Dear Jim and Monty,
I’m writing to you today because I am gravely concerned about the exposure that Canadian taxpayers have to the quickly changing Canada-wide real estate bubble, indirectly through the Canada Mortgage and Housing Corporation (CMHC). As the ministers responsible for Finance and Human Resources and Social Development in Canada, you are both acutely aware of the importance housing and markets have to the Canadian people in general and the wider-economy. You are also directly responsible for CMHC.
Over the past 8 to 10 years, many regions in Canada have experienced unprecedented escalating house price valuations. As a result, one fact has become glaringly obvious: The median family in Canada can no longer afford the median property in many urban centres. These same regions are home to the greater percentage of the Canadian population.
Beginning in 2006, perhaps as a result of your political party forming Canada’s New Government™, CMHC began liberalizing its standards for mortgage insurance. Come to think of it, personally I can’t see much difference between your government and its Liberal predecessors, so I’m more inclined to think that the liberalization of standards at CMHC was the result of internal management processes and not applied-from-above political forces.
I’m not exactly sure when the private mortgage insurance companies began providing competition—and I hesitate to use that word because statistically CMHC still has an effective monopoly on the mortgage insurance market. Regardless, the effect of private mortgage insurance companies like Genworth and GMAC on CMHC’s policies couldn’t be more pronounced. But this isn’t news to you, nor should it be.
In a remarkably short period of time for any government entity, even one governed, so-called, at arms-length of elected officials, CMHC has first stretched out amortization periods from a long-held standard 25 years to 30, 35 and ultimately 40 years. They have also dropped the minimum down payment from 25 per cent to 20 per cent in an effort to “absolve” one from purchasing mortgage insurance—retrospectively this may be a prudent decision that benefits taxpayers as it potentially reduces the total number of default mortgages that taxpayers may end up subsidizing through CMHC. They even took the sub-prime equating step of dropping the 25 per cent minimum downpayment for "investment" properties. I use quotes because I fail to see how properties purchased for valuations far above what rents will support qualify in any financial circles as investments.
One fact remains undeniable: never before has the Canadian taxpayer been more exposed to private lending practices than it is today. And as the real estate market winds down and inevitably contracts from its unprecedented expansion, Canadian taxpayers may well end up “insuring” the bad lending practices of banks, private mortgage lenders, the speculative buying activities of would-be real estate investors and the poor insurance decisions of CMHC who agreed to back them.
The governors and management of CMHC may have enough investment reserves to handle the mortgage defaults inevitable as people face higher interest rates, rising inflation and decreasing house valuations. They may not. CMHC may be able to sell enough new mortgage insurance premiums to cover increasing defaults, although common market sense suggests they won’t in a declining market.
The Government of Canada, specifically the Department of Foreign Affairs, has recognized the world-wide real estate asset bubble and acted prudently by selling off many millions of dollars of real estate at a time when it made great fiscal sense to do so; despite the fact that one can dispute the political or diplomatic sense of these decisions until the cows come home. I am asking that you please also act with the same fiscal prudence and privatize CMHC, now while the market still maintains some outward appearance of stability.
This action may cause a short-term, collective WTF with the general electorate, but given that it looks as though the combination of you governing like Liberals and the Liberals being an ineffective opposition will lead to you staying in power until October 2009, you should be OK. I believe, rightly or wrongly, that many economists who don’t depend on real estate for an income will applaud your decision publicly which should mitigate the negative effects of the public outcries from the ones who do depend on the Canadian Real Estate Association for a paycheck.
This anonymous blogger—like more and more people around him, a fact which is slowly being reflected in the mainstream media—believes that in 2009 real estate valuation schadenfreude will be as mainstream as the real estate valuation love-in that was 2007. During your election campaign in that fall you will be able to get up on your soapbox and pat yourselves gleefully on your backs while chanting, yes chanting!, “we saw this coming and we acted to protect you, the average working family heroes. The corporations will be held to account for their loose lending ways.”
To summarize, the taxpaying many must be protected from the actions of the few and the only clear way to do so is to privatize the CMHC. Who knows, CIBC will likely line up to buy it, they seem to have a way of ignoring the underlying issues present in their investments.