Questioning the CMHC

Canadian Mortgage Trends has an interesting interview with Pierre Serré, CMHC's Vice-President of Insurance Products and Business Development. There's a bit of discussion though not too much analysis of the interview over at Vancouver Condo. There's also a link to a really great piece on CMHC done by the America Canada blogger.

In the interview, Pierre doesn't really tell us anything too specific, and CMT seems to let him off a tad bit too easy IMO. Here's an example of what I mean:

CMT asks "What percentage of mortgagors put down only 5%, and how has this percentage changed in the past two years?"

Pierre responds: "While the recent CAAMP survey did not ask that question..."

CAAMP isn't CMHC. They're the Canadian Association of Accredited Mortgage Professionals. They sell CMHC backed products, but they aren't the CMHC. So Pierre doesn't answer the question but goes on to say the following:

"Their statistics show that only 9% of them have equity positions of less than 10%."

Here's my question, which is really CMT's question: What do CMHC's statistics show? Pierre never answers this question and what he does offer is just a bunch of spin.

"we have found that 73% of first-time purchasers used their own resources for a down payment"

So 27% don't. Is Pierre indirectly telling us that 27% of home buyers get their down payments as gifts or cash-backs? Sure looks like it. Is that statistic high? Seems like it to me. And it has absolutely nothing to do with equity position.

"75% of purchasers have a goal to be mortgage free sooner than their original amortization and 20% of recent purchasers report having made a lump sum payment to their mortgage. These results indicate that Canadians are astute mortgage consumers and manage their mortgages prudently"

I have a goal to win the lottery every Wednesday and Saturday. Whoop dee do. What Pierre is really telling us is only 26% of people with the "goal to be mortgage free sooner" are actually doing anything about it right now. That's not a good number and shouldn't be misconstrued as "astute mortgage consumers who manage their mortgages prudently." What this really indicates is 74% of mortgage consumers can't or won't pay down their mortgages faster at a time when interest rates allow them to. When interest rates jump by 1% or more, even if they want to, many mortgage payers won't be able to pay down faster. And again, the answer has nothing to do with true equity position.

The real trend is down on home equity in Canada, and remarkably so, over a period of maniacal home value appreciation, which probably explains why Pierre doesn't want to answer the question.

Let's look at another issue Pierre responds to. CMT asks: "What third parties oversee and regulate CMHC to ensure CMHC is insuring strong mortgages and not taking undue risk?"

Here's Pierre's response (excerpted):

"CMHC maintains capital reserves and premium reserves for future losses in accordance with guidelines set out by the Office of the Superintendent of Financial Institutions (OSFI), Canada’s mortgage insurance regulator. In fact, CMHC maintains capital reserves that are twice the minimum required by OSFI."

Coincidentally, CMHC is not actually regulated by the OSFI. They really only answer to cabinet and the Auditor General of Canada. So what does this really mean? Here we should be looking for ratios. How much asset reserve does CMHC hold to backstop it's growing portfolio of mortgage insurance liabilities? Here's their annual report. I've been reading it most of the night but haven't been able to make enough sense of it to quantify their capital reserve ratio. The best I've come up with is 1:33.5, but if that's accurate, and I'm certain it isn't, it actually exceeds the bank reserve ratio maximum of around 1:18. Perhaps one of you more financially literate readers will be able to nail the true number down in the comments?

The bottom line is this: CMHC only insures mortgages that banks wouldn't write if mortgage insurance didn't exist. By their very nature, CMHC only insures sub-prime mortgages despite the fact that they claim to have "stringent requirements at all levels of down payments to ensure borrowers are able to manage their debts prudently." What's more, CMHC has bought back almost all of the loans they've underwritten over the past 18 months allowing banks to double up on the number of sub-prime mortgages they've written and effectively doubled down on the insurance risk to CMHC. Take a look at this graphic and notice the changes from 2006 to 2008 and then the drastic jump to 2009:

They claim to be well capitalized, but what I want to see clarified is how. 2008 and 2009 were not good years for capital markets worldwide, so we know they didn't make good returns on their investments. 2008 saw roughly 75% of 2007 and 2009 sales volumes of homes, so we know they weren't collecting higher than usual premiums. Where did the capital come from that's necessary to back stop 180% compounded growth in exposure over 4 years? How does an insurance business maintain such growth (2006-2007 was 17%; 2007-2008 was 28%; and 2008-2009 is projected to be 41%)?

Perhaps the only move forward post-housing market meltdown will be to subject borrowers to the same strident restrictions as insurers are: that is, stress test lending. If a borrower wants $400K at 4% interest, they shouldn't get it unless they can handle the payments on $400K at 7% interest.

Haven't you heard?

Dear Landlord,

I'd like to take the opportunity to thank you for your warm seasons greetings I received from you today. I'd also like to confirm that I received your notice of rent increase form as well. The four months notice you've given me is generous.

I also want to thank you for not increasing my rent by the maximum allowable amount, instead choosing to keep the increase below 3% of my total, or about the price of a cold case of beer. I like beer. I like all kinds, but I'm especially partial to the kinds that only come in 1s or 6s. The premium kinds in other words. I can afford them; I earn a decent income and thanks to you subsidizing my lifestyle with market rent well below equivalent ownership costs I am able to drink a lot of premium beer each month--ask my wife, who is constantly reminding me that premium beer is creating premium pressure on my waistline. But I digress, and while beer is worthy of writing about anytime, my note to you has other purpose.

It's with beer in my mind, not affecting it mind you, that I kindly reject your annual rent increase for 2010. Now I know that inflation eats into your bottom line. I know this because the price of a six-pack of Heineken has increased lately too. We're all affected negatively by inflation. But inflation seems to swing both ways in some markets.

You see, things have changed over the past several months. Lots of people like me have moved on, to jobs elsewhere, to houses bought, to who knows where, but one thing is for sure, more have left than arrived--the For Rent sign on the front door reminds me of that each time I come and go myself.

I'm a good tenant. I pay my rent on time, I keep things clean and tidy, I don't lock myself out in the middle of the night (or day for that matter) and when something breaks I fix it myself if I can. You're lucky to have me. So I won't be paying you more next year.

It's simple really: the vacancy rate has climbed to a point where you can't be as choosy as you once were. In fact, it's climbed to a point where you may be lucky to even be able to choose. Come spring, it may have climbed to a point where you may have to drop rents or offer incentives to get a tenant to fill your vacant units. The last thing you need is for me to leave you over a cold case of beer. But remember, I like beer. Enough to leave you. And I don't want to allocate funds from other uses to make up for an unnecessary rent increase.

You might be wondering how I've come to realize this? Let me tell you: some people like to walk into Future Shop regularly to see if that 60" plasma flat screen has come down in price. Me? I like to check out vacant rental suites and see what I'm missing. Just the other day I was in one nice enough to make me think very seriously about moving. Sure it cost more per month, but it was worth every penny. I tried to negotiate with that landlord--they'd been trying to rent their new basement suite for over 3 weeks; I smelt a deal brewing.

That landlord had a false sense of the market though. They'd just bought the house and renovated it to create a suite, told me they wouldn't be able to afford their mortgage without it. It was nice, but they were asking too much, and they wanted someone in right away. Long story short, we gave them a call the next day and told them we'd take it in the middle of the month if they dropped the rent by $50/month or they gave us a 6 month lease instead of 12. They didn't feel they should have to do either. That was three weeks ago. I checked Craigslist while writing you this note and sure enough, there it still is, still vacant, and still asking too much. The money they left on the table in December by rejecting my offer would have more than made up the difference between my lower rent offer and their asking price over the course of the lease. But apparently they can't add months together in their calculations--they're probably part of this new "can I afford it this month" culture.

Do you see where I'm going with this? There's a lesson here. You want more money. I don't want to give it to you. I know there's a lot of unit choice out there, many of them nicer than where I live now. I could move, costing you money to advertise, clean, lost rent etc, and me some time and beer for the buddies with trucks who will help me out on moving day. I think the cost will be much greater for you than me. I'm willing to take a stand on this. Are you?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Best quote from that news story:

“It’s nerve-wracking because ... there’s not going to be anyone filling my place and that burden falls on you financially,” she said, adding she can’t afford the $2,130 mortgage without a little help.

“If I was to give anyone advice, it’s to not buy a place that you can’t afford on your own.”

I want to know how she got a mortgage for a two-bed condo she can't afford on her own? And they say there's no sub-prime lending in Canada. Sure.

BREAKING NEWS

News Release here. (H/T Skeptic)

The important bits:

The proposed OSFI changes will significantly decrease access to affordable mortgage loans for first time Canadian home-buyers and apartment investors as the Canada Mortgage and Housing "(CMHC)" securitization program is curtailed by changes to the capital governance rules that will restrict a financial institution's ability to generate Government guaranteed loans or require an injection of capital (equity).

CMHC's current securitization program supports affordable housing by enabling banks and financial institutions to issue more Government guaranteed loan products, thus making it possible for these institutions to provide credit to Canadians at lower interest rates as the securitization frees up space on their balance sheets. This allows these institutions to meet the demand for more mortgage loans than they otherwise could if they had to hold all the loans on their balance sheets, which are subject to several restrictive regulatory capital leverage ratios.

The OSFI's proposed policy will effectively tighten the capital governance rules and reduce an institutions capacity to generate these government backed mortgages.

"These are exactly the consequences that most of the academics, industry and political parties have openly said they do not want as they are all supportive of retaining the CMHC programs (supporting over 900,000 housing units worth $148 billion in 2008) instead of curtailing them" said Paul.

"CIBC senior economist, Benjamin Tal describes CMHC as the "secret weapon" and he credits CMHC's ability to provide inexpensive credit as one of the reasons Canadian banks did not need a bailout during the recent recession. (Globe and Mail, Report on Business October 17)"

Reading this release, it's an effective leak of plans by the Office of the Superintendent of Financial Institutions to end the CMHC buy-back of insured, "sub-prime" mortgages from the banks. Essentially, the Department of Finance is saying to institutions: "you've received all the support you're going to get from us."

What's next is anyone's guess. The author of the letter featured in the release believes this is bad for FTBers and the market in general. I'm inclined to believe him. If you're a FTBer looking to access more money than you ever should be able to using terms that are a fiscal time bomb for yourself, your family and Canada's taxpayers, you will find this to be terrible news. If you're a homeowner looking to sell your property, it appears the money for the greater fool may just dry up after all.

I dare say this may be the most fiscally conservative move the government has made since 2006.

Google won't win

At least not soon.

VancouverCondo.info has an interesting link to a Wall Street Journal article about how Google map-based open access listings may change the real estate transaction game.

I think they're over simplifying things just a tad too much. Essentially, the argument goes like this: MLS has map-based listings, Craigslist doesn't, enter Google who will, and suddenly real estate commissions are eroded by a technology-savvy generation and a bunch of HTML maps. If only.

As we've already discussed, the issue isn't the crappy website the CREA offers its customers. The issue is ownership of data. CREA and their member organizations (local real estate associations and agents) believe they own the data that you and I need to have access to in order to make educated decisions about general market conditions and individual market values simply because they've been able to collect it without outside interference for a generation. Can you think of any other market dealing with comparable valuations without any arms-length data transparency oversight or regulation?

They rent this data to us by way of a pseudo-monopolistic need to use a real estate agent in order to gain equitable access to 95% or more of the real estate marketplace. Essentially, and we've never seen a credible argument denying this, the CREA's claim to the data is "finders keepers."

I have no doubt that Google's real estate site will kick Realtor.ca's a$$. This isn't because Google is the sh&t when it comes to web design and functionality. It's because Realtor.ca uses Bing, which sucks more than Realtor.ca, and because Realtor.ca sucks period--on purpose.

Let me be very clear here: CREA doesn't want you and I to be empowered as real estate listing searchers. The opposite is true. CREA wants you and I to be so frustrated with the experience that we simply toss our hands in the air, give up and quit, and then call one of their members so they can rent an income.

Somewhere deep down inside that archaic industry association is a group of power-people still pissed that we aren't required to come into their office during bankers hours to flip through their three ring binder of listings--steadfastly refusing to adapt to a changing world where freedom of information is a given, rather than a "paid for"--doing everything in their power to prevent the game from changing.

So what's next? Google will get in the game, it's part of their Cyberdyne-like plan to take over the world. But the rules won't change. YET. Give it a decade.

Once Google has captured enough of the market transaction data (ten years worth should do it) and you and I are free to see the transaction history of listings at the click of a button without a rent-seeker getting in the way, the game will change. When that happens, the 1100 or so ambulance-chasing agents in this town will be reduced to the 300 or so who are actually worth their full commission because they give a damn, "get it", adapt to changing times, work their asses off, and care about their clients enough to be honest about the true state of the market rather than chasing their next commission without concern for their client's long-term financial security.

That day will be monumental. Perhaps it can be in February. We'll name it rent-freedom day and forever enshrine it with the distinction of being the event that leads our society to a stat holiday every month.

Banks versus Re/Max

Almost every major bank has released some kind of housing market economics report over the past several weeks that either pronounces the Canadian market to be in bubble territory or suggests that we may soon be there.

And now Re/Max comes up with a gem: Housing market to soar in 2010. I won't link to their advertorial here because I want to save readers from the sick taste of bile it inspires. But I will say this: I think they may be right. And by they, I mean both the banks and Re/Max. We are in a bubble and I believe housing prices will continue to rise in 2010.

Yesterday the federal government announced that almost all of it's stimulus funds are committed. What this really means is the money will be flowing next year. Whenever governments rush to spend money, contractors jack prices. Next year could be a great year, one of the best on record even, for Canada's bloated construction sector.

Government spending, and the subsequent consumer spending it will trigger, will be inflationary. Prices will rise.

I don't believe house prices will fall until interest rates rise by at least 1%. When that happens, look out.