Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Friday, March 09, 2012

Ghost of Fannie Mae Haunts Canadian Housing as Exposure Worsens: Mortgages

The Canadian housing agency’s vulnerability to mortgage defaults has soared nine-fold in 20 years, approaching levels reached by Fannie Mae and Freddie Mac in the U.S. at the height of the housing boom. Canada Mortgage & Housing Corp. says its finances are secure unless the country plunges into deep recession for several years.

Government-owned CMHC insured C$541 billion ($546 billion) in mortgages as of Sept. 30, an amount equal to 31 percent of Canada’s annual gross domestic output, as home prices climb and construction expands. In 2006, when U.S. home prices peaked, the combined exposure of the government-backed agencies to potential defaults was slightly more than a third the size of the economy, according to Bloomberg calculations based on U.S. Federal Reserve data. Fannie and Freddie were bailed out in 2008.

“If a significant number of homeowners default, CMHC would have a lot of claims they would have to pay out,” said John Andrew, real-estate professor at Queen’s University in Kingston, Ontario. Homes would “sell at greatly discounted prices as supply exceeds demand,” he said, adding “the risk of this is significant.”

CMHC has enough capital to remain solvent unless Canada were to see “multi-year recessionary periods” with “persistent high unemployment going above 13 percent” and house prices falling close to 25 percent, the agency said in an e-mailed response to Bloomberg News. Canada hasn’t approached CMHC’S worst-case scenario since 1982, when unemployment peaked at 13.1 percent in December at the end of a six-quarter recession.

Not Losing Sleep

“You can’t rule out the possibility of a significant correction in Canadian real estate because there is overvalution, but I just don’t see the catalyst to cause it to happen in the near term,” said Craig Alexander, chief economist of Toronto-Dominion Bank. (TD) “I’m not losing any sleep over the taxpayer liability of CMHC insurance.”

CMHC Chief Risk Officer Pierre Serre said in a telephone interview it’s “extremely unlikely” economic conditions would push CMHC into insolvency.

Canadian home sales accelerated in February on an annual basis, regional data show, adding to evidence the country’s housing market remains buoyant amid low mortgage rates.

Canadian housing prices have increased 44 percent since 2006, while U.S. prices have fallen 32 percent. Finance Minister Jim Flaherty, who has acted to try to cool the market three times since 2008, warned again this week that families should be careful about taking on debts they won’t be able to afford when interest rates rise.

Greatest Domestic Threat

The Bank of Canada, which has kept the country’s benchmark interest rate at 1 percent since September 2010, reiterated yesterday record household debts represent the greatest domestic threat to the country’s economic outlook. The central bank forecasts consumption and housing will account for more than half of the country’s 2 percent economic growth this year, after such spending helped lead the economy out of a recession in 2009 ahead of other Group of Seven nations.

CMHC’s estimate of its ability to stay solvent is based on stress tests it conducted last year using 10,000 economic scenarios. The probability of insolvency is less than 0.5 percent, the agency said. An increase in unemployment and decrease in housing prices would be the main driver of insurance claims against CMHC, followed “much further down” by an increase in interest rates, Serre said.

Chances of Correction

Another 1980s-style housing correction can’t be ruled out, said Finn Poschmann, vice president of research at the Toronto- based think-tank C.D. Howe Institute. “Everything under the sun will happen again. It always does,” Poschmann said, adding CMHC’s stress tests would be more credible if the agency provided enough data for outsiders to validate the results.

There’s a 15 percent chance housing prices will decline 10 percent or more over the next year, according to the median of a Bloomberg survey of 13 economists last month. CMHC said in a Feb. 13 report the average price of existing homes will climb 2.7 percent in 2013.

“Although there were a lot of discussions in the public domain about a house-price bubble, I must say clear evidence is lacking to support those conclusions,” said Mathieu Laberge, CMHC’s deputy chief economist, in a telephone interview.

Unlike the U.S., Canada avoided having to directly inject public money into the country’s financial institutions during the financial crisis. In September 2008, the U.S. took control of Fannie Mae and Freddie Mac, which have since received more than $180 billion in government funds. Freddie Mac said today it will ask for $146 million more in aid to cover its deficit at the end of last year.

Growing Balance Sheet

As Canada’s housing market has boomed, CMHC’s balance sheet has grown to record levels. In 1982, CMHC insured C$29.1 billion of mortgages, equal to 7.7 percent of the country’s output, less than one-quarter of today’s proportion. The agency’s total assets have increased from C$8.9 billion in 1991 to C$294 billion at the end of September.

This growth has put CMHC under greater scrutiny. In a December report, International Monetary Fund staff called on the federal government to review the agency’s governance and oversight, and assess whether the agency needs to do more to protect itself against housing market risks.

CMHC was established in 1946 to address a housing shortage at the end of the Second World War. It began insuring mortgages in 1954, the agency says, partly to encourage private lenders to play a bigger role in mortgage underwriting.

Rise in Claims

In the late 1970s, claims on CMHC insurance rose sharply following losses on programs to insure homes and rental units for low-income individuals. The rise in claims created a C$786 million actuarial deficit in the agency’s insurance fund by 1984, a hole it filled partly by borrowing from the government.

By insuring mortgages against default, CMHC says it helps lenders keep mortgage rates low. The agency also buys mortgage- backed securities from financial institutions, which it says lowers funding costs for banks and other lenders.

In Canada, federally regulated financial institutions must obtain insurance on mortgages where the downpayment is less than 20 percent of the purchase price. While CMHC insures these loans, 73 percent of its coverage is on mortgages that have loan-to-value ratios of less than 80 percent, which are often securitized by Canada’s largest banks.

The agency controls about 70 percent of Canada’s mortgage- insurance market. The rest is held by private insurers such as Genworth MI Canada Inc. (MIC) and Canada Guaranty Mortgage Insurance Co.

Canada Mortgage Bonds

Since 2001, CMHC has funded its purchases of mortgage- backed securities by issuing Canada Mortgage Bonds, which are backed by the Canadian government and share its top credit rating. CMHC issued more bonds last year than any provincial government, according to data compiled by Bloomberg. The agency’s guarantees on Canada Mortgage Bonds and mortgage-backed securities have risen to C$334 billion from C$8.4 billion in 1991.

Bonds issued by Canada Housing Trust, CMHC’s financing arm, have lost 0.3 percent this year through yesterday, according to Bank of America Merrill Lynch data. That compares with losses of 0.4 percent for federal government bonds, and gains of 0.9 percent for global government bonds. Housing Trust bonds made 6 percent last year, versus 9.6 percent for Canadian governments and 6.1 percent for global sovereign debt.

The Office of the Superintendent of Financial Institutions (OSFI), the country’s banking regulator, doesn’t formally oversee CMHC. Still, the agency says it holds more than twice the level of capital OSFI requires private mortgage insurers to hold.

Few AAA Sovereigns

“If you look at Canada’s ability to pay relative to most of its peers in the G-7 and the rest of the world, it’s pretty darn good,” said Marc Rouleau, Montreal-based vice president of fixed income at Standard Life Investments, which manages C$31.5 billion in assets in Canada. “Canada’s one of the few remaining sovereign AAAs out there.”

CMHC points to several differences between the U.S. and Canadian home-finance systems. The “subprime” loan market didn’t take hold in Canada like it did in the U.S., the agency says, and so it isn’t exposed to such risky loans, as Fannie Mae and Freddie Mac were.

Fannie Mae and Freddie Mac are government-controlled companies that buy mortgages and repackage them as bonds. Pressure to enhance short-term returns for shareholders was one of the factors that led Fannie and Freddie to buy risky mortgages, according to a panel set up by Congress to look into the causes of the crisis.

Government-Owned

While CMHC also holds mortgage-backed securities, its main business is insuring home loans against the risk of default. CMHC is fully owned by the federal government.

Amid concerns about the country’s housing market, Flaherty may be preparing to further rein in CMHC. In his budget last year, Flaherty gave himself the authority to charge CMHC to compensate for the risks posed by its insurance book.

The government may also soon need to decide whether to raise the C$600-billion limit CMHC has on the amount of mortgage insurance it is allowed to issue. The corporation said Jan. 31 it has been rationing insurance for lenders.

“We think we’re going to be able manage within the limit,” Serre said.

CMHC reports to the country’s Parliament through Human Resources Minister Diane Finley. A spokeswoman for Finley, Alyson Queen, said CMHC is operating within its insurance limits, and declined to comment on the agency’s risk management and oversight.

Original Article
Source: bloomberg
Author: Andrew Mayeda and Greg Quinn

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