Secrecy and Moral Hazard Abound at CMHC

Do they grow bubbles on plants>??>(Originally appearing at LvMIC.)

Itself a government-owned enterprise, Canada Mortgage and Housing Corporation (CMHC) is well-versed in the political pillars of secrecy and moral hazard.

This week, CMHC faced controversy over allegations that it is intentionally seeking to conceal information about foreclosure sales from would-be bargain hunters. Here is the back story, according to Garry Marr of the National Post:

Canada Mortgage and Housing Corp. has been asking realtors for months to keep consumers in the dark about whether the properties it sells are part of a foreclosure, according to a document obtained by The Financial Post.

The move, said to be part of CMHC national policy, upset Quebec realtors who refused to play ball, worried about an ethical breach.

The Quebec Federation of Real Estate Boards, which oversees the 12 real estate boards in the province, says it challenged CMHC about the change requiring them not to report on a detail sheet that properties for sale were part of a foreclosure, despite the fact that information is considered mandatory when loaded by brokers onto the selling system of local boards.

“Because the repossession field is currently a mandatory field in the brokerage system you have no choice by to indicate ‘no’, which goes against ethical rules stipulating that real estate brokers are obliged to publish information that is truthful and verified,” the group said in a statement to members.

The two sides resolved the issue by making it no longer mandatory to reflect the foreclosure status of a home, based on the seller’s instructions.

Responding to this development, a representative from CMHC reiterated that this policy is simply an effort to squeeze top dollar out of the foreclosed properties it has insured:

Canada Mortgage and Housing Corp. is making no apologies over its tactic of not disclosing a house has been repossessed when it puts the home back on the market.

The Crown corporation says it is acting like any other seller — just trying to get the best offer it can. Critics charge CMHC should disclose more information, given its role as Canada’s national housing agency.

“We don’t want to attract low-ball offers,” said Mark McInnis, vice-president insurance underwriting, servicing and policy with CMHC.

[…] “We establish our target prices and we stick to our guns,” said Mr. McInnis. “It’s more efficient to deal with people who are paying fair market value.”

Of critical importance here is that CMHC isn’t at all like any other seller. It is an agency of government responsible for underwriting all high ratio mortgages (consisting of a down-payment which is less than 20% of the sale price) in Canada. The level of mortgage loan insurance in-force is capped at $600-billion by government legislation. At the end of the third quarter of 2012 (which is the most recent data available), CMHC was insuring $575.8-billion in mortgage debt. In the event of default, CMHC is on the hook for all of it. Currently, the $575.8-billion in total insurance in-force is backed by assets totalling $10.733-billion – leverage of almost 54 to 1.

Should Canada face a U.S.-style housing crisis accompanied by the insolvency of the CMHC, a government bailout by taxpayers would be the likely result. This creates considerable moral hazard, as institutional players recognize that engaging in increasingly risky behaviours may result in elevated profits. At the same time, losses are of limited concern, as responsibility can be shirked by transferring them to taxpayers. Simply put, it creates a situation of: “Heads, I win; tails, you lose.”

Wherever government is concerned, transparency is the best policy. Instead of hiding information about foreclosures in order to minimize losses, CMHC should be required to publicly disclose all of the foreclosed properties on its books. This would better inform Canadians about the current state of the real estate market in Canada and hopefully encourage more prudent underwriting practices by CMHC.

And, instead of the other way around, you might even get a steal of a deal out of the government.



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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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