What if the federal government no longer backed mortgages — more to the point, what if the Canada Mortgage and Housing Corporation (CMHC) were abolished?
On Wednesday, the International Monetary Fund (IMF) suggested that Canada should look at phasing out its practice of insuring home mortgages through the federal housing agency.
IMF said of the CMHC in their latest report on Canada’s economy:
“Over the long run, the need for extensive government backed mortgage insurance should be re-examined. The current system has its advantages, including as a macro-prudential tool. However, it exposes the fiscal budget to financial system risks and might distort the allocation of resources in favor of mortgages and away from more productive uses of capital.”
As many have pointed out, the IMF recommendation seems to align with the efforts of Finance Minister Jim Flaherty to cool house prices by demanding banks tighten mortgage rules. But some analysts credit the CMHC for providing confidence in Canada’s housing market during the 2008/2009 crisis, which many believe was caused by the US mortgage crisis.
Indeed, there are differences of opinion on the matter. To give you an overview of the arguments, here’s a sampling of what the experts are saying through various media outlets.
Speaking to the Canadian Press, CIBC deputy chief economist Benjamin Tal says he believes the IMF’s advice may be appropriate for the US, but not necessarily for Canada, where the CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.
“In this case size matters,” Tal told the Canadian Press. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy by contributing to low borrowing rates and liquidity.”
The National Post spoke with Peter Routledge, an analyst with National Bank, who said that if Canada were to eliminate all government back of mortgage, rates would be much higher.
“The great benefit of the system is it has pretty much democratized and equalized credit for the household,” Routledge told The Post.
Also in conversation with The National Post, Rob McLister, editor of Canadian Mortgage Trends, said he would like to see more research into the impact of the government pulling out of the sector before any moves are made to change the system.
“I’m not saying it’s bad idea, I’m saying somebody has to do some hard core analysis on this and put the numbers out there. I’ve never seen it,” McLister told The Post.
Context is important here, and the CBC provides it with this piece of exposition on Canada’s housing agency:
CMHC, established in 1946 to house war veterans and promote home building, evolved into a backer of mortgages in 1954, when the chartered banks first began offering mortgages. It has a mandate to ensure Canadians have affordable housing and has shouldered part of the risk of mortgages for three generations of Canadians.
What say you, dear readers? Has the CMHC lost its purpose or usefulness?
