CMHC piercing the housing bubble

The word is that right now CMHC as a crown corporation actively cooperates with the Bank of Canada in slwoing down the housing market in Canada.  As I mentioned in my post on Jan 25, 2010 I had the personal experience where a bona fide purchase in the Toronto area that was listed for $689,000 was sold for $732,000 but CMHC turned around and valued it at $650,000 using their ‘expert’ Emily system.  This has not happened in recent memory on a purchase!

David Wolf delivered a speech on behalf of Tim Lane, Deputy Governor of the Bank of Canada in Edmonton on January 11, 2010 for the Edmonton CFA Society where he stated: “If the Bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.”

What he is saying is that they will not raise interest rates in the near future – perhaps not until 2011.  Later he goes on saying that “An array of supervisory and regulatory instruments can be used by the government to restrain the buildup of systemic risks [this is their code word for bubble].  These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance and a variety of other measures.”

Assuming that we are in the middle of a bubble, the last thing the government wants to do is to blow the bubble up.  That’s because no one wants a crash and a rapid decline in house prices.  Of the tools available at their disposal and listed above, all but one requires a very visible and public announcement that could blow up the bubble.  The one that can be done behind the scenes and without public announcement is the tightening the ‘terms and conditions of mortgage insurance’.  Just like it happened to my client, CMHC may confirm a lower value without an appraisal.  As a result unless there is a significant downpayment, the purchase may fall apart.

Is this a serious problem?  Yes.  I spoke to a number of lender representatives and wherever they can, they try to avoid CMHC for this very same reason.

Is there a way around this to save the consumer?  Yes.  Instead of dealing with CMHC, lenders and mortgage brokers who have access to Genworth direct their business there for mortgage insurance.  Ironic.  A year ago, in the midst of the credit crisis,  no one wanted to deal with Genworth, a private company.  Now they may be our saviour when CMHC fails the consumer.