CMHC insured mortgages are sub-prime

Lot's of confusion about sub-prime mortgages in Canada. We hear things like Canada doesn't have sub-prime mortgages; we don't have adjustable rate mortgages either; our banks are solid and prudent and we'll never have a sub-prime problem because Canadians are by their very nature risk adverse and prudent. I call bullsh&t.

Apparently so does the CEO of ING. The problem lies in the narrow definition of sub-prime in Canada. People believe--incorrectly--that sub-prime refers only to poor credit rated borrowers. In fact, sub-prime is a category of mortgage debt that would not be granted to borrowers without either

1. a higher interest rate to price in the risk of the credit worthiness of the borrower, or
2. some form of insurance to protect the lender

In Canada, a conventional mortgage is one that includes a down payment greater than 20 per cent of the purchase price. Every mortgage written on down payments less than 20 per cent are unconventional and, by law, require mortgage insurance, mostly backed by the CMHC, regardless of the credit rating of the borrower. You may have flawless credit, but if you don't have 20 per cent to put down, you're a risky client for the banks (without the CMHC that is).

There is no arguing that CMHC has allowed millions of Canadians to own homes earlier than they otherwise would have. Banks would not take on the risk of these debtors if it weren't for the CMHC. The real estate industry applauds this practice. The scheme is so brilliant it's disgusting. The scheme has created market manipulation on a scale that is economically unmeasurable. In 2009, the CMHC will insure $600 billion in mortgage debt that otherwise wouldn't be written by the banks.

The Canadian taxpayer is now the world's largest holder of sub-prime mortgage debt. All of it Canadian, much of it packaged up as mortgage backed securities and sold to the government.

Here's a quote from the ING guy:

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think,"

We have no idea how the Canadian sub-prime mortgage market will unravel, or even if it will. We do know the government will intervene to prevent its unraveling. The government faces a massive economic dilemma though: any policy changes will likely lead to downwards price pressure, and that is a very slippery slope that ends in economic calamity.