tag:blogger.com,1999:blog-31427364.post6564660544665087176..comments2024-03-26T03:52:23.395-07:00Comments on Housing Analysis: Bill C-3 Gets Royal Assentmohicanhttp://www.blogger.com/profile/06094213357140749289noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-31427364.post-9965691870539196732011-07-02T04:42:00.168-07:002011-07-02T04:42:00.168-07:00Frankly I don't see this legislation as anythi...Frankly I don't see this legislation as anything other than the government trying to "look" responsible, that fact is that CMHC has always operated as a direct policy vehicle of the government of the day and the legislation seems to pretend that it's some kind of autonomous operation such as the BoC which it isn't.<br /><br />I did get a laugh out of this quote, from a prof no less: "Dr. Londerville: the CMHC, as a crown corporation, has its mortgage insurance policies implicitly 100% guaranteed by the federal government under the Basel accord." Of course all obligations of CMHC are expressly guaranteed by the Crown and they are not shy about saying so. As the NHA says:<br /><br />“Every right or obligation acquired or incurred by the Corporation under this Act, whether in its name or in the name of Her Majesty, is a right or obligation of Her Majesty”patriotzhttps://www.blogger.com/profile/11154064267408955762noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-44746831708778829522011-07-01T19:27:55.770-07:002011-07-01T19:27:55.770-07:00So the 10% deductible is nothing new; this bill me...So the 10% deductible is nothing new; this bill merely formalizes this arrangement. CMHC has no deductible if it defaults. The way it works, as I understand it, is as follows:<br /><br />A bank takes on a high-ratio loan and needs or wants to purchase insurance against this loan. It will enter the insurance contract, however there is counterparty risk where the insurance contract is unenforceable if the insurer is insolvent. So the government says it will underwrite the insurer so that if the insurer does go bankrupt with a 10% deductible in the case of private insurers. There is no deductible with CMHC insurance.<br /><br />This is important because banks need to provision for this 10% deductible in their accounting, reserving capital. When they take out CMHC loans there is no requirement to provision capital. If CMHC insurance were to have counterparty risk, banks would be required to have reserves, and it would significantly change how readily banks would accept high ratio loans. My expectation is that the government is using this legislation as the first steps towards seriously determining whether CMHC's insurance arm should be privatized.<br /><br />I agree with you that they can simply carry on as-is, but I expect there will be some pressure on insurers -- and banks -- to stop making loans into overinflated markets, none more overinflated than parts of Vancouver.<br /><br />To answer your question, yes, the taxpayer is "on the hook" for about 97% of the value of all mortgage insurance under force, though practically there is always loss recovery with mortgage insurance so the net amount will be far less than this. I think Poschmann is generally correct that CMHC will remain solvent, but the way it's looking, it's going to be a close call.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-31427364.post-71328716718519262512011-07-01T15:42:22.745-07:002011-07-01T15:42:22.745-07:00Hi Jesse
I know you set great store by this Bill...Hi Jesse<br /><br /><br />I know you set great store by this Bill from earlier comments, and hope that you are right, though i suspect it is more tinkering after the horse has well and truly bolted.<br /><br />However maybe you can explain this to me since I am ignorant of the mortgage minutiae<br /><br />'There is a 10% deductible to any funds that are paid by the government to backstop private mortgage insurers'<br /><br />What was is before this Bill? <br /><br />Does this mean that the government is now extending our largesse to private insurers too?? God Forbid, having the CMHC creature is enough - is the tax-payer on the hook for almost ALL insured mortgages now?<br /><br />Please tell me that I have misunderstood.Fish10https://www.blogger.com/profile/09770438465068216630noreply@blogger.com