Friday, January 27, 2012

Mortgages: Canada vs. US

Here is a bit by Sherry Cooper, chief economist for the Bank of Montreal. From BMO's weekly publication Focus:
Amid concern about a Canadian housing bubble, the question of the financial strength of the major Canadian mortgage insurer, CMHC, has come to the forefront. The bottom line is that CMHC is solid. CMHC has very prudent underwriting standards and the quality of its insured mortgage portfolio is strong. The rate of delinquencies is very low and stable, remaining in line with the levels for Canadian banks—under 0.5%, compared to 8% in the U.S.

CMHC is governed by a Board of Directors and accountable to Parliament through the Minister of Human Resources and Skills Development. As a Crown corporation, CMHC is also required to meet a number of governance and accountability requirements under the Financial Administration Act and the CMHC Act.

CMHC’s capital is funded by its insurance premiums, fees and investment income on the securitization portfolio of the Canada Housing Trust (CHT). It holds capital at a level nearly three times the mandatory minimum level set by OSFI to protect Canadian taxpayers from the costs arising from the risk of mortgage defaults1. CMHC has an internal (self-imposed) capital target of 150% of the OSFI Minimum Capital Test (MCT) and a capital holding target of 200% of MCT. In addition, they maintain additional capital reserves in retained earnings and unearned premiums and fees.

If CMHC is uncomfortable with the terms of a mortgage loan presented by lenders, then mitigating measures, such as an additional down payment or reduced amortization, would be requested—the minimum standard for the latter was officially reduced in Q1 of last year.

CMHC is also subject to stress testing for extreme circumstances similar to the banks. Even under the most extreme tests, with house prices plunging 30% and the economy going into a deep recession (with spiking interest rates—highly unlikely), CMHC comes through without relying on taxpayer funding.

Indeed, historically, CMHC earns an annual budget surplus that reduces the federal government’s outstanding deficit. Over the last decade, CMHC contributed over $14 billion to the government’s coffers.
The difference between Canada and America is very simple: Canadians believe in government and our regulators take their job seriously. In the US the people hate government and taxes and the regulators drank the kool-aid of "deregulation". Simply put: Canada believes in civil society while the US is a Hobbesian struggle of all-against-all.

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