CMHC. To Privatize or Not to Privatize? That is the Question.
Overview
There is continuing debate in the media and the public as to whether or not CMHC, the Federal Crown Corporation that provides massive support to the residential housing industry by way of mortgage guarantees, should be privatized. http://bit.ly/WZIFTa http://bit.ly/UGhv57 http://bit.ly/ZI44HL
Much has been made over the growth in the book insured by CMHC and the “precarious” nature of the residential Canadian housing market. Fear mongers in the media and even at CD Howe claim that CMHC has gone well beyond its mandate and expanded its book to dangerous levels given the “bubble” nature of certain portions of the Canadian market, particularly in Toronto and Vancouver.
Where these massive concerns have arisen is somewhat of a mystery. Clearly, the government has been using CMHC to open the taps on mortgage funding to spur on residential construction growth in 2008 and 2009, and once that was achieved has used CMHC to slow down the growth of residential sales in 2010 to the most recent changes in 2012.
CMHC has been in business since 1946 when it commenced operations to assist war veterans to find housing. It has gone through numerous booms and busts in the Canadian marketplace. In my lifetime, there have been significant and dramatic mortgage defaults in the mid 70’s, the early 80’s when interest rates exceeded 20%, and the lengthy and deep recession in the early to mid 90’s.
Through all of those huge and massive recessions, CMHC survived and thrived. Itassisted institutions in avoiding significant losses but not in overwhelming circumstances.
Clearly, the underlying fear of the government and the marketplace is that CMHC will become like Fanny Mae, Ginny Mae and the other U.S. federal mortgage insurers and suffer massive losses. Of course, everyone ignores the fact that those mortgage insurers insured sub-debt mortgages, mortgages from people who were barely alive and properties that were mortgaged beyond their total value. No such scenario is existent in Canada and notwithstanding that certain markets have been extremely buoyant and may have somewhat overextended themselves, there is no real risk of significant corrections that would result in massive losses to CMHC.
CMHC provides a very important service to the residential housing industry. It provides entry level assistance to young people to assist them in acquiring housing and sets the standard for its private competitors. It provides assistance to non-profit housing, multi-residential housing, senior citizens homes and all kinds of community based housing which might not otherwise be supported by the private lending industry and private insurers.
It provides assistance to condominium construction, with appropriate equity and security safeguards, offering alternatives to developers to provide much needed rental and freehold ownership housing to Canadians.
This is far to say CMHC is perfect and does not need ongoing reviews as to its mandates, its scope of lending and the size of its mortgage book, but taking out such a significant player in the mortgage insurance business and turning it into a private entity would not assist Canadians. Although I am not a fan of government intervention in the private marketplace, this is the only government-run vehicle that has any input into the residential housing market and by and large has been very successful in supporting the industry, assisting it when it needed boosting and toning it down when it was blowing off too much steam. Actually, I hate to say it, we all need to support CMHC as a continued Crown Corporation. Perhaps it is time to look at its mandate and see where it can even expand its areas of mortgage insurance in the Canadian marketplace.
