September 5, 2017

CMHC Previously described by McLeans Magazine as Canada’s Mortgage Monster – apparently lives up to its reputation.

Canada Mortgage and Housing Corporation is a Crown Corporation that facilitates and encourages excessive indebtedness for Canadian consumers and ironically charges them a fee for the privilege.

The CHMC holds assets valued at over $248,490,000,000.00 according to its 2014 Financial Statements.  A few years ago CMHC bailed out Canadian banks to the tune of $114,000,000,000.00 (of taxpayer’s money) in the form of “liquidity loans” – largely buying up risky mortgage portfolios.

CMHC reported it had net (after operating expenses) income of $2,625,000,000.00 in 2014 – that is massive.

In 2010, before hiring Evan Siddall away from the investment bank of Goldman Sachs, the CMHC was paying an annual salary of over $514,000.00 to its president.

So CMHC is making a lot of money but is it helping people out?

CMHC actively encourages irresponsible borrowing by insuring “lenders”, and this is an important point, it is lenders and not “the borrowers” who are insured.  Without CMHC insurance many lenders would not take risks on people who have little or no money to use as a deposit for the purchase of a house.

We already know, and CMHC has acknowledged in its own reports, that Canadian real estate is overvalued.  By some estimates Canadian housing is overvalued between 30-60%.

CMHC will not insure mortgages for values that exceed 95% of the value of the property.  Therefore if houses are knowingly overvalued what is the basis for calculating risk?  

Let’s think about a property you plan to purchase for $200,000 should the CMHC believe it to be overvalued by 30% then CMHC ought to consider  the actual value to be only $140,000 therefore it logically should insure a mortgage of up to $133,000 for the purchase price – requiring the purchaser to come up with $67,000 balance.

But that never happens, no such adjustments are made to appraised values. 

By facilitating high risk lending/borrowing CMHC is putting borrowers at risk – not lenders.  Remember lenders are insured, not borrowers.  After the dust settles on a power of sale proceeding it is the borrower who will be left on the hook for the shortfall incurred.  CMHC will pursue the borrower for a deficiency arising from a short sale. 

It is very rare that a power of sale commenced on a CMHC insured mortgaged property will generate suffiicent proceeds to satisfy the mortgagee in full.  But the lender will get paid out by the insurance that the borrower purchased.

How often do you buy insurance that insures a third party?

Bear in mind that CMHC already knew, or ought to have already known, from the time of purchase that the property was effectively overleveraged.  Also of note is that the CMHC has increased its insurance rates and decreased the number of properties it will insure, perhaps in anticipation of higher than average payouts.

What are your thoughts? Would you, or did you, pay thousands of dollars for an insurance policy that doesn’t protect you at all?