# Future of CMHC



## Robillard (Apr 11, 2009)

There was an article today on the Globe and Mail website on future of the Canada Mortgage and Housing Corporation. It seems that the Federal government is interested in privatising it with a 5-10 year time horizon. 

http://www.theglobeandmail.com/report-on-business/economy/housing/flaherty-eyes-privatization-of-cmhc/article4627593/ (Please note the pay wall)

What is your take on this?

I don't thnk it sounds like a terrible move. Instead of just privatising the CMHC though, I think the government ought to break it up into 3-4 several competing portfolios. Hopefully that ought to get away from the "too-big-to-fail" issues, which forced the US federal government to effectively re-nationalize Fannie Mae and Freddie Mac. Also, I think it would be best the keep the big five banks from gobbling up the mortgage insurance portfolios. They are the ones who will need the insurance if borrowers default.

Of course, Fannie Mae and Freddie Mac were not exactly providing mortgage insurance. They were also doing a lot of securitisation. And implicitly, they were adding a Federal government guarantee on each and every mortgage pool that they securitised.


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## sags (May 15, 2010)

I don't know how well that would work. 

Fannie and Freddie.......and Genworth in the US are basically bankrupt from all the defaults.

If "privatization" means some company comes in and swoops up the fees........but the government still has the liability, I wouldn't think much of the deal.

If the lenders are forced to take all the risk....................

Home prices would collapse for lack of qualified buyers.


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## Robillard (Apr 11, 2009)

@sags

You're right, Fannie and Freddie were essentially insolvent when the US re-nationalised them. The damage that would have been inflicted if they actually went through bankruptcy, I think, was too much for the US government to bear, i.e. they were too big to fail.

While it would be nice to simply let the mortgage lenders absorb all the risk, there would still be demand for mortgage insurance. Mortgage insurance plays an important role in securitisation. Banks need some ability to sell/securitise mortgages. What if they need to raise more capital? It's hard to sell mortgages to other investors without securitisation. It's better for all of us if banks have sufficiently liquid balance sheets. Personally, I would rather not see a string of bank failures in my lifetime.


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## HaroldCrump (Jun 10, 2009)

Robillard said:


> Of course, Fannie Mae and Freddie Mac were not exactly providing mortgage insurance. They were also doing a lot of securitisation. And implicitly, they were adding a Federal government guarantee on each and every mortgage pool that they securitised.


Our govt. also guarantees all securitized mortgages insured by the CMHC.
I believe the guarantee for Genworth mortgages are 80%, but CMHC ones are 100%.

The difference between CMHC and the US Freddie/Fannie/Gennie is that their housing market crashed and ours didn't.


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## andrewf (Mar 1, 2010)

I see no benefit in this. No private industry is capable of absorbing a housing crisis like the US went through. The government will always end up being the backstop. If the losses are going to be socialised, so should the profits.


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## HaroldCrump (Jun 10, 2009)

If implemented in the near future (i.e. the 5 year timeframe quoted by the G&M article), this will explode the Canadian housing market/bubble in a hurry.
No need to raise interest rates, no need to reduce amortizations, no need to tighten lending rules.

Essentially, only those with 20% or more down payments need even bother applying.
And within that group, only those capable to paying Prime + several % points will stand a chance.

In other words, the housing market will be what it used to be back in 1910.

However, from a theoretical public policy perspective, this is the right thing to do.
Since the creation of the Freddie/Fannie/Gennie in the 1930s, housing has become the easiest instrument for governments and central banks to create inflation.
There is no other sector easier to inflate than housing.

Simply by tweaking interest rates, lending rules, and federal guarantees, the govt. can create and deflate business cycles and bubbles.

I find it hard to believe that any govt. will be willing to relinquish control of such a powerful lever in manipulating markets and business cycles.


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## Cal (Jun 17, 2009)

I figured it would be more of a public perspective thing, in that the gov't would say that the public should not be responible for this debt, even though (as the US has already shown) that the public would be.

And yes as Harold mentioned the lenders would look like they were the bad guy, and perhaps the finger would be pointed at them if a RE lul were to occur durning the debt potfolio handover. Imagine, actually having to have some money or collateral to borrow hundreds of thousands of dollars.


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## Brenner (Jan 17, 2012)

My first instinct is to like this, that is the fed getting out of a business I am not sure they should be in. The thought that I am, as a tax payer, guaranteeing mortgages and taking the risk for the banks bothers me. I actually like the idea behind CMHC, and like helping young families get into housing. The problem is when you take the risk off the banks hands they no longer do to their due diligence in my opinion and their lending practices relax. If they were still only lending to people with good credit, good incomes, etc. I wouldn't have as much of a problem. 

That said, I fully expect the Feds to get hosed on any deal to privatize CMHC.


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