There is an article on the Financial Post website today which quotes the CEO of CMHC saying that CMHC are evaluating restructuring the mortgage insurance risk exposure which could include the sharing of risk with mortgage lending institutions.
“As a government entity, we need to have a different approach to risk management. Implicitly, we are in the bail-out avoidance business. Lenders pay us a premium to back them up if things go wrong,” said Mr. Siddall. “So we have an explicit responsibility to manage tail risk and survive, since insolvency is a less obvious option for us.”
I think there are a few things of note here. CMHC recently increased their insurance premiums by 15% to offset what they perceived as additional risk. The question arises that if CMHC offloads a part of the risk to mortgage lenders, will they not also decrease the insurance premiums, or will they share part of that premium with the banking institutions holding the mortgage? Will this also affect the ability to switch institutions? I don’t believe that even CMHC should reasonably expect lower risk for free. I would anticipate if they were to do this, that they would have to make the insurance premiums lower also. In that sense, it would be a good thing.
On the other hand, mortgage lenders being exposed to risk could carry consequences regarding investor confidence and the return on investment they demand, which would then place upward pressure on interest rates. As long as the mortgage interest rate increase was offset by the mortgage insurance premium decrease, then I see no concern for homeowners.
Another note here is it is often understood in the industry that the banking institutions will not file claims with CMHC on defaults where they take a loss even now. They do this so that they maintain their strong standing with the insurers, so at this point the interest rates that are currently offered already include the risk premium for loss. However, if there was a meltdown I would imagine that the banks would reserve the right to change their internal policy on this, so its understandable why CMHC would have a concern.
On a brighter note, the last paragraph of the article addressed concerns of a housing bubble:
“As a risk manager, let me tell you why we aren’t overly worried about a housing bubble at this point in time, based on what we know,” he said. “Our educated opinion is that growth in house prices in Canada will moderate. If we are wrong, and price growth remains strong or accelerates, we may need to look to macro-prudential counter-weights to avoid excesses. As I said, we are currently evaluating them.”
The good news is that even experts in the industry do not realistically see a housing bubble at this time. The only issue I continue to have is that their response will be “macro-prodential counter-weights” to cool the housing market. I feel that micro counterweights could create a more equitable real estate system that would be fairer and easier to get into for the average homeowner. Currently it is said that 25% of condos in downtown Vancouver sit vacant despite demand because of affordability. This is what I believe that these wonderful “macro-prodential counter-weights” have gotten us.