Opinion: CMHC raises white flag after warning of over-debt

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The former head of CMHC called what he saw as an irresponsible practice by real estate agents, lenders and politicians who encouraged Canadians to take on more mortgage debt.

Graham Roy / Canadian Press

Few people working in the Canadian real estate industry shed a tear when Evan Siddall stepped down as head of Canada Mortgage and Housing Corp. in April after spending seven years lecturing them, among other things, about their greed.

To his credit, Mr. Siddall felt obligated to mention what he saw as an irresponsible practice of real estate agents, lenders and politicians who encouraged Canadians to take on ever-increasing levels of mortgage debt. However, the fact that he did it with all the dexterity of a jackhammer ultimately only undermined his influence.

Mr Siddall angered Canadian bankers with a blunt message he sent out last August criticizing lenders for shunning the CMHC in favor of private mortgage insurance providers after the federal agency tightened eligibility criteria to prevent borrowers took on too much debt. The outspoken CMHC chief feared that low interest rates would lull buyers into piling up debt, leaving them and the entire housing market vulnerable when rates inevitably rise.

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“We have achieved a reduction in our market share to promote a more competitive market in your best interest. However, we are approaching the minimum market share we need to protect the mortgage market during the crisis. We need your support to prevent further declines in our market share, ”Mr. Siddall wrote at the time. “If you want us to be in wartime, please support us in peacetime.”

The letter flew like a lead ball. Mortgage lenders not only ignored Mr. Siddall’s requests, but also moved more of their business from CMHC into the hands of private insurers Sagen MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., which adhered to weaker eligibility criteria for borrowers who make a down payment of less than 20 percent to buy a home. By the first quarter of 2021, CMHC’s share in the new underwriting business fell to 23% from almost 50% a year earlier.

Romy Bowers, Mr Siddall’s successor at CMHC, wasted no time trying to repair the damage. This month, it dropped the eligibility criteria set by Mr Siddall by lowering the minimum credit rating and raising the maximum debt ratios that borrowers can maintain to be eligible for CMHC insurance.

“We are taking this action because our July 2020 underwriting changes were not as effective as we expected, and we suffered losses from a decline in our market share. Strong market share is important as it helps us fulfill the financial stability aspect of our mandate, ”the CMHC said in a July 5 statement announcing the move.

Mr Siddall clearly miscalculated if he believed the moral conviction on the part of the CMHC would be enough to convince real estate players to curb their enthusiasm, while the federal government and Bank of Canada continued to pump record amounts of liquidity into financial markets during the pandemic. … With the exception of the Financial Institutions Management Board, which tightened its own mortgage stress test in June, politicians in Ottawa worked in the opposite direction with CMHC, injecting incentive fuel into a real estate market that needed nothing.

As a result, the average price of a typical Canadian home in June rose 26 percent over the same period last year. This is down 38% in May, as extraordinary price increases in previous months showed some signs of slowing down. Potential buyers are rightly wary of buying at the top of the market, especially since many economists predict that the Bank of Canada will start tightening monetary policy earlier than previously expected.

However, Canada’s housing market remains dangerously overheated and it may not take long to suddenly change direction.

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“Since the effectiveness of monetary policy is much higher than at any time in the post-war era due to record high household debt, a relatively small rate hike could have a noticeable impact on the market,” CIBC economist Benjamin Tal. wrote in a July 16 report, co-authored with William Johnston of Equifax.

The report notes that while the average mortgage for new buyers increased by 19 percent in the first quarter of 2021, monthly payments were up just 3.7 percent. “In the long term, however, there are concerns that the rising cost of mortgages in low-income regions could become a problem if interest rates rise,” they write.

The long-term consequences of over-indebtedness were exactly what Mr. Siddall warned about when he sent his letter to lenders almost a year ago, saying that their business had a “dark underbelly” that he sought to expose.

“The economic costs of COVID-19 have been postponed thanks to effective government intervention; This could not be avoided, ”Siddall explained then. “Over-lending to households will exacerbate the suffering of COVID-19’s delayed economic adjustment.”

His warning was not heard. After all, CMHC can’t be alone in paying the price.

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