Mortgage lending change could trigger soft landing or ‘apocalypse’
Published On Thu Apr 26 2012
Canadian Mortgage and Housing Corp. to be overseen by Canada's finance regulator in hopes of reining in risky mortgages.
Susan Pigg and Les Whittington Staff Reporters
The federal government has moved to further tighten up mortgage lending and cool the overheated Canadian real estate market by effectively reining in the Canada Mortgage and Housing Corp.
What’s unclear is whether the move will throw a cold compress on Toronto’s feverish housing market or just mean there’s one more person keeping a close eye on its temperature.
Under a bill tabled Thursday, the Office of the Superintendent of Financial Institutions will be given oversight of CMHC, which now insures nearly 50 per cent of the $1.1 trillion in residential mortgage credit now outstanding in Canada.
“I’ve been concerned about the CMHC for some time in the sense that it’s become an important financial institution in Canada and it was not subject to the same supervision by the Office of the Superintendent of Financial Institutions,” Finance Minister Jim Flaherty told a news conference.
“So I think this is an important step forward.”
Flaherty made it clear he’s particularly concerned about the condo markets in Toronto, Vancouver and Montreal. The bill, which he’s been hinting at for weeks, is aimed at discouraging high-risk borrowing and reducing the risk to taxpayers if those major markets take a tumble.
It is inevitable that OSFI’s oversight of the CMHC will have at least some dampening effect on the housing market as more mortgage applications inevitably get rejected or subjected to scrutiny that has slipped over the last decade, says Ben Rabidoux, an analyst at M Hanson Advisors.
It would be "apocalypic" for the condo industry, but highly unlikely, if investors found themselves no longer backstopped on mortgages by CMHC, as some housing analysts have suggested could eventually happen, says Brian Persaud, a realtor and co-author of a book on condo investing.
Rabidoux agrees: “This is a credit-driven housing market and (Flaherty) is walking a tightrope when he tries to slowly rein it in and induce a soft landing, particularly when you see how reliant the economy is on this current housing boom.
“I think he is starting to get the sense, rightfully so, that a soft landing is not in the cards and, by passing the dirty work off to OSFI, he’s not the one seen to be responsible for it.”
But CIBC deputy chief economist Benjamin Tal predicts “the surprise will be how little this will change as far as the overall activity of CMHC goes,” calling the change of oversight as nothing more than “changing reporting lines.”
The amount CMHC insures has almost tripled just since 2000, from about $200 billion to $541 billion as of last September — so close to the $600 billion insurance cap set by Ottawa that it’s raised fears taxpayers could be left hugely exposed if prices start dropping and over-leveraged homeowners start defaulting on mortgages.
Just this week, the governor of the Bank of Canada warned Canadians, yet again, that household debt is a significant risk to the country’s economic health with interest rates bound to rise and house-prices-to-income levels running 35 per cent above historic levels.
The budget implementation bill tabled Thursday would also stop CMHC from providing insurance to major banks on conventional loans that aren’t considered high risk. That practice has become big business for CMHC and only served to boost the bottom lines of banks, says Rabidoux.
Carleton University professor Ian Lee, a former mortgage broker, called the move “long overdue” along with OSFI’s recommendations that lending be tightened on home equity lines of credit.
He’s urged Ottawa to privatize CMHC in the past, believing that “the role of government is to referee the hockey game and regulate it aggressively. But they shouldn’t be owning one of the teams.”
The aim of the bill introduced Thursday is to ensure that CMHC’s commercial activities “are managed in a manner that promotes the stability of the financial system” and contributes “to the stability of the housing market,” said Flaherty.
“CMHC was created to assist in social housing but it’s become much more than that.”