Friday, March 9, 2012

My Open letter to Mr Flaherty

The Honorable Jim Flaherty
Minister of Finance

March 9th 2012

Dear Minister

I am writing to you as a concerned citizen worried about the effect a housing slow-down will have on the financial well-being of the CMHC and of our country.

As you are no doubt aware the CMHC has now reached the level of leverage attained by Fannie Mae and Freddie Mac in the US prior to the US housing collapse.

The CMHC is supposed to make home ownership more accessible to Canadians, however by its actions it is having the opposite effect.

1) Insuring investment property purchases surely takes homes out of the housing stock.

2) Rates are at all time lows, banks are falling over themselves to lend at very low rates and prices are at all time highs. To provide insurance at such a time to vulnerable borrowers is setting these borrowers up for disaster should there be the slightest change from the current ideal circumstances and exposing us all to excessive risk.

The result is that the CMHC has, in my opinion, been a significant factor in the recent huge and unsustainable rise in home prices across Canada and decline in affordability.

This rise in house prices gives the impression of wealth, and certainly increases the net worth of current owners. However new entrants into the market and those who 'move up' are left struggling with such huge burdens of debt that there is little money left over for discretionary spending and no capacity to deal with set-backs in employment or income.

Would it not be sadly ironic, that having watched the debacle in the US from front row seats, we nevertheless march onwards and repeat their same mistakes.

I am sure Canadians would not look kindly on the legacy of a Finance Minister who allowed this to happen unfettered. The CMHC seems to have taken on a life of its own and has moved into areas that increase their size and importance but are well away from their stated mandate.

May I offer some suggestions, at this late hour to mitigate the risk we are all now exposed to:

1) Do no allow the CMHC to increase its lending ceiling. We are already at $540 Billion, that is higher per capita than Freddie Mac and Fannie Mae were to the US tax-payer.

2) The CMHC should get out of insuring investment property. That is more risky and is reducing the stock available for other owner-occupiers.

In fact the CMHC should have its horns clipped significantly. As mentioned, insuring vulnerable lenders at all time low rates and all time high prices is doing no one any favours. I would encourage you to continue on your path of tightening lending requirements.

Privatizing the CMHC would be the ideal solution to allowing the market-place to properly evaluate risk and reduce the burden on the tax-payer.

3) The Board of the CMHC needs to revamped. I have reprinted the names and occupations of the Board members taken from the CMHC site, below:

Dino Chiesa
Toronto, Ontario
Chair of the Board of Directors, CMHC
Principal, Chiesa Group

Karen Kinsley
Ottawa, Ontario
President and Chief Executive Officer

James A. Millar
National Capital Region
The Sussex Circle

Brian Johnston
Toronto, Ontario
Monarch Corporation

André G. Plourde
Montréal, Quebec
President, Groupe immobilier de Montréal Inc.

Sophie Joncas
St-Hubert, Quebec
Chartered Accountant

E. Anne MacDonald
Pictou, Nova Scotia

Michael Gendron
Edmonton, Alberta
Chief Financial Officer
Mancap Group

Rennie Pieterman
London, Ontario
Partner, Practical Plumbing Co. Ltd.

Where are the academics, the high level actuarial talent watching out for the tax-payers' interests, where are the impartial voices whose livelihoods are not tied to housing? Does this board seem to you reasonable for overseeing many Billions of tax-payer exposure? The IMF doesn't seem to think so.

Clearly you have concerns about rising household debt and the high price of housing, as you have voiced caution many times publicly. However talk alone is not enough, we need action.

We need to rein in one of the largest enablers of this debt explosion, the CMHC, and reduce the liability that we will all face once there is a correction in housing.

Canadian banks have already shown with their ultra-low rates, cash back mortgages and stated income loans that despite their rhetoric and reputation they are following the same pattern as the US banks prior to their housing collapse, let us at least try and mitigate some of this by removing the CMHC's gasoline from the fire as much as possible.


  1. I will be e-mailing this into Mr Falherty's Common's e-mail address. I would encourage anyone else who is concerned to copy it, modify it, send it to their MP or whoever else they think has influence.

    We have ben critiques of the CMHC for a long time, but now, with their ceiling approaching, we have to stop them from endlessly increasing the potential liability on tax-payers and helping distort the housing market.

  2. Hi Fish,

    A few grammar/spelling corrections. Sorry to nit-pick but I give a writer a downgrade in credibility if I spot mistakes in the writing.

    "however by it's actions" should be "however by its actions" (remove apostrophe)
    "banks are falling over them-selves" should be "banks are falling over themselves" (remove hyphen)
    "taken on a life of it's own" should be "taken on a life of its own" (remove apostrophe)
    "increase it's lending cieling" should be "increase its lending ceiling" (remove apostrophe; spelling)
    "have it's horns clipped" should be "have its horns clipped" (remove apostrophe)
    "low rate sand all time high prices" should be "low rates and all time high prices" (space in wrong place)
    "who's livelihood's" should be "whose livelihoods" (wrong whose; remove apostrophe)

    I think it would be great to follow this up with a similar one to Mark Carney targeting their inflation-control mandate, historical inflation rates, and the emergency low rates and the discouraging effect that policy has on prudent financial behavior by individuals and banks.

  3. How about capping the max. individual mortgage amount?

  4. This comment has been removed by the author.

  5. I would send this on to his boss while you are at it.

  6. Thanks Autuin. I have made the changes. Now blogger has messed up the whole lay-out (it does that) will have to fix that when i have time.

  7. Fish,
    You are a lonely voice. Dont waste your time, nobody gives a dam anyway, chinese money is making the rules here.
    China is buying RE and renting it back to us, and their income on rental is still better than 0% treasury bonds. This will go on for a long time as they have a lot of recycling to do. What we need to do, is tax the hell out of foreign property owners in this country, that is all.
    I wanted to close my brokerage account with TD and they told me to call 604-654-8888.
    What a surprise when I did, the first spoken language is chinese there.(that is how it sounded to me anyway!)

  8. I Cleaned it up a little more, if no-one can spot any more errors, I will submit it tomorrow. May I suggest you send something to someone too- Flaherty or your MP (especially if you are in a Conservative riding) We have to stop the CMHC from becoming an even bigger monster.

    Do not think for one moment that we do not have any effect.

    Remember when Canwest Global asked the Conservatives to levy a charge from the Cable Companies (which was going to be passed on to us consumers) for their 'high quality' content. Canwest complained they weren't being paid enough and yet still managed to pay their senior executives Multimillion Dollar salaries.

    A grass-roots campaign by bloggers, tweeters etc led to a ground-swell of anger that rejected the move. The Conservatives were considering it, but backed off, and Canwest went bust- good riddance.

    If you want to read about Canwest's miserable history, Wikipedia has a great summary. Read especially the section under Editorial Controversies to find how they battled their own reporters to stifle freedom of expression and reliable news in Canada. Very dark days for freedom of the press.

    We have a voice. We just need to use it.

  9. FV- last two weeks

    Surrey 1934 Active SFH 44 Sold
    Abbotsford 718/ 5! - I can only guess that they haven't loaded up the sales yet.
    Mission 761/14

  10. From the Ottawa Citizen, one day after I posted the letter to Flaherty. Maybe our message is getting out there:

    Why is the federal government warning Canadians about debt while it is encouraging aggressive mortgage lending?

    When it comes to interest rates and housing prices, it's difficult to see the thread of consistency in federal government policy. Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty frequently warn Canadians that levels of household debt are too high. At the same time, the Bank of Canada's low interest rates make possible the low mortgage rates that are fuelling the housing market.

    The government encourages risky mortgage lending even more by facilitating it through the Canada Mortgage and Housing Corporation. The government-owned mortgage insurer charges a substantial premium to home buyers with less than 20 per cent to put down, a federally mandated practice that effectively takes the risk out of mortgage lending for Canada's banks.

    As concerns about a contraction in Canadian housing prices increase, the CMHC is finally getting some long overdue scrutiny. This week, the Ottawa-based Macdonald-Laurier Institute recommended a thorough review of how Canada finances mortgages. The institute questioned whether home buyers are paying too much for CMHC mortgage insurance, a fee which can be up to 2.9 per cent of your loan, higher if you are self-employed.

    This mortgage insurance fee costs home buyers thousands of dollars, and the institute asks whether the fees are unduly high. The fact that the CM-HC has returned profits to the federal government of $14 billion over a decade suggests that this is a cash cow.

    Other organizations, including the International Monetary Fund and the C.D. Howe Institute, are worried that the publicly owned CMHC has taken on too much mortgage liability, exposing Canadian taxpayers to undue risk. While there is a debate about whether Canada has a housing bubble, housing prices have increased 44 per cent since 2006. The CMHC's total loan insurance portfolio is now $541 billion, up from $350 billion in 2007. The Howe institute has suggested encouraging private mortgage insurers to play a larger role.

    The main question, generally unasked, is why a federal agency has to take the risk out of mortgage lending for Canada's big banks. It's particularly pertinent with banks lowering rates again this week as they fight for more lending businesses. Normal businesses take risks. Why not our banks?

    Our financial leaders say they are against debt, but their policies encourage it, and the government makes a tidy profit off insuring it. As long as those policies persist, they should spare us the lectures.

    1. Fish, what is your view on the true leverage of canadians to the housing market? I've seen the data on consumer debt vs disposable income that paints a very scary picture, but i've also read all the Canadian bank reports that say Loan to Value ratios are quite low in Canada. Something doesnt add up here. Banks have obviously gotten heavy into home equity lending over the last few years, but im not sure that is the full answer. Are banks not properly documenting loans/committing mortgage fraud when obtaining insurance from the CMHC? Do you think the CMHC really has a handle on the C$580bln mortgage insurance they have written?
      Also, how overvalued do you actually think the housing market is in Canada? What in your view, will ultimately cause the bubble to pop?

  11. just posted it on His facebook wall...