecasts to be wrong. When you consider that the same agency making these rosy forecasts and actively encouraging consumers to buy, actually makes money from the volume of mortgage transactions it underwrites...well there's a clear potential for a conflict of interest and breach of fiduciary duty.

As I've said in the past...all of this wouldn't be a problem if they provided disclaimers with their forecasts...something that's common (and often mandatory) in the securities industry. It's the minimum we can ask of the CMHC as a crown corporation in service to Canadians.