financial

CMHC mortgage insurance may be reduced by feds

Finance Minister Jim Flaherty may find getting out of mortgage insurance hard to do.

The future of CMHC is in Minister of Finance Jim Flaherty’s hands. (Photo: THE CANADIAN PRESS/Sean Kilpatrick)

Karen Kinsley was, until recently, among the most powerful women in Ottawa you’d never heard of. Since becoming CEO of the Canada Mortgage and Housing Corp. in 2003, she’s presided over an unprecedented expansion of Canada’s housing market. Politicians barely blinked as CMHC grew into one of the nation’s largest financial institutions. But now Kinsley’s masters have turned on her.

For months, Finance Minister Jim Flaherty has said he expects CMHC to remain within its $600-billion limit for insurance outstanding. Since it’s already nearing that cap, this greatly constrains underwriting activities. In April, Flaherty placed CMHC under the supervision of the Office of the Superintendent of Financial Institutions. Then came a bombshell: he hinted CMHC might one day be forced to exit underwriting altogether.

Just what provoked Flaherty is unclear. Some believe he’s looking for ways to raise borrowing costs to calm housing markets. Others suspect he’s gained a belated appreciation of the risk CMHC’s activities present to taxpayers. Regardless, the minister may find getting out of mortgage insurance hard to do.

Founded after the Second World War to house returning veterans, CMHC has become firmly entrenched. By legislation, any mortgage for which the down payment is less than 20% must be insured for the full amount and for the entire amortization period, as long as 30 years. Should the borrower default, the insurer pays the outstanding balance, up to 18 months of accrued interest, plus foreclosure and maintenance costs. It allows more Canadians to bid on homes, and prices in your neighborhood are probably higher as a result. CMHC provides other forms of insurance aimed at helping banks raise new capital, thus ensuring cheap funding for new mortgages. Of the $1.1-trillion worth of outstanding mortgages in Canada, roughly half is insured by CMHC. “It’s the 60,000-pound gorilla in that space, and our collective risk exposure has been increasing with each passing day,” says Queen’s University finance professor Louis Gagnon.

Even if underwriting ceased tomorrow, CMHC’s liabilities would diminish slowly over time. Its private-sector competitors would reap market share, but they, too, enjoy federal backing. (Should rival insurer Genworth go bust, for example, the federal government would cover 90% of any claims.) Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals, says that guaranty was intended to place private insurers on equal footing with CMHC. “If the government’s no longer in the business, it can be argued, why do you need it?” he says.

Yet, without that backing, lenders would charge higher rates to all borrowers, and more consumers would find themselves unqualified to borrow. That could undermine the demand for homes, causing a serious correction in prices. Kinsley may be on a shorter leash, but Flaherty can’t afford to put her agency down quite yet.