CMHC: A Danger to Canada's Economy?

CD Howe says that CMHC is too big

"The federal government should limit tax payer exposure to potential problems in the housing market by winding back the role of the Canada Mortgage and Housing Corp.
The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, says the report.
Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.
According to the report by Finn Poschmann, vice president of research at the CD Howe Institute,  the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product."

CMHC- with assets at about 10 billion, is it too big to fail?

"As a result, Canadians are exposed to “large, ill-defined risks,” says the report, which argues that Ottawa should crank back the CMHCs presence in mortgage insurance and allow more room for private sector insurers.
Originally conceived as a mechanism for executing public policy, the CHMC has expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to boost lending by allowing them to securitize more home loans."

1954- CMHC introduced Mortgage Loan Insurance, taking on mortgage risks with a 25% down payment, making home ownership more accessible to Canadians.
1954-1990- Somewhere along this time, 10% became minimum down payment.
1990- 5% was introduced as a trial run, then officially accepted in 1999.
2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market
2001 – CIBC offered below-prime mortgages.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth anounces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 20% down.
April 2010- CMHC did some minor tightening of their guidelines.
Mar 2011- CMHC: 5% down, 30 yr amortizations,

The loosening of lending standards in Canada is one of the reasons why home ownership rates are higher than the Americans.  The effects of clamping down on mortgages will be felt when interest rates move up.

"But critics worry that the unintended consequence was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels."

Looks like Canadian homes are overvalued by at least 30%.  If a Saskatoon bungalow followed inflation over the long term, it would be around 160-170k.  As it stands now, bungalows in Saskatoon are just a tad above that.  Partly in thanks to CMHC.

Canada has followed the US on the way up, if Canada follows them on the way down, even just part of the ways, we will find out how dangerous CMHC has been to the housing market and to the overall economy.