To Sell Off or Not To Sell Off CMHC?

Alexandra Burnett, Commentary, Crown Corporations

Canadians are unaware of the increasing risk posed by Canadian Mortgage and Housing Corporation (CMHC). It is a dangerous business for the government to be involved in a corporation that monopolizes a significant part of Canada’s economy. Canadians are exposed to a bubble burst similar to the US financial crisis of 2008.

Canadians have an alternative choice? Selling off all or part of CMHC. The Frontier Centre for Public Policy has published an alternative way of valuing the CMHC, a better way to determine the viability of the company.

CMHC has become the dominant force in Canada’s mortgage market, while supporting many Canadians in meeting their housing needs, CMHC is a federal Crown corporation and all risks that the corporation takes exposes the Canadian taxpayer to that risk.

CMHC provides low-cash assistance to people buying first homes, with down payment as low as 5 percent. Because of these policies, approximately two-thirds of homes in Canada are mortgaged by CMHC. But, these mortgages are with individuals who would not qualify for regular uninsured mortgages from private companies. Consequently, these people are very risky for lending agencies.

Is this the reason to keep “CMHC as a crown corporation? There is the option to sell all or part of CMHC. Would that help Canadian taxpayers?

CMHC is now valued approximately at $29.9 billion. If the Canadian economy experiences a serious recession that affects the income and employment of CMHC mortgage holders, the corporation could be in serious trouble. The Greater Vancouver and Toronto regions would be affected most because their housing market is already over-heated.

If the federal government were to sell CMHC, the money could be used for urgent needs including healthcare. According to the valuation report, the proceeds from a sale could be used to hire up to 5,000 new doctors or 10,000 new nurses over the next twenty years. Not only would Canadians benefit from having more doctors, the mortgage market would become open to new investors. It would also become less risky too.

Not surprisingly the federal government is trying to defuse the CMHC ticking time bomb. By mandating stricter mortgage standards, the government is trying to ensure that CMHC can withstand fluctuations in the market that could dramatically increase loan defaults. Finally, in the 2016 annual report, CMHC acknowledges that its new standards require verified employment, income and credit histories.

But, what about the large number of Canadians who didn’t need to meet these standards before being sold mortgages? If Canada experienced a serious recession, or soaring interest rates, the solvency of CMHC would be threatened. Ultimately, Ottawa would need to bail CMHC out, which is exactly what the U.S. Congress did in 2008 to secure Fannie Mae and Freddie Mac.

Understanding the potential risk that CMHC poses in Canada’s economy is important. Canadians need to ask themselves if citizens should own a Crown corporation that could cost taxpayers dearly, or if they prefer to have that money invested in more secure places.

Even if Canadians choose not to sell CMHC, there are still other ways to reduce the risks. Some of these options include restructuring or splitting up the corporation to reduce its size in the mortgage market. Whichever alternative choice Canadians prefer, talking about the options is the first step.

It is important to think about alternative choices for CMHC. What would you rather have?