As Jim Flaherty continues to make waves in the broker channel, limiting the use of portfolio insurance by mortgage lenders in the 2013 budget, the question of privatizing the CMHC has once again been raised as a means of levelling the lending playing field for mortgage insurance.
“It served as admirably in the recent financial crisis,” Jane Londerville, associate professor and interim chair of the Department of Marketing and Consumer Studies at the University of Guelph, stated in a recent position paper. “But it has one important failing: it denies consumers benefits from full competition by giving the CMHC an unfair advantage over private firms.”
Londerville, who also teaches real estate finance and appraisal, wrote a report in 2011 recommending privatizing the CMHC to level the playing field. Privatization might, in fact, loosen the government’s control over the mortgage industry, says some industry insiders.
“I really see this as a double-edged sword, with the consumer taking the brunt of the blade in either case,” says Chris Karram, founding partner of Safebridge Financial. “If we leave things as is, that enables the government to make decisions that can drastically impact our real estate market as we’ve seen since last July.”
The CMHC is currently very near or at the $600-billion cap set by Ottawa last year on mortgages it insures. CMHC, which controls about three quarters of the mortgage insurance market, is 100 per cent backed by the federal government. The two private insurers, Canada Guaranty and Genworth
Financial, control the rest of the market and are 90 per cent backed by Ottawa. Their limit is $350-billion each.
“Some may say it gives them more power than necessary for the specific service that CMHC provides and based on the original purpose of CMHC,” says Karram. “On the other hand, privatizing mortgage insurance will eventually put the decisions in the hands of a business, which has one goal, to make profit.”
The new rules introduced by Flaherty will gradually limit the sale of insurance on a conventional mortgage - those with more than a 20 per cent down payment - which may cause lenders to, once again, tighten-up their mortgage approvals.
Some of the recommendations for privatizing the CMHC include it being repositioned as an affiliated non-Crown public entity, equal to the terms set out for private insurers. Transforming the CMHC from a primary insurer to a re-insurer has also been suggested to help mitigate the risk to taxpayers.
“In the end, it’s a tough decision either way,” Karram points out, “but at least if it was private then the Canadian government wouldn’t be able to dictate decisions that are made as they did in the case of the Manulife scenario.”