Concern over a red-hot housing marketing and increasing consumer debt has prompted Finance Minister Jim Flaherty to make some drastic changes this week. On Thursday, Minister Flaherty announced that responsibility for the Canada Mortgage and Housing Corporation (CMHC) will be handed over to the Office of the Superintendent of Financial Institutions, the nation’s banking regulator.
It’s unclear how the change will impact the market. While some believe that new oversight will help halt skyrocketing real estate prices in Toronto, some experts anticipate very little change. Flaherty made it overtly clear that his main reason for tabling the bill was concern over the Toronto condo market. Designed to discourage high-risk borrowing, the new regulations would put the OSFI in charge of reviewing and monitoring CMHC’s commercial activities. The agency was previously monitored by Human Resources Minister Diane Finley.
What to Expect
In a nutshell, the CMHC’s function is to insure consumer mortgages. Part of the new bill includes the tightening of mortgage underwriting criteria for banks under the OSFI. As such, the OSFI’s oversight of the CMHC should have a dampening effect on the housing market as more and more mortgage applications will inevitably get rejected or, at the very least, be subjected to higher scrutiny. According to the Globe and Mail, new regulations could become “apocalyptic” for the condo industry if the OSFI ever decided to quit backstopping CMHC mortgages, as some housing analysts have suggested could ultimately happen.
The amount of capital the CMHC insures has almost tripled since 2000, from about $200 billion to $541 billion as of September 2011. This puts the CMHC dangerously close to a government imposed limite of $600 billion. Officials fear that if the CMHC were to go over this limit, tax payers could be left exposed if the housing bubble were to burst and homeowners started to default on their best rate mortgages.
According to Bank of Canada Governor Mark Carney, the average home price in Canada is about 4.75 times the average person’s income. Historically, the average has hovered closer to 3.5 times. The increase in housing prices has been heavily influenced by the Bank’s near-record low 1% interest rate, as more and more first time buyers and real estate investors take advantage of low mortgage rates.
Thursday’s bill also included a provision that would stop the CMHC from providing insurance to major banks on conventional, low-risk mortgage products. This practice has become big business for the nation’s banks, boosting their bottom lines. On Wednesday, Flaherty stated that “the issue that pushes them [the CMHC] near their lending limit is the desire of some financial institutions to purchase portfolio insurance for their low ratio mortgages.” He then added, “that’s not the way most people usually think of CMHC.”
The CMHC currently insures nearly 50 percent of the $1.1 trillion worth of residential mortgage credit now outstanding in Canada.
According to the Financial Post, the bill also provides protection of covered bond contracts and collateral in the event an issuer goes bankrupt. It also prohibits the issue of covered bonds, except those within the government’s framework. The CMHC will now only be able to guarantee covered bonds that have been approved by the finance minister.
The main goal of Thursday’s bill is to ensure that the CMHC’s commercial activities remain appropriate. Flaherty remains adamant that the CMHC’s business is “managed in a manner that promotes the stability of the financial system” and further contributes “to the stability of the housing market.”