The Canada Mortgage and Housing Corp. (CMHC) represents a significant risk to the Canadian economy.
It’s dangerous for government to be involved in a venture that monopolizes a significant part of an economy. Canadians are exposed in much the same way Americans were when the U.S. economic bubble burst in 2008.
What’s the alternative?
Selling off all or part of CMHC.
To that end, the Frontier Centre for Public Policy proposes an alternative way of valuing CMHC, to determine the viability of the company.
CMHC has become the dominant force in Canada’s mortgage market. While supporting many Canadians in meeting their housing needs, CMHC is a federal Crown corporation and all risks the corporation takes are borne by Canadian taxpayers.
CMHC provides low-cash assistance to people buying first homes, with down payments as low as five per cent. Approximately two-thirds of homes in Canada are mortgaged by CMHC. But many of these individuals wouldn’t qualify for regular uninsured mortgages from private companies because they represent too much risk.
Is this a good reason to keep CMHC as a Crown corporation? Or would selling all or part of CMHC help taxpayers?
CMHC is valued at about $29.9 billion. But if the Canadian economy experiences a serious recession that affects the income and employment of CMHC mortgage holders, the corporation could be in serious trouble. The Greater Vancouver and Toronto regions would be most affected because their housing markets are already overheated.
If the federal government sold CMHC, the money could be used for urgent needs, including health care. According to the Frontier Centre valuation report, the proceeds from a sale could be used to hire up to 5,000 new doctors or 10,000 new nurses over the next 20 years.
At the same time, the mortgage market would open up to new investors and become less risky.
Not surprisingly, the federal government is trying to defuse the ticking CMHC time bomb. By mandating stricter mortgage standards, the government is trying to ensure that CMHC can withstand fluctuations in the market that could dramatically increase loan defaults. Finally, in its 2016 annual report, CMHC acknowledges that its new standards require verified employment, income and credit histories.
But what about the large number of Canadians who weren’t required to meet these standards to get mortgages in the past?
If Canada experienced a serious recession or soaring interest rates, CMHC’s solvency would be threatened. Ultimately, the government would need to bail CMHC out, just as the U.S. Congress did in 2008 to secure Fannie Mae and Freddie Mac.
Understanding the potential risk that CMHC poses to Canada’s economy is important. Canadians need to ask if they should own a Crown corporation that could cost taxpayers dearly or if they prefer to have that money invested in more secure places.
Even if Canadians don’t want to sell CMHC, there are other ways to reduce the risks. Options include restructuring or splitting up the corporation to reduce its size in the mortgage market.
It’s important to think about alternatives for CMHC, because it poses a significant risk to the Canadian economy.
Alexandra Burnett is a junior research associate enrolled in the Frontier Centre for Public Policy internship program.
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