National Post/Brent Foster

Canada Mortgage and Housing Corp. has been in the crosshairs of the federal government for a while now. Late last month, Ottawa pulled the trigger, announcing the agency would come under tougher scrutiny.

OTTAWA — It’s not often a Crown corporation bangs its drum loudly, appears to question market sentiment and misrepresents the central bank’s monetary policy — all in the same day.

Canada’s housing agency did just that on Tuesday, issuing an annual report that read like a defence of its business practices, and saying that despite concerns by Jim Flaherty, the Finance Minister, and many others about the real possibility of an overheated housing sector, there was no sign of a market bubble.

In the same report, referring to interest rates, it offered that the Bank of Canada “has indicated that it is likely to remain at 1.0% for 2012,” prompting a strong denial by the central bank itself. CMHC later issued a clarification, saying it was characterizing views of market forecasters and “we don’t have specific guidance from the Bank of Canada. We’re not in the inner circle of monetary policy.”

THE CANADIAN PRESS/Sean Kilpatrick

“I’ve been concerned about the CMHC for some time,” Jim Flaherty said late last month when announcing the agency would come under tougher scrutiny.

The 66-year-old Canadian institution has been in the crosshairs of the federal government for a while now. Late last month, Ottawa pulled the trigger, announcing the agency would come under tougher scrutiny. The responsibility for ensuring that happens will be passed on from the Human Resources and Skills Department to the Office of the Superintendent of Financial Institutions.

“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,” Mr. Flaherty said in announcing the change.

Recently, the minister has even contemplated eventually taking the mortgage insurance function of the CMHC private, telling a National Post editorial board such a role for the agency was not “essential.” According to a Bloomberg News report, former CMHC Chairman Dino Chiesa, who’s term ended in March, studied the sale of Australia’s government-owned insurer and presented the findings to the Bank of Canada.

Rock-bottom mortgage rates have fueled Canada’s housing boom, but they have also raised concerns over record-high household debt as many consumers take advantage of cheap lending costs while they last. Higher rates could push many households beyond their limit and out of the market, and that could lead to a drop in prices, especially in the over-development condo sector.

On Tuesday, CMHC also reported housing starts jumped 14% in April, mainly for multi-unit construction, with some economists saying this was proof the housing market is heating up, especially in the condo segment in major cities.In its annual report, however, CMHC said, there was no “clear evidence” of a housing bubble.While the report did not make specific reference to the government’s changes in the oversight of CMHC, it did offer what could be characterized an strong validation of its role and operations. “CMHC follows prudential regulations as set out by the Office of the Superintendent of Financial Institutions, with CMHC maintaining more than twice the minimum capital required by OSFI,” it said. “As a result, CMHC is well positioned to weather possible severe economic scenarios.”

The report also highlighted the important role CMHC plays in the housing market, which it said accounted for 20%, or $346-billion, of Canada’s gross domestic product last year. It pointed out the agency “manages its mortgage loan insurance and securitization guarantee operations using sound business practices that ensure commercial viability without having to rely on the government of Canada for support.”

Its mortgage loan insurance portfolio in 2011 accounted for most of its $1.53-billion in net income, it said, “which helped improve the government of Canada’s fiscal position.”

“CMHC manages its insurance business in a financially prudent manner and generates reasonable returns for the Government of Canada,” it said. “Since 2002, CMHC has contributed $16-billion to improving the government’s fiscal position.”

The corporation, created in 1946, currently has a $600-billion loan limit, which the government increased three years ago from $450-billion. The federal government guarantees the full value of mortgages insured by CMHC and 90% of loans insured by private firms.

Posted in: FP Street  Tags: cmhc, housing market, Jim Flaherty

Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank.

It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.

Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.

Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporation Canada Mortgage and Housing Corp.

“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.

The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to the Financial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.

Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.

However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.

“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”

It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.

“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.

Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.

“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.

“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”

But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.

Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.

While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.

It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.

It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?

 I suspect everyone in our industry is familiar or has some basic understanding of OSFI’s responsibilities. The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada, and the agency reports directly to the Minister of Finance. OSFI’S mandate? Simply stated OSFI’S role is to ensure that Canadians have confidence in the financial system. Given what’s transpired in the rest of the word since 2008, I suspect Canadian confidence in our financial system has not waned, at all. Yet most Canadians wouldn’t know who or what OSFI is. Maybe that’s not a bad thing. Regulators in the US have come under heavy criticism for their role or lack thereof leading to the financial crisis of 2008. The criticism that regulators in the US have received over the last four years contributes to the erosion of consumer confidence. When regulators make headlines you know change is coming. Consumer confidence is the underpinning of any established economy. If consumers are concerned about their jobs, they don’t spend. If Canadians ever questioned the stability of our banking system, well, the net result could be cataclysmic.

So what exactly is the responsibility of this shadowy agency that so few Canadian know about or even know of their existence?

1. Supervise institutions and pension plans whether they are in sound financial condition

2. To ensure that financial institutions are complying to law and supervisory requirement

3. To advise institutions of material deficiencies, and to require management and boards of said institutions to implement corrective measures

4. Create policy and procedures designed to mitigate risk

5. Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively

We’re getting firsthand experience as it relates to the fifth mandate. OSFI has significant concerns about the state of lending in this country and the risk posed to financial intuitions if current lending practices continued. Lending practices are being questioned and change is coming. What’s unknown is the degree of change. OFSI requested for CAAMP to respond to their draft guideline – B-20 Residential Mortgage Underwriting Practices and Procedures. CAAMP was grateful for the opportunity to respond to OSFI and once again it demonstrates that CAAAMP has become the guardian of our industry. CAAMP’s response was well measured and focused.
For a copy of a CAAMP’s full response, please click here.

As a teaser, CAAMP’s response focused on the following lending practices and procedures;

1. Loan Documentation

2. Debt Service Change –Additional Assessment Criteria

3. Loan to Value Ratio

4. Down Payment

5. Home Equity Lines of Credit

It is clear that OSFI is reviewing every aspect of lending and specifically the fundamentals of credit decisions. As an industry it would be naïve to believe that change would have no impact on our business. Change is coming and one has to hope that change is measured and based on facts. Over reaching changes to lending policies poses a risk. Confidence in the financial system is critical. However, if Canadians don’t believe that banks want to lend prudently, they’ll respond accordingly. There are different ways for Canadians to lose confidence in the banking system. It’s not just about writing bad loans…it’s also about writing no loans.

Support for banks ‘more substantial than Canadians were led to believe’: CCPA report

Canada’s biggest banks accepted tens of billions in government funds during the recession, according to a report released today by the Canadian Centre for Policy Alternatives.

Canada’s banking system is often lauded for being one of the world’s safest. But an analysis by CCPA senior economist David Macdonald concluded that Canada’s major lenders were in a far worse position during the downturn than previously believed.

Macdonald examined data provided by the Canada Mortgage and Housing Corporation, the Office of the Superintendent of Financial Institutions and the big banks themselves for his report published Monday.

It says support for Canadian banks from various agencies reached $114 billion at its peak. That works out to $3,400 for every man, woman and child in Canada, and also to seven per cent of Canada’s gross domestic product in 2009.

The figure is also 10 times the amount Canadian taxpayers spent on the auto industry in 2009.

“At some point during the crisis, three of Canada’s banks — CIBC, BMO, and Scotiabank — were completely under water, with government support exceeding the market value of the company,” Macdonald said.

“Without government supports to fall back on, Canadian banks would have been in serious trouble.”

During October 2008 and June 2010, the banks combined to report $27 billion in profits on their balance sheets.

CMHC mortgage program aided banks

One of the most well-known ways in which policymakers helped the banks during the crisis is through a $69-billion CMHC program whereby the housing agency took mortgages off the balance sheets of big Canadian banks. In contrast with other support facilities, all of the funds granted by the CMHC were through selling assets (in this case mortgages) to the housing agency. They were not funds that had to be paid back.

The CMHC has provided the aggregate total of how much was given out, but has yet to release specifics on which banks sold how much to them, and when, the CCPA says.

When asked for comment in reaction to the CCPA report, the Canadian Bankers Association noted that the $69 billion that Canada’s big banks sold into the CMHC program is in fact only 55 per cent of what was allocated for the program.

“Many of the mortgages were already insured and therefore, created no additional risk for the government,” the CBA noted in an email to CBC News. The CMHC estimates that by the time the program is wound up, it will have generated $2.5 billion in profit as those mortgages are paid off, the bankers’ group noted.

Calling the CCPA report “completely baseless,” Department of Finance spokesperson Chisholm Pothier noted that the mortgage program has already generated more than $1.2 billion in net revenues for the CMHC’s coffers.

But Canadian lenders also dipped into a program set up by the U.S. Federal Reserve aimed at providing cash to keep American banks afloat. CIBC and BMO took almost $3 billion each out of the fund, RBC and TD took out $8 billion and Scotiabank drew down almost $12 billion, the CCPA report found.

‘These funding measures were not put in place because banks were in financial difficulty.’—Canadian Bankers’ Association

That data came from the U.S. Federal Reserve, which released it publicly. But Macdonald’s analysis found that Canadian banks got a comparable amount — $41 billion — from Bank of Canada facilities, an agency that has been far less transparent in sharing information.

“Despite Access to Information requests for the data, the Bank of Canada refuses to release it,” the CCPA report states.

“The federal government claims it was offering the banks ‘liquidity support,’ but it looks an awful lot like a bailout to me,” says Macdonald. “Whatever you call it, Canadian government aid for the country’s biggest banks was far more indispensable than the official line would suggest.

“The support for Canadian banks was much more substantial than Canadians were led to believe,” Macdonald said.

The Canadian Bankers Association disputes the notion that the funds in question were any sort of bailout, arguing they were routine transactions aimed at keeping the financial system liquid.

“These funding measures were put in place to ensure that credit was available to lend to businesses and consumers to help the economy through the recession,” the CBA said. “These funding measures were not put in place because banks were in financial difficulty.”

Since the start of the recession, the CBA notes 436 U.S. banks have failed. No Canadian financial institution went under, but Canada’s banking sector was hit by an overall crisis of confidence in the banking sector that caused some of the banks’ normal lending sources to dry up, the CBA says.

Canadian banks get about two-thirds of their funding from consumer and business deposits, but the other third comes from credit markets.

“It was these markets that were seizing up. Funding was less available,” the CBA says. “Canadian banks continued to lend and increased their lending after some non-bank lenders pulled out of the Canadian market.”

While some of the funding came from government sources such as the Bank of Canada, the bankers’ association points out that the central bank itself says Canadian banks needed less official central bank liquidity support than their foreign counterparts.

“The credit was extended at competitive interest rates to protect taxpayers,” Pothier said. “Financial institutions accepting this credit paid interest on the loans.”

To show the scale of the funding, the CCPA report contrasted the total value of the support Canadian banks took against the bank’s total value at the time. Under that comparison, CIBC received $21 billion in support — almost 1.5 times the value of the company at the time. BMO maxed out at $17 billion or 118 per cent, Scotiabank peaked at $25 billion or 100 per cent of its value, while TD and RBC maxed out at $26 billion and $25 billion — good enough for 69 and 63 per cent, respectively, of the total value of those companies at the time.

“It would have been cheaper to buy every single share in these companies,” Macdonald said.

But the CBA disputes those numbers too, saying comparing a bank’s value to the level with which it participated in a liquidity program aimed at boosting confidence in the market is “an apples to oranges comparison as the two factors are not at all related.”

“The Oxford dictionary defines bailout as ‘financial assistance to a failing business or economy to save it from collapse,” the Canadian Bankers Association noted.

“That definitely was not the case here: not one bank in Canada was in danger of going bankrupt or required the government to buy an equity stake under taxpayer-funded bailouts.”

http://www.cbc.ca/news/canada/ottawa/story/2012/04/30/bank-bailout-ccpa.html