Some issues to do with the Canada Mortgage and Housing Corporation (CMHC) came up in the comments on my last post. I got some interesting information, and thought I would dig deeper. The key question relates to the extent to which the CMHC looks like Fannie Mae or Freddie Mac.
Here is what CMHC does, and these slides, by Virginie Traclet at the Bank of Canada, summarize what is going on in the Canadian housing market. The key features of interest are the following. First, CMHC insures mortgages. There is also one private mortgage-insurer that has been in the business since 1995. In Canada, a mortgage must be insured if has a loan-to-value ratio greater than 80%. Essentially all mortgages are originated by private lenders, predominantly chartered banks. Second, the share of insured mortgages relative to the total has increased from about 20% in 1990 to 50% or more currently. This seems to be due to the fact that CMHC has become more aggressive in relaxing the terms of insured mortgages. For example, loan-to-value ratios of up to 95% are permitted in some cases. Third, after 2000, CMHC became increasingly engaged in securitization. You can find the details here. The first table here shows that securitized mortgage lending (NHA MBS in the table) has grown to about 25% of the market. The mortgages in securitized loan pools are essentially all insured mortgages. Fourth, CMHC issues debt that looks much like agency debt.
Thus, there are ways in which the activities of CMHC look like those of Fannie and Freddie. CMHC issues its own debt, it puts together mortgage pools and issues mortgage-backed securities, and it guarantees those securities. Further, as with Fannie and Freddie, the activities of CMHC have grown substantially in recent years. However, there are some critical differences:
1. CMHC is a Crown Corporation. It is owned by the government, and therefore its activities ultimately are reflected on the federal government's balance sheet. A critical problem with Fannie and Freddie is that they were spun off as private corporations, but with implicitly government-guaranteed debt. Fannie and Freddie, as has been amply demonstrated, are subject to a standard too-big-to-fail moral hazard problem, by virtue of their private profit motive coupled with implicit government insurance.
2. A 5% down payment on an insured mortgage might seem risky, particularly in a volatile real estate market like Toronto's or Vancouver's. However, a mortgage lender in Canada has more recourse than is typically the case in the U.S. They can go after the borrower's other assets in the event of default.
3. CMHC is not regulated by the the Office of the Superintendent of Financial Institutions, (OFSI), but claims to adhere to OFSI regulations. If that is true, that is a good thing, as OFSI is notably conservative. OFSI also regulates the chartered banks and the insurance industry. As proof that OFSI is serious, note that there have been only two small chartered bank failures since the 1920s, and there were none during the recent financial crisis. A key problem with Fannie Mae and Freddie Mac was lax regulation, in particular weak capital requirements.*
Of course the proof is in the pudding. Traclet's slides give you the summary of the Canadian experience during the financial crisis. In spite of CMHC's incursions into what might appear to be dodgy lending, nothing bad seems to have happened. This doesn't mean that what CMHC is up to is a good idea. Indeed, some of what I said about Freddie and Fannie in my previous piece applies here. If Canadians want to redistribute income to the poor (and believe me, Canadians know a lot about redistribution) there are better ways to do it than through government participation in credit markets. This piece is coming out of a noted right-wing Canadian think tank, the Fraser Institute, so take it with a grain of salt, but I'm sympathetic.
*Note the correction here. See the comments below.