Canada’s banks should share more of the risk on home mortgages and the Canada Housing and Mortgage Corp. is looking into new formulas to make that happen, according to the head of the federal housing agency.
Evan Siddall, who became president and CEO of CMHC in December 2013, said the prospect of privatizing the agency is not on the table, but the government has expressed interest in reducing its role in the housing market.
That may mean creating new formulas to shift part of the risk for insured mortgages to the banks.
'In the insured mortgage businesses, the banks offload all that risk to the government through CMHC.' —CMHC CEO Evan Siddall
“That ultimately will be a decision for government to make and we’re in the process of looking at different options that will take a few years to evaluate, but the idea is that people should have skin in the game,” said Siddall in an interview with CBC’s The Exchange with Amanda Lang.
As things stand now, homebuyers who cannot raise a 20 per cent down payment are insured by CMHC or by private sector lenders Genworth and Canada Guaranty. CHMC insured mortgages are a risk on taxpayers. But it’s banks that make decisions about who will be approved for a mortgage.
“In the insured mortgage businesses, the banks offload all that risk to the government through CMHC,” Siddall said.
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“The government’s interested in taking a reduced role in the housing market … so we’ll look at different ways to share risks with lenders.”
Any changes to shift risk onto the banks won’t be made in the near future, he said, but a couple of years down the road. CMHC has finished its current review of its insurance portfolio after ending support for condo mortgages and second-home mortgages.
CMHC a 'shock absorber'
Siddall said CMHC played an important stabilizing role in the 2008 financial crisis so that Canada was unaffected by the widespread home defaults that hurt the U.S. He called it a “shock absorber” for events like the financial crisis.
That’s one reason it is unlikely to be privatized, an idea raised earlier this year.
The U.S. housing agencies, FannieMae and FreddieMac, had to be bailed out during the crisis.“I think the fact we have a government-controlled business, that’s accountable to government as opposed to FannieMae and FreddieMac in the U.S. where there wasn’t accountability, is a far better system," Siddall said.
Siddall said he is not worried about the prospect of higher rates, as he believes Canadians are prepared for a modest increase.
Because of changes to the system two years ago, 65 per cent of the mortgages insured by CMHC are given only to those who qualify for a five-year fixed rate, even if they are variable-rate mortgages. That means there is wiggle room for homeowners.
“It’s not a huge worry, actually. The thing that worries us is consistent high levels of unemployment, that’s when people can’t afford their homes and they need to sell them,” Siddall said.
High prices mean consumers have less money
He also is concerned that consumer liquidity is constrained because of high housing prices.
But he said any moves to cool prices would have to come from the finance minister.
“We’d be supportive of the government doing that in the medium term, simply because we’ve got elevated levels of indebtedness — it’s 164 per cent of income,” he said.
"Canadians now have about five times the assets on the balance sheets than they have liabilities and so ... the Canadian consumer balance sheet’s pretty solid, but I don’t think we have more insurance than we need."
To hear Amanda Lang's interview with Evan Siddall, tune into The Exchange with Amanda Lang at 7 p.m. ET.
A previous version of this story failed to mention that in addition to CMHC, private sector lenders Genworth and Canada Guaranty also insure mortgages where the buyer cannot raise a 20 per cent down payment.Oct 21, 2014 5:52 PM ET