What is CMHC Up To With Pending Announcement?

There is likely no small announcement pending this coming Friday at 11 am from Canada Mortgage and Housing Corporation (CMHC). A major announcement from the insurer of what is estimated to be 50% of all Canadian Mortgages, 70% of insured mortgages and the second largest crown corporation (to Canada Post) is well worthy of attention. So what is CMHC up to with this major press release…. lets look at what we do know:

CMHC was originally formed to assist returning war veterans who encountered an extreme housing shortage with funding home purchases after World War II. Today it provides insurance security to major lending institutions for loans with 20% or less down payment. If the loan defaults, CMHC acts as essentially a taxpayer back stopped insurance policy that the borrower pays for (the CMHC Fee) and the bank benefits from (unlike Genworth & AIG Insurance CMHC insures 100% of the loan value). The five major Canadian banks only made around 7.8 Billion in 2012, they oh so need a taxpayer backed support program (estimated to representing a risk factor of $17,000 per Canadian). CMHC is not alone there is Genworth and Canada Guaranty with a smaller percentage of the market but keep in mind CMHC  insures their insurance program to 90% of loan value. CMHC has other facets from renovation loan insurance, housing programs, research,reporting and more. It suffices to say that the main business of the corporation is insuring mortgage loans with less than 20% down-payment.

Mr. Evan Siddall was appointed by Jason Kenny, the Federal Minister who oversees the Crown Corporation as the Chief Executive Officer in December of 2013 and took the post January 1st of this year. Mr. Siddall has an investment banking background and has worked for Goldman Sachs & Co., Nesbitt Burns and Irving Oil Ltd.. A Globe and Mail Article announcing the appointment contained the following quote from Finn Poschman, vice-president of research at the CD Howe Institute which could prove telling:

“He is calm, understands financial markets, and clearly has the confidence of government, and the Finance Minister, in the direction he and they may take with respect to CMHC,” Mr. Poschmann said. “Whether the route is toward a larger private role, or something more like the status quo, it is a terrific appointment.”

In December while speaking to reporters  Finance Minister Jim Flaherty told reporters: “Regrettably, CMHC became something rather more grand, I think, than it was intended to be…We’ll see over time what that role should be.”

In the recent budget the government restated that CMHC will pay guarantees fees to the Receiver General to compensate the Federal Government for mortgage insurance risks. This move will also align CMHC with guarantee fees paid by private mortgage insurers who already do this.

So Speculation Option 1 – Some Form of Privatization? This would be big news and create great political fodder. If privatization was a part of the announcement it would likely be under taken through a partial break up of the crown corporation through transfer of the core Mortgage Insurance business while Research, Indian Affairs Programs among others would remain. Australia took a similar  approach with success.

The recent budget included the statement “The Government continues to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance and securitization ”  which have also been a running theme to statements made by the Finance Minister. Reducing future taxpayer burden is clearly part of the agenda. So the question that begs here, is what step could they take to reduce taxpayer risk, which leads to our Speculation Options 2 and 3:

Speculation Option 2 – A change to the down-payment requirements:  A return to 10% down-payment structure, eliminating the 5% down option. This would have a major impact on a lot of consumers, housing affordability thresholds and the economic engine that is the housing industry. In our opinion this move would be wrong in so many ways!

Speculation Option 3 – A reduction in the amount of insurance protection offered: Will it be less geared to impact the end consumers of mortgages and more directed to impact the degree of security provided to banks (the companies making billions) ? If Genworth and Canada Guaranty offer 90% insurance to banks is it fair that a public backed crown corporation under a government that wants to promote a more competitive environment (this was referenced in last budget with legislation changes to assist smaller banks access to mortgage insurance) is competing with an uneven playing field? So a change to the mortgage insurance guarantee from say 100% to 95% and then 90% would put CMHC on a level playing field, pave the way for a future transition to privatization just like the  Receiver General Fee structure guidelines placed on CMHC within the last budget did. Is this not the trend? All the while reducing the tax payer risk a clear mandate of this government.

My money is on Speculation Option 3  while at the end of the day we can only speculate while awaiting with anticipation as to what what this major player in the real estate insurance market has to say this Friday!

The writings expressed here are that of the writer Patrick Hulley, broker of record and founder of RealtySource Inc.. Click the image to the left to email Patrick directly or add your comments here…debate welcomed and encouraged!