We’ve been treated to a long-running battle between Jim Flaherty and mortgage lenders over the length of mortgage amortization periods and low mortgage interest rates. I wonder why we can’t just have a market-based solution.
I don’t mean this in the same way as some critics of Flaherty who call for him to leave markets alone. Mortgage lenders lay off much of their risk to the Canada Mortgage and Housing Corporation (CMHC), and CMHC charges mortgage loan insurance premiums that make no sense. As long as this situation persists, we can’t just let the lenders go crazy lending to anyone with a pulse.
This brings up the question of why CMHC premiums make no sense. The rules for calculating the premium you have to pay with your mortgage fit on a short web page. The premium amounts don’t take into account important factors such as the current ratio of house prices to rents. This guarantees that the premium you pay has little relationship to the real risk of default.
It wouldn’t be too hard to come up with a better set of rules for calculating CMHC premiums. If they properly took into account how hot the real estate market is in each part of the country, there would be less need to rein in mortgage lenders. If premiums were to rise sharply in very hot markets, the added cost to borrowers would dampen their enthusiasm. If buyers kept buying anyway despite the high premiums, at least CMHC would be collecting more money to offset the higher risk of mass defaults.
Is there some reason why CMHC can’t charge rational premiums for mortgage loan insurance?