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Is CMHC Mortgage Insurance Anti-Competitive?

A report this week by the C.D. Howe Institute suggests that under the current Canadian mortgage insurance system, it just might be.

In general, a Canadian home buyer must make a minimum five percent mortgage down payment to qualify for CMHC loan insurance and is subject to insurance on down payments of less than 20 percent of the purchase price of a home. According to C.D. Howe, CMHC – a Crown corporation created in 1946 to lead housing programs for returning World War II veterans – now backs up mortgage lending equivalent to 30 percent of the country’s GDP.

The report’s author is Finn Poschmann, an economist and Vice President of Research for the C.D. Howe Institute, which describes itself as a non-partisan, non-profit organization that aims to improve the Canadian standard of living by fostering sound economic and social policy. In a provocative op-ed article for the Financial Post, Poschmann suggests that government involvement in the housing market can “contribute to distortions in the economy and large risks in the financial sector.”

Among the Institute’s recommendations (reprinted from the C.D. Howe press communiqué):

  • Federal policy should limit taxpayer exposure to mortgage lending risks, by winding back CMHC’s role in the direct provision of mortgage insurance, and allow domestic and foreign providers to take on a larger role. The agency instead would undertake the reinsurance and securitization functions that back private insurers.

  • Independent of whether Ottawa pursues this recommendation, Parliament should place CMHC under the supervision of the Office of the Superintendent of Financial Institutions, on a level footing with other market participants.

  • Parliament should also adopt legislation that would support covered bonds – bonds backed by assets such as mortgages as well as the full faith and credit of the lending institution – by domestic financial institutions and clarify creditor arrangements in the event of the bankruptcy of a federally regulated deposit-taking institution. Such legislation would help those institutions compete for low-cost capital and better serve the domestic mortgage lending market.

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