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Why Not Raise CMHC Mortgage Premiums?

We’ve been treated to a long-running battle between Jim Flaherty and mortgage lenders over the length of mortgage amortization periods and low mortgage interest rates. I wonder why we can’t just have a market-based solution.

I don’t mean this in the same way as some critics of Flaherty who call for him to leave markets alone. Mortgage lenders lay off much of their risk to the Canada Mortgage and Housing Corporation (CMHC), and CMHC charges mortgage loan insurance premiums that make no sense. As long as this situation persists, we can’t just let the lenders go crazy lending to anyone with a pulse.

This brings up the question of why CMHC premiums make no sense. The rules for calculating the premium you have to pay with your mortgage fit on a short web page. The premium amounts don’t take into account important factors such as the current ratio of house prices to rents. This guarantees that the premium you pay has little relationship to the real risk of default.

It wouldn’t be too hard to come up with a better set of rules for calculating CMHC premiums. If they properly took into account how hot the real estate market is in each part of the country, there would be less need to rein in mortgage lenders. If premiums were to rise sharply in very hot markets, the added cost to borrowers would dampen their enthusiasm. If buyers kept buying anyway despite the high premiums, at least CMHC would be collecting more money to offset the higher risk of mass defaults.

Is there some reason why CMHC can’t charge rational premiums for mortgage loan insurance?

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Comments

  1. Bet CrooksMarch 21, 2013 at 9:01 AM

    I suspect the politicians fear loss of votes too much to try to adjust CHMC rates. You're right, though, that the logical flaw in the mortgage system is being under-invested in the home. If house prices drop 25%, and someone only has 5% in the house, the tendency is to walk away from the home rather than keep bailing. If they have 25% in the home, they wince, but keep making payments hoping prices will rebound. The penalty (e.g. CHMC fees) for not having the 25% could be raised to deter new buyers. But the political backlash against whoever raises that rate could be severe.

    ReplyDelete
    Replies
    1. Michael JamesMarch 21, 2013 at 9:05 AM

      @Bet Crooks: If we had sensible CMHC rates that took into account the ratio of house prices to rents, the threshold for CMHC kicking in (currently 25%) would fluctuate as well. Sudden changes in CMHC rates would cause a major backlash, but they could certainly evolve slowly over time. This would limit political problems and get us to more market-based prices in, say, 5 or 10 years.

      Delete
  2. Tom BradleyMarch 21, 2013 at 10:11 AM

    Brilliant. And if there's any truth to rumours that Mr. Harper wants to privatize CMHC, then this is a good first step to moving them into the real world. Mike James for
    Finance Minister.

    ReplyDelete
    Replies
    1. Michael JamesMarch 21, 2013 at 10:19 AM

      @Tom: Thanks. I don't think I'm cut out for politics. I can just hear myself responding to some question in parliament: "That's stupid question. The honorable member doesn't even believe the things he says."

      Delete
    2. PatrickMarch 21, 2013 at 3:17 PM

      Unparliamentary language!

      Delete
  3. AnonymousMarch 21, 2013 at 11:48 AM

    Good article - FYI the down payment requirment to avoid all 3 insurers is now 20% not 25%.

    ReplyDelete
    Replies
    1. Michael JamesMarch 21, 2013 at 11:50 AM

      @Anonymous: Thanks. I haven't had a mortgage for some time and am stuck in the past :-)

      Delete
  4. paulMarch 21, 2013 at 12:14 PM

    Hey Michael,

    The problem is you actually make sense and have a sensible idea. Try adding a little "crazy" to it and it might get implemented.

    ReplyDelete
    Replies
    1. Michael JamesMarch 21, 2013 at 12:20 PM

      @Paul: Thanks for the chuckle :-) That's certainly the way politics feels sometimes.

      Delete

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