Could Canadians Pay for CMHC Mortgage Loan Insurance?

By: Gary Parkinson on January 29, 2013

The Canada Mortgage and Housing Corporation (CMHC) is recognized as Canada’s national housing agency, and has contributed to the country’s rapidly expanding housing sector over the last decade by helping those who can’t afford a mortgage receive financing.  However, with the market now cooling off, some economists are concerned that if a US-style crash occurs in Canada, the CMHC could collapse, leaving taxpayers on the hook for billions of dollars in bad loans.

The CMHC was formed following World War II to help war veterans and eventually all citizens acquire homes.  At the time, homeownership was an elusive dream for many returning soldiers because lenders required a 50 percent down payment.  This practice continued for years until Ottawa expanded the mortgage lending market to include the country’s largest banks as mortgage financers.  The federal government’s provisions also mandated the CMHC to offer mortgage loan insurance, which is essentially a government guarantee to repay lenders in cases where homeowners are unable to make the payments.

As the CMHC grew into Canada’s national housing agency, the organization became partially responsible for increased housing demand, particularly during the rapid growth over the last decade.  The CMHC adopted lending practices that were rampant south of the border by increasing the number of riskier mortgages supported by the mortgage loan insurance program.

However in 2006, then Bank of Canada Governor David Dodge called the CMHC sub-prime lending strategies “a mistake.” Dodge said the riskier loans were irresponsible, and lead to mortgages that were unaffordable for average Canadian homeowners – which he argued put unnecessary risk on the economy.

When US mortgage firms Fannie Mae and Freddie Mac were near the brink of collapse, the CMHC recognized Dodge’s warnings were more prophetic than the organization expected.  The US example proved that rising home prices and easy access to mortgages allowed too many Americans to take on loans they couldn’t afford, subsequently crashing the entire housing market.

Canadian homes are currently valued at record high prices, particularly in major markets like Vancouver and Toronto.  The total amount of Canadian mortgage debt has tripled since the year 2000 to $1.2 trillion, with approximately two thirds of that debt backed by mortgage loan insurance.  Canada’s housing market has begun to cool off, and the government is doing what it can to prevent a US housing crash north of the border.

If the housing market does unravel, it leaves the CMHC on the hook for outstanding mortgage debts, which the government funds through taxpayer dollars.  The size of the CMHC has grown far beyond its initial conception, and Dodge in 2006 stated the organization was already “too big to fail.” A collapse in housing could devastate the CMHC, and ultimately cost Canadians millions of dollars in extra taxes.