Canada Mortgage and Housing Corp (CMHC) is the country’s largest mortgage insurer, and Jim Flaherty is mulling over whether the government should get out of the mortgage insurance business altogether. Privatization of CMHC would have its pros and cons to the Canadian market. A black and white paradigm shift would provide some positive results, but beware the negative tidal wave to come.
There are currently 3 mortgage insurers in Canada with CMHC being the largest by far. The reason for their market domination is partly because of their tenure in the Canadian market, partly because of the comfort level some institutions have in working with a government entity and partly because they’ve had unfair advantages over the private insurers. Privatization would finally level the playing field and perhaps attract more private mortgage insurers to Canada. More competition means better choice for consumers. Another benefit would be that the tax payers would be off the hook in the event of any major market catastrophe.
This all sounds good, but the cons would have a significantly greater negative impact. Currently, the government guarantee that’s available to the insurers allows them to securitize their mortgages, providing a major source of mortgage money for many of Canada’s smaller mortgage lenders and is relied upon to some extent by all Canadian mortgage lenders. Take away the government guarantee and you essentially choke the real estate market of some of its mortgage money. What capital remains of course will be priced significantly higher. Although, Flaherty would welcome increased mortgage rates, the sudden jump would hurt the ailing economy now or whenever it came to pass.
And although many consumers love to hear about removing taxpayer burden, they might not be aware of the unburdening that CMHC actually does. As the country’s largest insurer it posts ridiculous profits which significantly subsidize the Canadian taxpayer. In good times and bad, year over year, the insurer has posted remarkable profits often in excess of $1 Billion annually. They are a far from losing a penny let alone burdening the taxpayer.
It makes for good headlines to talk about privatizing a financial behemoth, but a black and white solution is ill-advised and impractical. That’s not to say that the government shouldn’t reduce its involvement in the business of mortgage insurance, but a strategy needs to be crafted to encourage the pros while mitigating the nasty side effects.