Wednesday, May 23, 2012
Tuesday, May 8, 2012
Anyone trying to understand the concern over a potential housing bubble in Canada need look no further than the debate among government officials over whether to exit the mortgage insurance business.
The board of Canada Mortgage & Housing Corp. considered selling the home loan insurer last year, according to former Chairman Dino Chiesa, who’s term ended in March. CMHC, set up in 1946 to promote home ownership, also studied the sale of Australia’s government-owned insurer and presented the findings to the Bank of Canada, according to documents released to Bloomberg News under Canada’s Access to Information Act.
The moves by the federal housing authority came as house prices in Canada continued to surge, pushing government guarantees on mortgage insurance to $541 billion at the end of September, equal to 31% of gross domestic product, and more than twice as much as a decade ago. Finance Minister Jim Flaherty has since questioned the need for a government-owned mortgage insurer.
“We didn’t go and price what we could sell CMHC for, but we certainly looked at the role of a national housing agency,” Chiesa said in a telephone interview.
Flaherty’s concern that CMHC poses an increasing risk to taxpayers was underscored by his efforts to tighten oversight and governance of the company in his March 29 budget, after toughening mortgage insurance rules three times since 2008. He also proposed on April 26 barring banks from using insured mortgages to back new covered bond issues.
CMHC analyzed Australia’s housing finance system, where the government-owned mortgage insurer was sold to the private sector in 1997. Since the 2008 credit crunch, Australian homeowners pay “relatively higher margins on their mortgages than do Canadians; the lending industry has become more concentrated and less competitive,” according to the documents obtained by Bloomberg News, which show the analysis was presented to Bank of Canada officials last June.
The Australian government sold Housing Loan Insurance Corp. to the finance unit of General Electric Co., which later spun off its insurance business to create Genworth Financial Inc. Australia doesn’t guarantee either mortgage insurance or mortgage-backed securities.
U.S. housing prices remain 33% lower than they were at the start of 2006 while home prices in Canada have surged 44%, prompting Flaherty and Bank of Canada Governor Mark Carney to warn Canadians about taking on too much debt. Canada’s housing market will be the subject of a panel discussion at Bloomberg’s Canada Summit in Toronto today.
“I have been concerned about CMHC for some time in this sense: that it’s become an important financial institution in Canada and it wasn’t subject to the same supervision,” Flaherty told reporters in Ottawa on April 26.
CMHC’s board reviewed the agency’s role “at least six times” during his seven-year tenure as chairman, said Chiesa, adding that directors have a responsibility to consider such options.
The board opted to “stay the course” for at least the “next few years,” he said. A critical look will show that CMHC should be kept “in one form or another, because of what it’s contributed,” said Chiesa, who is chairman of Leisureworld Senior Care Corp.
The process for replacing Chiesa on CMHC’s board continues, Raymond Rivet, a spokesman for the government Privy Council Office, said in an e-mail. The closing date for applications was April 23.
The amount of mortgages insured by CMHC has risen 156% over the previous decade. Canada Mortgage guarantees the full value of mortgages it insures, meaning the government is liable for losses if borrowers default. Canada also guarantees 90% of loans insured by private companies such as Genworth MI Canada Inc.
Besides mortgage insurance, CMHC guarantees the principal and interest on mortgage-backed securities issued by lenders through a program it manages.
Flaherty’s budget proposed allowing the country’s banking and insurance regulator, the Office of the Superintendent of Financial Institutions, to review CMHC’s books at least once a year. It would also add two government deputy ministers to the agency’s board.
Investors shouldn’t “overreact” to Flaherty’s comments about exiting the mortgage insurance business, RBC Capital Markets analysts Geoffrey Kwan and Sean Adamick said in an April 30 research note. “If it were to occur, we believe it would be unlikely to happen for a while,” they said.
The government would have to address a number of questions about how to handle an exit, including whether it would raise the legal limit on private mortgage insurance of $250 billion, the RBC analysts said.
While CMHC said in January it was rationing its mortgage insurance as it approaches its legislated $600 billion limit, private mortgage insurers have room to grow this year, said Andy Charles, chief executive officer of Canada Guaranty Mortgage Insurance.
Canada Guaranty would like the limit raised to $300 billion, Charles said in an April 18 phone interview. “I have a strong level of comfort that the Department of Finance monitors this.”
Flaherty would have to be careful not to sideswipe Canadian banks in exiting mortgage insurance, because loans guaranteed by the government are deemed riskless assets under international capital rules, said Neil Mohindra, a policy analyst at the Vancouver-based Fraser Institute research group.
Flaherty questioned the need for a government-run mortgage insurer in an April 27 interview with the National Post newspaper. He later said any move on privatization isn’t imminent. “In the longer term, there are a number of government enterprises we review to see whether or not they need to remain within the public sector,” the minister told reporters May 1 in Kitchener, Ontario.
Governments don’t always need to intervene to promote home ownership, the International Monetary Fund said in a report published in April last year.
“Many countries in western Europe, as well as Australia, have achieved high homeownership rates without extensive government participation,” the IMF said.
Spokesmen for CMHC and the Bank of Canada declined to elaborate on their meeting last year. Part of the agency’s mandate is to “conduct research and contribute to the well- being of the housing sector by offering objective, reliable housing information,” CMHC manager of media relations Teresa Amoroso said in an e-mail.
Wednesday, May 2, 2012
Jim Flaherty has suggested Canada Mortgage and Housing Corporation could be pulled out the mortgage insurance business
On Friday Finance Minister Jim Flaherty has suggested Canada Mortgage and Housing Corporation could be pulled out the mortgage insurance business. Flaherty didn’t offer a timetable, but said as long as “affordable mortgage insurance is available” it’s “not essential” it be offered by the government.br>
This comes as Ottawa puts CMHC under closer scrutiny and tighter control, in light of how big a player the agency really is in the overall Canadian economy. Through CMHC and its two private-sector competitors (backed 90% by the government) Canadians are approaching $1 Trillion in exposure to insured mortgages.br>
Oversight of CMHC is being moved to the country’s top banking regulator, The Office of the Superintendent of Financial Institutions. Control shifts from the federal human resources department to the finance department, which gets representation on the agency’s board through a deputy minister.br>
Finance Minister Jim Flaherty said that this will “contribute to the stability of the housing market and benefit all Canadians”