The shutdowns ordered by governments in Canada to slow the spread of the Covid-19 novel coronavirus have caused unemployment to leap. Most of the millions of workers laid off thus far have been low- and lower-middle-income wage earners, just the sort of people who may qualify for, and receive, approval of home mortgages insured by the federal Crown corporation, CMHC, also known as Canada Mortgage and Housing Corporation. These are homebuyers who have either too low a cash down payment, too low an income, or too short or erratic an income or credit history to qualify for uninsured bank borrowing.
In a valuation study conducted by the Frontier Centre a couple of years ago, a sensitivity analysis was conducted to see what the effect would be of an increase in unemployment on mortgages insured by CMHC. While retail clerks, hairstylists, waitresses, hotel housekeeping staff and flight attendants might not, on their own, necessarily have even the reduced down payment to purchase a small home, they often are part of a household whose members, combined, might so qualify; and now, sadly they do not, and may not be able to maintain mortgage payments on a reduced income.
In addition, there are other unskilled, lower-paid workers, such as non-trades construction workers and factory workers who may soon become unemployed as lower demand and lower sales multiplier effects ripple through the economy. Plus, all the energy-related workers – and those dependent on their spending – who are losing their jobs in Alberta, Saskatchewan and throughout the country, may soon find themselves with the same disadvantage.
The aforementioned valuation study concluded that, as a cash-generating business, CMHC’s intrinsic value ranges from $7.47 billion to $29.9 billion, with a median (mid-point of the array of calculated values) of $12 billion and a mean (simple average) of $13.6 billion. However, a severe recession, which could, and apparently already is, devastating employment in this country, could bring about 13.1% unemployment rates, and default rates of as high as 50% in the Greater Vancouver and Greater Toronto regions, where home prices were over-inflated and unaffordable to most people, and 10% in the rest of the country. In such a scenario, the range of value drops to negative $6.2 billion to positive $16.2 billion, with both the median and mean in negative territory; i.e., insolvency beckons.
Using market-comparison valuation methods, the results are similar. The no-recession values are a median of $27.7 billion and a mean of $27.5 billion. In a full recession scenario, the value drops to a minimum of $0.94 billion – barely above negative – and a median of $14.1 billion and a mean of $13.9 billion. So, a severe recession, which we have entered, will be substantially negative for CMHC.
If income replacement programs enacted by Ottawa are insufficient to help homeowners with CMHC-insured mortgage payments, the Crown corporation could require a financial injection in the several billions of dollars, which would ultimately be paid for by Canadian taxpayers, if not immediately, then in the future. This will drag on the economy, perhaps for a decade or more, as the austerity measures of the 1990s did well into this century. It is unclear what the delinquency rate will turn out to be for CMHC’s mortgage portfolio; it may end up being significant but not solvency-threatening.
It could take a lot of modelling, scenario-testing and other study, including a post-mortem after this economic downturn and its aftermath have receded into the past, for CMHC to determine how best to change its standards and requirements to lower its risks in future recessions, whether caused by pandemics or anything else. It is already too late for this economic debacle. Taxpayers will be on the hook for its effects, and over-extended homebuyers who lose their dwellings will add that extra measure of misery to that brought on by their unemployment.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.