David LePoidevin isn’t the first person to suggest Canada’s roaring housing market is headed for a U.S.-style crash. But he is a rare breed of money manager for daring to point a finger at the Canada Mortgage and Housing Corporation, the country’s biggest mortgage insurer. In a fall 2009 note to his clients, LePoidevin questioned what was underpinning the country’s skyrocketing home prices, aside from rock-bottom interest rates. “The stock market was sure not providing huge capital gains to the masses,” he wrote. “Did the banks all of a sudden open up the lending spigots? In fact banks have actually reduced the number of their mortgages held from the peak of third quarter of 2008. The smoking gun is the CMHC and its securitization policies.”
As mainstream economic commentary in Canada goes, it was damning stuff. And it provided ammunition to critics who argue the Crown corporation’s policies have inflated a housing bubble. The CMHC is arguably the most influential player in Canada’s $1-trillion housing market. Its main function is to provide mortgage insurance for prospective homeowners who put less than 20 per cent down on their houses, protecting the banks in the event of defaults. The CMHC also helps to spread risk by finding investors to buy CMHC-insured mortgages that have been pooled together into so-called mortgage-backed securities. All of this is guaranteed by the government.
Almost immediately, LePoidevin’s bosses at National Bank leapt to the CMHC’s defence. In a letter to an Ottawa newspaper that had referred to the commentary, co-chief executive Ricardo Pascoe said the Vancouver portfolio manager’s views were “personal” and “do not reflect the views of National Bank Financial Group.” When reached by Maclean’s, LePoidevin declined to talk about the public rebuke or the CMHC in general. A National Bank spokesperson justified its actions, saying the company “felt that the commentary was treading on social and political issues.”
The apparent unwillingness of the country’s sixth-largest bank to challenge the CMHC is curious given the role similar U.S. institutions Fannie Mae and Freddie Mac—quasi-government agencies that securitized mortgages—played in the U.S. housing crash. But it’s far from unusual. Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack. One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.
Even worse, the public knows next to nothing about what lurks inside the CMHC’s books, aside from the smattering of details it releases in its annual report. And, unlike every other major insurance provider in the country, the CMHC doesn’t answer to Canada’s top financial services regulator. It falls under an amalgam of government acts and departments, including Finance and Human Resources, while also working with the Bank of Canada. Yet on specific decisions that dramatically loosened mortgage lending rules last decade, CMHC officials have testified they did so on their own with the approval and oversight of the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional.
It all raises troubling questions about the agency, its oversight and, ultimately, the health of the country’s frothy housing market, a key driver of the Canadian economy. And, as LePoidevin found out the hard way, asking hard questions seldom yields satisfactory answers.
Since taxpayers, through the CMHC, and not the banks are ultimately on the hook in the event of a housing crash, a growing chorus of critics has been calling for more transparency and oversight, if not outright reform. Stephen Jarislowsky, a billionaire Montreal investor, says home prices are likely overvalued by as much as 20 per cent in some Canadian markets thanks to CMHC policies that encouraged banks to lend far too much money to people to whom they shouldn’t have. The core problem, he argues, is that promoting home ownership makes for good politics in Canada, if not always sound economic policy.
“The CMHC is influenced by the political process, just like [Fannie Mae and Freddie Mac] were in the United States,” says Jarislowsky. He notes the average debt-to-income ratio of Canadian households recently surpassed that of the U.S. for the first time in 12 years. “The political folks are guaranteeing mortgages that the banks might never have made if they had to keep them on their own books,” he says.
At the end of 2009, the CMHC insured roughly $473 billion worth of mortgages (it expected that figure to rise to $519 billion last year, though updated figures haven’t been released), which is nearly the entire mortgage insurance market in the country. The CMHC also assists the financial sector by buying pooled mortgages and reselling them to investors as bonds, giving banks and other institutions an immediate source of cash that they can re-lend. As of 2009, the CMHC had securitized $300 billion worth of mortgages. So critical is this function that Ottawa relied on the agency to prop up the country’s big banks during the financial crisis, giving the CMHC permission to buy $66 billion worth of mortgages.
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