Should we privatize CMHC?

Canada Mortgage and Housing Corporation (CMHC) is in the news again after Minister of Finance Jim Flaherty released the 2013 budget on Thursday March 21. New changes are coming that will, once again, limit the use of portfolio insurance by mortgage lenders.

Portfolio insurance, also known as bulk insurance, is a product which caused CMHC to eat up most of its $600-billion limit on the mortgages it insures. Anyone with less than a 20% down payment and borrowing from a financial institution regulated by the Bank Act, must purchase mortgage default insurance. Those with more than 20% do not have to buy that insurance but lenders have been purchasing it on behalf of these clients because the loans were more easily securitized with federal government backing.

CMHC, which controls about three quarters of the mortgage insurance market, is 100% backed by the federal government. The two private insurers, Canada Guaranty and Genworth Financial, control the rest of the market and are 90% backed by Ottawa. Their limit is $350-billion each.

The new rules introduced by Flaherty will gradually limit the sale of insurance on a conventional mortgage -- those with more than a 20% down payment -- which may cause lenders to, once again, tighten-up their mortgage approvals.

Perhaps it’s time to revisit the role of CMHC and consider privatizing the crown corporation.

For years, lenders have known that Canada Mortgage and Housing Corporation (CMHC) has had an advantage over private mortgage insurers since its policies are backed 100% by the feds, unlike the 90% guarantee given to private insurers.

In a report written in 2011 by  Jane Londerville , Associate professor and Interim Chair of the Department of Marketing and Consumer Studies at the University of Guelph, who also teaches real estate finance and appraisal, has recommended privatizing  the CMHC to level the playing the playing field.

“I’m not saying it’s the right answer,” Londerville said in an interview. “But if we want mortgage insurance that benefits the consumer, then we have to look at ways to make the insurance market more competitive. This would likely lead to lower mortgage insurance fees.”

Lawrence Smith, Professor Emeritus at the University of Toronto co-authored a Federal Task Force  Report in 1979 that discussed the role of CMHC and if there was a case for privatizing it then.  At the time, it was a radical idea, but an idea whose day may be finally coming.

“We clearly needed CMHC 60 years ago,” he said. “However, times have changed and the reasons it was created in the first place no longer exist.”

CMHC was created in 1946, and then known  as Central Mortgage and Housing Corp.  The mandate of CMHC was to administer the National Housing Act and the Home Improvement Loans Guarantee Act.  Essentially it was created to help soldiers returning home from the war access affordable mortgages.

By the 1950s, CMHC was in the affordable public housing business. The agency’s social policy portfolio expanded, with assisted housing and assisted home-ownership programs, on-reserve housing, and green energy and conservation programs. CMHC also grew its mortgage loan insurance program by requiring those with low down payments to purchase mortgage insurance.

Finn Poschmann, vice-president of Research at the C.D. Howe Institute wrote in the Globe and Mail recently that CMHC may be doing too much – that’s its role has expanded into territories where it may not belong. He asks these questions:  Why does the Crown Corporation do all of the things it does? Why aren’t social housing and related social programs part of a division of Human Resources and Skills Development Canada, where similar social programs reside? Why aren’t housing market data functions handled and financed by Statistics Canada? Why aren’t green energy programs parts of Natural Resources Canada?
With regard to mortgage insurance, Poschmann wrote, “This usually is a profitable business – people must buy the product, and to do so at the price CMHC sets. But why does the federal government hustle mortgage insurance, and not auto insurance?

Taxpayers have often raised concerns that backing mortgage insurers is risky business and can end up costing them as it did in 1979 when CMHC didn’t have enough in reserve to cover claims and needed government assistance. Since then, CMHC increased premiums and have been more cautious about maintaining its reserves.

“Having a competitive market for mortgage insurance greatly benefits homebuyers and would likely lower insurance fees,” said Londerville.

To foster a more competitive environment she recommends that CMHC be repositioned as an affiliated non-Crown public entity and ensure the government backing for this new company is equal to those terms available to private insurers. She also recommends the federal government set lending criteria.
Londerville, Smith and Poschmann all agree that CMHC should not be wound down but its role should change.

Statscan could take took over housing market data, and energy-conservation programs can migrate to other federal departments said Poschmann. CMHC’s financial market functions are already overseen by Finance and the Office of the Superintendent of Financial Institutions, which also inspects private insurers.
The mortgage insurance program, meanwhile, would be an attractive investment for a well-capitalized domestic financial institution, such as a pension fund -- the Ontario Teachers’ Pension Plan already owns half of one of the private insurers, Poschammn added.

Smith said the government should consider establishing CMHC as a reinsurer rather than a primary insurer as it is now. Reinsurance is the most common risk-transfer tool used by insurers to manage risk. Private mortgage insurers use it, as does Export Development Canada, a federal Crown corporation with a significant export credit insurance business.

Reinsurance is risk-sharing between the direct insurer and the reinsurer who agree to fulfill certain obligations under certain conditions, like any legal contract. In the case of mortgage insurance, it could be agreed that if there is default up to a certain amount the reinsurer will pay the difference, thereby sharing the risk.

“There are still many questions to answer about CMHC,” said Smith. “We may not need it as it exists today -- its role must be redefined.”

Are Renters Less Energy Efficient than Homeowners?

by Elizabeth La Jeunesse
Research Assistant

According to data from the Energy Information Administration, American renters use nearly a third more energy per square foot than homeowners. What accounts for this difference?

In part it’s because rental units are typically smaller, and are therefore more energy intensive. For example, a family in a small apartment needs a refrigerator, stove, and water heater the same way a family in a larger apartment (or a homeowner) does.  These things require a basic amount of energy, regardless of square footage.  Rental units also tend to be older; 75 percent of renters live in units built before 1990 while 68 percent of owners live in older units.

Source: US Department of Energy, Energy Information Administration, 2009 Residential Energy Consumption Survey.

That said, the above chart shows that the amount of energy used by renters can vary depending on whether their utility costs are fixed (built into their rent) or if they pay for utilities themselves.  As the chart illustrates, renters consume considerably more energy when some or all of their utility costs are fixed.  This shows the general tendency of people to consume more of something when there is no added cost for doing so. Such excess energy consumption drives up the amount of energy renters use overall, further accounting for the efficiency gap between owners and renters.  

Even so, renters who pay for utilities separate from their rent still use slightly more energy per square foot than owners.  This suggests a real, structural efficiency gap between rental and owner units. In fact, a recent study found that multifamily rentals in 2009 had 34% fewer energy efficiency features on average than other housing types. Consumer fuels and utility costs have risen over 50 percent over the past decade, outstripping overall inflation, which makes energy efficiency improvements (insulation, energy efficient windows, compact fluorescent lighting, HVAC upgrades, energy efficient appliances) appealing to people wanting to lower their energy bills.  But when tenants pay for their metered energy usage, a property owner’s incentive to perform energy efficiency retrofits is lower, since any cost savings will benefit the tenants, not the owner. Rental property managers also have less control over how their tenants respond to an energy retrofit (e.g. more efficient windows might still be left open in the winter).  These things can keep rental property owners from performing energy efficiency retrofits at the same rate as homeowners which, in turn, keeps energy usage by renters high.

The gap in energy usage between owners and renters suggests that there are real opportunities for savings through some combination of added incentives for property owners to make these investments in retrofits and greater incentives for tenants to conserve energy. Lowering energy use would have the additional benefit of bringing down the cost of rental housing at a time when more renters are paying very high shares of their incomes for housing as a new study by the National Low Income Housing Coalition shows. 

Many Canadians think getting a mortgage is complicated

A new survey commissioned by ING DIRECT found that 67% of Canadians who have had or currently have a mortgage felt the process was either complicated, confusing , or hard to figure out. Thirty-eight per cent of current or former mortgage holders say getting a mortgage is time consuming while one in five describes the process as annoying.

By comparison, a mere 7% of respondents feel the process is stress-free. 

The most stressful aspects of the mortgage process was negotiating for a rate, deciding on the right term and payment schedule and getting customer service help from the lender. Haggling for a rate was one of the more stressful parts of the process. Interestingly, over half of the respondents agreed that researching and comparing offers made the process more difficult.

There is no question the mortgage process can be complex and daunting but is doesn’t need to be stressful.  A mortgage broker can help by researching and filtering through numerous loans and a variety of products with a number of mortgage lenders. Brokers will review the best options with you, assist you with key decisions, answer all your questions at your convenience and in the comfort of your own home, if you prefer, and support you through the application and closing process.

According to the survey 20% of mortgage consumers feel the ability to get a mortgage from home would make the process easier. Mortgage brokers like to make it as easy as possible for you.
Here are some other findings of the study:

* Simplified language in mortgage contracts would make the process easier
* 16% of respondents felt that  getting a mortgage would be easier if they had access to more education about mortgages

Let a mortgage broker sweat the details for you so that all you  have to worry about is moving in. 

Nonprofits Play Key Role in Repairing U.S. Homes

by Abbe Will
Research Analyst

Private sector spending on improvements and repairs to U.S. homes is approximately $300 billion a year. Yet as a new Joint Center working paper shows, each year nonprofit organizations and public agencies are also investing resources into the rehabilitation and repair of the homes of America’s most vulnerable households—including the elderly, disabled, and those with low-incomes—who might not otherwise be physically or financially able to undertake critical home remodeling and repair projects themselves. Major nonprofits such as Rebuilding Together, Habitat for Humanity, Enterprise Community Partners, the Local Initiatives Support Corporation, and NeighborWorks America, as well as thousands of local community development organizations across the country, are filling a significant and growing need, largely unmet by the private sector, by investing considerable resources—financial, technical, and direct provision of services—to make homes safer, healthier, more energy efficient, and more accessible for disadvantaged households.

The recent foreclosure crisis and sluggish economy undermined years of efforts to stabilize and improve distressed neighborhoods in cities across the country, only adding to the need for nonprofit and public sector involvement. Until this past cycle, housing inadequacy—a measure of the physical condition of housing units—had been on the decline in the United States, largely due to the success of govern­ment housing policies and the growing affluence of the pop­ulation. Since the housing market bust, however, this trend has reversed with the number of moderately or severely inadequate homes increasing by 7% between 2007 and 2011 to 2.4 million units. Certainly the severe housing and economic downturn had a measurable impact on the quality of the nation’s housing.

While a comprehensive data source of home rehabilitation and repair activity by nonprofits and public agencies does not exist, this new Joint Center working paper provides some insight into the topic. Rebuilding Together, one of the nonprofits in the study, provides critical home rehabilitation and modification services to low-income homeowners through its extensive network of local affiliates. A member of the Joint Center’s Remodeling Futures Steering Committee, the organization provided support for an affiliate and homeowner survey that collected data on the various types of projects undertaken by their affiliates, as well as demographic and socioeconomic information about the homeowners served and their experience partnering with Rebuilding Together.

Recent spending on home repairs and replacements, as reported by participating households, suggests that many of the homes worked on by Rebuilding Together have seen significant under-investment over the years. While the average American homeowner spent $3,000 on home improvements and repairs in 2011, according to Joint Center analysis of the American Housing Survey, almost two-thirds of Rebuilding Together program participants reported having spent less than $500 on average in the past year—fully 80% less than the typical homeowner in the U.S. Indeed, according to estimates developed by Rebuilding Together affiliates and the Joint Center’s Remodeling Futures Program, the homes serviced by Rebuilding Together were so in need after years of deferred maintenance, that the average value of the rehabilitation and repair projects undertaken by Rebuilding Together was in excess of $6,000 per home, or twice the annual amount spent by the typical homeowner in the U.S.

Home improvement expenditures under the Rebuilding Together program in 2011 were heavily oriented toward exterior replacements and kitchen and bath improvements—projects that would produce the greatest gains in key program objectives such as health and safety concerns, accessibility, and savings in energy use. Typical projects included additions or replacements of steps, ramps, railings, grab bars, windows and doors, roofing, insulation, energy-saving appliances, as well as painting and plumbing and electrical repairs. In the end, Rebuilding Together participants reported significant improvements in health and safety concerns, improvements in accessibility, and energy use savings as a result of nonprofit involvement.

Source: 2011 Harvard JCHS-Rebuilding Together Household Survey

While a more precise estimate is unavailable, hundreds of millions of dollars are spent each year by nonprofits such as Rebuilding Together, community organizations, and public agencies. Their contributions not only improve conditions for residents, they also help preserve badly-needed affordable housing opportunities, stabilize and revitalize deteriorating neighborhoods—of special importance in recent years—and encourage neighborhood stability by helping long-term residents of the community to remain safely in their homes.

The competitive mortgage market- it’s not all about rate

The recent announcement that BMO has lowered its 5-year fixed rate from 3.09% to 2.99% has caused a flurry of speculation from market analysts and warnings from the federal government.

For the past year the Bank of Canada has been warning that high household debt levels, the bulk of which come from mortgages, are the largest risk facing the country’s economy. BMO’s recent rate cut prompted Finance Minister Jim Flaherty to issue a warning to the country’s banks that he expects prudent lending practices – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.

It’s clear that in our current market where homes sales have slowed and the spring buying market is kicking into gear, that competition is strong among lenders. Mortgage lending is a large part of their bottom lines.  Gord Nixon, CEO of Royal Bank of Canada, the country’s largest mortgage lender said in a conference recently, “There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand.”

Lower rates could interest more buyers this spring, and might encourage some buyers to take out larger mortgages than they otherwise would. So, despite the government’s rule changes this past year, and despite its urgings to lenders, growing market share triumphs.

According to Canaccord Genuity analyst Mario Mendonca, BMO has been seeking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks.

The interesting part of all this is that some lenders’ fixed rates are actually lower than what BMO has advertised – the difference is that BMO actually announced it. For the past month or so mortgage brokers have had access to rates trending down from 3.04% to 2.89% for 5-year fixed to 2.69% for 3-year rates.

Mortgage consumers should also look at BMO’s product and read the fine lines because there are restrictions, which, of course, are not advertised. They include the following:

1.  You only get 10%/10% prepayment privileges. many other lenders give homeowners the option to increase their monthly payments by 20% or more each year, as well as make lump-sum payments on the original mortgage in that same percentage range.
2.  You can’t skip a payment or access a mortgage cash account. Skipping a payment, should you need to, is not an option.
3.  You can’t transfer your mortgage to another lender until your term is up. Throughout your 5-year term, the only way you can refinance, transfer or payoff the balance of your mortgage, is if you stay with BMO while doing so, or sell your home. It’s not uncommon for homeowners to break their mortgages early.

While 2.99% offer may seem attractive at first, the product may not be the best one for your situation. Mortgage brokers can offer consumers similar and even lower rates, in a mortgage product that best serves the client.

A Surge in Hispanic Household Growth? The Challenge of Interpreting Short-Term Trends in Datasets that are Occasionally Adjusted

by Dan McCue
Research Manager

Interpreting year-to-year changes in annual surveys from the Census Bureau can be a tricky business, especially around decennial censuses.  Because it is the largest and most comprehensive count of the population, after each new decennial census is released, the smaller but more frequently issued surveys available from the Census Bureau, such as the Current Population Survey (CPS), Housing Vacancy Survey(HVS) and American Housing Survey (AHS), are updated, or “re-benchmarked” based on the findings from the new decennial census.  Prior to this, these surveys were controlled to extrapolations based off of the prior decennial census. While it is inevitable that ten years of extrapolation can lead controls to drift off course, failing to recognize when and how datasets are re-benchmarked to correct for this drift can lead to misinterpretations about short-term trends.  The danger is that the re-benchmarking adjustment can be misinterpreted as an actual trend that occurred in a single month or year, rather than what it really is: a discontinuity in the data due to an adjustment made to correct the net sum of ten years of extrapolation errors that had accumulated in the dataset since the last decennial census.

Take for instance, the following data overview in a recent online article:

"The latest U.S. census figures, for June, show year-over-year Hispanic homeownership increased by 7.3 percent, from 6.2 million to 6.7 million. For black-owned households during the same time, the numbers dipped by 1.3 percent, from 6.3 million to 6.2 million. Likewise, whites' homeownership also saw a slight decrease of about 1 percent, from 58.4 million to 57.8 million." - National Journal

On its face, this data leads us to conclude that the number of Hispanic homeowners surged from June 2011 to June 2012, while at the same time the number of homeowners among both blacks and whites dropped significantly, and therefore without growth in Hispanic homeownership the overall number of homeowners in the US would have dropped significantly over the past 12 months instead of growing slightly as was reported.

However, the Census Bureau’s Housing Vacancy Survey (HVS) showed that both Hispanic and non-Hispanic homeownership rates dropped during the June 2011 to June 2012 period, a time wherein Hispanics also suffered higher than average unemployment rates. At first glance, the divergence in the two reports is puzzling. However, on the Census Bureau’s HVS website, there is a short but significant sentence under the “Changes in 2012” section of the Source and Accuracy of Estimates web page:   

“Beginning in the first quarter 2012, the population controls reflect the results of the 2010 decennial census.”  - HVS Source and Accuracy of Estimates

This note is important, because the distribution of occupied households by tenure, race, and ethnicity of households is based on these population controls.  Therefore, any changes in the number of homeowners by race and ethnicity that spans across the first quarter of 2012 is also incorporating change due to the shift in the distribution of households by age, race, and tenure that occurred with the re-benchmarking of the survey..

The adjustment to Hispanic households due to the re-benchmarking appears to be significant. Looking at the Hispanic share of households in HVS before and after Q1 of 2012, we can see that the re-benchmarking in that quarter led to a significant upwards adjustment that forms a discontinuity in this series (Figure 1).  The existence of a discontinuity is corroborated by data from the Current Population Survey, which re-benchmarked to the 2010 Census in 2011. The CPS Table Creatorallows us to see the impact of the re-benchmarking directly by comparing the Hispanic share of households in 2011 under both 2000 and 2010 Census weights.  It shows that the 2010 census weights raise the Hispanic share of households a full percentage point, from 11 to 12 percent, compared to the 2000 census weights.  In short, this all suggests that results from the 2010 Census found that the 2000 Census-based population extrapolations had been underestimating Hispanic household growth in the 2000s, and therefore these household counts needed to be shifted upwards in 2012 as a correction.

Figure 1:  The Shift to 2010-Based Population Controls in Q1 of 2012 in the HVS Coincides with an Apparent Discontinuity in the Hispanic Share of Householders

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey data.

With the change in population controls in the HVS in Q1 of 2012, the amount to which the shift in the distribution of households towards Hispanic households was underestimated incrementally over the last ten years gets corrected all at once, and gets attributed as change measured between Q4 of 2011 and Q1 of 2012.  And as we see in Figure 2, the quarterly change recorded in Q1 of 2012 has a huge influence over our view of the recent trend in household and homeownership growth by Hispanic ethnicity. 

Figure 2: Concurrent with the Switch to Census 2010-Based Population Controls, The First Quarter of 2012  Has a Large Influence on the Recent Trend in Hispanic and Non-Hispanic Household Growth 

Source: JCHS Tabulations of the 1995-2011 AHS

Without the ability to compare alternative HVS household counts for Q1 of 2012 under both 2000- and 2010-based population controls, it is difficult to determine exactly how much of the change in Hispanic and non-Hispanic households and homeowners in 2011 to 2012 was due to the re-benchmarking and how much was due to actual change measurable in the survey.  We refrain from presenting alternative scenarios here, but because the quarter is such an outlier, most assumptions to smooth or discount that quarter of data would conclude with much lower Hispanic household and homeowner growth and much higher growth among non-Hispanics over the past year.