In a rare move, Canada Mortgage and Housing Corporation responded directly to recent criticism about its role in Canada’s mortgage system.
In a letter released to the media on Monday, Douglas Stewart, CMHC’s VP, policy and planning took aim at Finn Poschmann of the C.D. Howe Institute, who recently expressed in a report that Canadian taxpayers shouldn’t be exposed to the liabilities held by CMHC, when private insurers could pick up the slack.
“[Your report] suggests that under its recommended model, there could be participation from foreign insurers which would help diversify financial market risks beyond Canadian borders,” says Stewart. “Prior to the economic downturn, a number of foreign mortgage insurers had entered the Canadian marketplace. However, during the downturn, their parent companies experienced significant financial losses, and the majority of these mortgage insurers exited the Canadian market, along with their capital. Risk diversification through foreign insurers has its own inherent risks.”
Stewart also reiterated CMHC’s stance that Canada’s current model withstood the recession and that “in addition, CMHC’s prudent underwriting practices and market presence have contributed to the stability and resiliency of Canadian housing finance.”
The C.D. Howe Institute wasn’t Stewart’s only intended target. He also sent a letter to David Madani of Capital Economics who recently predicted that housing prices would drop 25 to 35 per cent over the next two years. Madani also stated that “the fall in (the predicted) house prices would also have significant financial implications for CMHC. According to our calculations, a sharp decline in house prices could lead to losses of around $10 billion, which would be enough to wipe out all of CMHC equity.”
Stewart took Madani to task and refuted the assumptions which Madani used in making his calculations. Stewart said CMHC’s total insurance-in-force is $473 billion, not the $800 billion Madani based his report on. “The $300 billion in securitized mortgage guarantees should not be added to the level of insurance guarantees as the underlying mortgages are already insured by CMHC or the private sector,” said Stewart.