Broker: It’s time for CMHC reform

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One industry professional is arguing the crown corporation should be a non-profit organization that should focus on helping a certain segment break into the housing market.

“CMHC should operate on a break-even basis,” Bob Cameron, a broker with Cameron Financial Services, told MortgageBrokerNews.ca. “Their purpose [should be] to help first-time homebuyers purchase, but they are making big money and they shouldn’t be increasing fees.”

Earlier this year, CMHC increased premiums by 45 basis points for buyers who put less than 10% down on a home. It reported net income of $690 for the first six months of the year in its latest quarterly report, released in the summer. 

The crown corporation was originally established to give a helping hand to Canadians who otherwise would not be able to afford a home. However, many of whom believe the Crown corporation has outgrown its initial intention.

“CMHC was not established as a profit centre with a billion a year. It was created to help with home ownership. Originally if one was fortunate to have a CMHC insured loan your mortgage rate was discounted off the market rate,” one anonymous commenter wrote on MortgageBrokerNews.ca last year. “The crown corporation morphed into an insurance business with little regard paid to risk and its consequences.”

And it’s an opinion that was shared by the late Jim Flaherty.

“Regrettably, CMHC became something rather more grand, I think, than it was intended to be,” Flaherty once told reporters. “We’ll see over time what that role should be.”
  • Andre Asselin on 2015-10-24 6:09:38 PM

    Dear Justin;

    I am not sure what to make of the comments in your latest post

    On the one hand, you lament the billion $ profits of CMHC and report comments from Mr. Bob Cameron about how CMHC should be a non-profit organization and limit its fees; on the other hand you report the comments of an anonymous source about how CMHC has “morphed into an insurance business with little regard to risk and its conse-quences”. it seems to be that these two perspectives are contradictory.

    If indeed CMHC were operating as non-profit entity to break-even, it would not make the profits you lament and would therefore not be able to add to its capital to cover potential claims that could arise from an abrupt decline in the market. In fact, if CMHC were operating as a non-profit, with lower premiums presumably, it would also no longer be possible for private mortgage insurers like Genworth or Canada Guaranty to compete and continue to operate - all risks would be supported by CMHC.

    If indeed CMHC is/was operating recklessly without concern for risk, then perhaps someone could explain why CMHC is careful about pricing its premium appropriately and generating a profit. In fact, not only has CMHC’s continued presence helped Cana-da go through the 2007 US subprime crisis and subsequent worldwide financial crisis but during that period, CMHC continued to generate important profits that added to its capacity to weather potential risk events. Last year, the IMF reported that the CMHC, like all major Canadian Banks, had sufficient capital to face catastrophic risk without requiring funds from taxpayers. Likewise, the reputable C.D.Howe Institute recently concluded that CMHC held enough capital – from retained profits - to meet the claims that could occur in a catastrophic scenario. This does not seem like recklessness to me.

    As for comments from the late Minister Flaherty that CMHC has become “something rather more grand..than it was intended to be..” I would like to suggest that perhaps Mr. Flaherty has been briefed by individuals who have a limited understanding of the role played by CMHC in building our modern housing and housing finance industry.

    CMHC was indeed born out of a “grand” idea: to enhance access to good housing in all regions of Canada and for all socio-economic classes. At that time, 1946, the housing industry could not provide the homes needed for the young families that would be formed after the war, our cities needed to be revitalized and relief measures needed to be designed and organized to remove poor families from living in squalid conditions. Records also show that the financial system was unable to finance young families in purchasing their first home with reasonable down-payments and that the country lacked building codes, established legal and registration processes and planning requirements that protect property rights and ensure that homes remain good collateral for home mortgages.

    Yes, Canada needed “grand” ideas and “grand” institutions to lead the way and help Canadians find a proper home. C.D. Howe himself, first Minister responsible for CMHC and enthusiastic defender of market economy principles was excited by the prospect of Government working with the private sector - through its Crown Corporations - to de-velop the national economy.

    Eight years later, CMHC began insuring mortgage loans, because there was concern, as there is today, that banks should only partake in mortgage lending if there was suffi-cient credit risk protection against the vagaries of the economy and of real estate mar-kets. It was also felt that it was in the public interest to allow young families to purchase their home with a smaller down-payment, rather than having them wait until they have large savings, and their children are grown-up. Thus from that point forward, deposit-taking institutions gradually became dominant mortgage lenders, all the while accompanied and supported by CMHC.

    In the decades that followed, Canada, its cities and housing markets grew and so did the mortgage market and CMHC, achieving impressive levels of homeownership and building huge stores of capital for Canadians. Yes, the Canadian housing market became “grand” and so did CMHC, its premier governmental institution involved in housing. During that period, CMHC helped the housing industry and mortgage lenders go through difficult periods introducing innovations at no cost to taxpayers. CMHC remained focused on its mission consistently delivering value and profits for Canadians..no scandals, no mess, just steady and reliable competence.

    Meanwhile, year after year, critics and commentators continue to warn that the sky will fall over CMHC and drag public finances with it, thus requesting that it be dismantled or its activities curtailed. These critics simply look at CMHC’s insurance in-force, wave around large numbers, and choose to ignore that most of this insurance pertains to mortgages that have become quite seasoned and that only a very small percentage re-lates to high-ratio loans with equity of 10% or less. So, by far, the risk exposure of CMHC is considerably less that the amount of insurance in-force and, to cover that risk, CMHC (on behalf of Canada) holds sufficient financial reserves and capital for on-going claims to offset very severe economic scenarios without requiring any funds from tax-payers. (as indicated earlier: confirmed by the IMF and C.D. Howe Institute)

    Other countries use or are considering measures similar to those that have led to the creation and development of CMHC. Yet, that international perspective never seems to surface in reports concerning the Canadian mortgage market and the role of CMHC.

    Rather than thinking small, Canada should celebrate that one of its time-honoured insti-tutions remains strong – nearly 70 years later - while its private competitors have also achieved grand results and gained importance.

    When one thinks about the recent observations of the IMF about CMHC, are the higher interests of Canada served by eroding confidence in the institutions that have calmed the markets during the crisis and maintained stability? Or might it be better to make sure that CMHC remains rock-solid and to build further confidence in the regulatory and public policy framework that kept Canada out of the financial crisis? What else can CMHC do for Canada to help build stability and confidence and help our young families access affordable housing?

    In its report, the IMF signalled that CMHC had been a useful lever for public policy in the past - for instance, during the recent Financial Crisis. Perhaps new opportunities will arise in the future for the Government to employ CMHC’s market influence and exper-tise.

    Canada is a “grand” country that requires “grand” ideas for its large and developed housing markets and “grand” institutions like CMHC. This institution has served Canada well.

  • Paul Therien - CENTUM on 2015-10-26 1:31:40 PM

    I don't think that this story is taking one very important item into consideration... our government, Via CMHC, is backing the vast majority of mortgages that are outstanding in Canada today. Quite literally trillions of dollars are on the table.

    We sometimes also forget that the government also provides a 90% backing to both Genworth and Canada Guarantee.

    CMHC, and the other insurers, have made homw ownership in Canada much more accessible. With that also means that there is exposure to trillions of dollars of risk. The profit that CMHC earns provides a much needed buffer in the event that anything should cause our mortgage industry to experience the same issues as we saw in 2008 in many countries around the world.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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