Posted by Tim Stobbs on November 2, 2009
I came across this article over at The Tyee on CMHC (Canadian Mortgage and Housing Corporation) which granted does contain a few over reaction statements but does contain some interesting data on why our real estate market only had a slight correction rather than the fall in the US. Basically the argument goes that we are just sitting on a housing bubble funding by CMHC which puts us the taxpayers on the hook if this bubble bursts.
First a little history lesson, recall back in 2007 when 0% down payment and 40 year mortgages were introduced. This fulled the initial rush into the housing market until August 2008 when those rules were scaled back to 5% down payment and 35 years. You would have though the banks would have got some of that risk right? Actually the banks mortgage debt from the start of 2007 until Jan 2009 has grown by a mere 0.01%, so that means almost every mortgage in Canada from 2007 to 2009 was backed by CMHC. Then guess what CMHC has been packaging some of those loans up and selling them off in pools (if this sounds familiar it should Mortgage Backed Securities is what caused a lot of this mess in the US). So if people fail to pay their huge mortgages the banks are off the hook, but CMHC picks up the tab and CMHC is government backed. So in the end we the taxpayers are on the hook.
If your curious how big of an issue this is let’s look at the dollars. In 2007 the CMHC had $138 billion in mortgages or about 17.8% of all mortgages. By June 2009 CMHC had $290 billion in mortgages and the government has raised it’s leaning limit again from $300 billion to $600 billion since CMHC is predicting they will have about $500 billion in mortgages by the end of 2010. Currently CMHC has issued $114 billion of those loans as guarantee pools. Also keep in mind at the end of 2008 the net federal debt was about $480 billion.
Now this is the important bit, CMHC is not a bank. Therefore those wonderful conservative regulations that our banks have had praise for from around the world don’t apply to CMHC. Effectively meaning if the real estate market goes south on us that $56 billion deficit this year is starting to look damn small. Are you starting to get a little bit nervous? Good because so am I.
So what can the government do about this potential mess? Well so far they have done almost nothing (other than back away from those 40 year mortgages). After all things are going well so it’s not a big deal. Yet if they tried to tighten the mortgage rules back down to a maximum of 30 years you cut off the new home buyers, you do that and construction falls and the economy slows even further. If that happens mortgage defaults could go up. You can see the bind that they are in. If they try to fix it they would likely burst the bubble if they do nothing the bubble could keep growing.
So what do you think? Do we have a problem or not? If so what can we do about it?