In a report issued late last week, Craig Alexander, chief economist with TD Bank became the first to recommend an increase to the minimum downpayment on a purchase to 7% from 5%. Of course there’s nothing stopping TD Bank from making this change on their own, other than the fact they would lose a significant share of the mortgage market. Instead, the idea is to put pressure on Ottawa to tighten CMHC rules so that all lenders would have the same mortgage policy.
The idea of increasing the minimum downpayment to 10% or even 7% is certainly controversial. Not only because there is a strong argument that the housing market is solid and continued growth underpins our economic recovery, but also because it would reduce a significant revenue stream back to Ottawa. There was a time when CMHC would insure mortgages between 75% and 100% of the property’s value for both purchases and refinances. Today they only insure refinance mortgage between 80% and 85% Loan-to-value. TD Banks’s recommendation would tighten the purchase loan-to-value range to between 80% and 93%
CMHC’s 2010 profits soared to $1.77 billion in 2010 and they are 17% ahead of that pace 3 Quarters into its Fiscal 2011. The bulk of these profits come from first time buyers putting down the minimum 5% and consequently paying the highest percentage insurance fees. CMHC’s profits flow back to support our federal budgets with enough held back in reserve to equate to 2 ½ times the recommended minimum level set by the Office of the Superintendent of Financial Institutions (OSFI).
There’s nothing wrong with the current structure of mortgage insurance. Increasing the minimum downpayment on a purchase now could have disastrous ripples in our already anemic economic recovery. These ripples would directly hurt employment in industries such as construction, manufacturing and distribution of durables, and to the numerous service jobs supporting homeowners. Indirect harm would come from reduced revenues to Ottawa, leading to greater deficits, spending cuts or increased taxes.
If TD Bank feels they need to change their risk profile, then they should manage their business as they see fit. Leave the rest of the housing industry to itself.