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Mr Poilievre’s comments could benefit from a bit of explaining of mortgage insurance, coupled with a bit of recent history, in order to help people make their own assessments regarding the risks.
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First, as noted by Mr Siddall, banks (and other federally regulated financial institutions) cannot make mortgage loans with less than a 20% down payment unless there is mortgage insurance on the loan. Provinces may also have similar rules for credit unions/caisses populaires.
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Mortgage insurance means that, should the borrower default, the insurer will pay the lender any amount the lender cannot recover from foreclosure, etc.
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For loans made with less than 20% down, the borrower pays for the insurance. The cost of the insurance is added onto the mortgage loan payment.
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CMHC, which is a federal Crown corporation, is the largest mortgage insurer in Canada and largely dominates the market. However, there are also two privately-owned companies that compete with CMHC for business
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This is because mortgage insurance is a profitable business. Mr Siddall indicated that CMHC makes about $1 billion each year in profit on this.
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Mr Poilievre raised the spectre of a housing market collapse. This brings us to recent history — namely, the financial crisis of 2008. Some of this history should be familiar to Mr Poilievre, as he sat on the government side of the House at this time.
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Canada did not suffer the sub-prime debacle and housing market collapse that the US did, due to our better regulatory standards and also due to our more cautious lenders. But it did cause policy makers to imagine an even worse scenario.
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One change instituted under Mr Harper was to have OSFI — the federal (prudential) regulator for financial institutions — supervise CMHC. This includes the “stress tests” being done and to otherwise ensure the financial robustness of CMHC.
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In a stress test, a financial simulation is done to predict what would happen under some extraordinary bad circumstances. Essentially, it is a question of how much losses would arise and would that endanger the solvency of the corporation.
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CMHC has changed some of its business practices and also now maintains capital so that, in the event of another financial crisis, it will be able to absorb any losses on its balance sheet without a taxpayer bailout.
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Another change instituted under Mr Harper was to give the Minister of Finance the authority to set the criteria loans must meet in order to be insured. Some of you might be old enough to remember a day when you could get a 30-year loan with less than 20% down.
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Generally speaking, those criteria have been increasingly tightened over the years. For instance, you now cannot buy a $1 million+ house with less than 20% down. There are limits on refinancings. And so on.
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For loans with less than 20% down, there has been a “mortgage stress test” — where a borrower has to demonstrate that they can afford a loan at a higher interest rate than what they’re getting — for years. That rule was also done under Mr Harper.
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All this means is that the borrowers who are perceived at least able to afford a market downturn have a harder time qualifying for an insured loan. This helps keep the risk of defaults down.
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Note that over time, the principal amount on your mortgage goes down. So, you are building equity in a home even if the housing market is flat. In a falling market, there will still be homes “above water” — where the resale price is above the outstanding mortgage balance.
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I am not qualified to say whether or not these measures are adequate. All I can say is that they were implemented when Mr Poilievre was in Government, and have generally only become more stringent since then.
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Mr Poilievre also mentioned securitizations and covered bonds, which is another thing that CMHC does. These are means by which many lenders fund the loans they make.
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In a securitization, the lender creates a pool of mortgages and then sells securities that are backed by this pool. Kind of like a mutual fund of mortgages. By having a pool of loans, investors don’t lose everything if a loan defaults.
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CMHC dominates the securitization business with NHA mortgage-backed securities (MBS). What CMHC does is that it guarantees the timely payment to MBS investors. It earns a fee from the mortgage pool for this.
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This guarantee is important. If you hold MBS, you are expecting a regular stream of payments to be made. That stream of payments comes from the mortgages, so it depends on borrowers not going into arrears and missing payments.
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If loans default, the lender can foreclose. So (except for underwater mortgages), the money needed for that stream of payments will come eventually. But MBS investors aren’t in it for the risk of having to wait to get paid.
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Enter the CMHC. If this event arises, the CMHC will pay the MBS investors what they’re owed. And then the CMHC will recover what it paid out from the mortgage, either when the loan starts performing again or by foreclosure.
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And if the loan is underwater? All mortgages in a NHA MBS pool must be insured (even if the down payment was more than 20%). So there is no incremental risk from defaults on the pool.
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Covered bonds are another form of securitization. The CMHC has a registered covered bond program, which applies for MBS backed by loans that do not have mortgage insurance. CMHC also does not guarantee timely payment. So, there is no risk exposure.
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The benefit of a registered covered bond is the investor has increased statutory protections to ensure they get paid even if the issuer defaults or the loans in the pool stop performing.
This program was started under Mr Harper.
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This program was started under Mr Harper.
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All this goes to say that while there may be many problems with the housing market, there are also many measures in place to reduce systemic risks and a financial collapse. Measures that, in most cases, were implemented when Mr Poilievre was in Government.
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