Houses and hell: Why Canada isn’t on the fiery route
Posted on Nov 15, 2013 in Mortgage Market Updates and NewsRepublish Reprint
Finn Poschmann, Special to Financial Post | 07/11/13 7:30 PM ET
Amid the mortgage market demons, Canada seems positively angelic
Sometimes the road to Hell is so clearly paved and marked that it is difficult to believe that good intentions explain the route chosen.
So it is with recent proposals in the U.K., the Netherlands, and Italy, to introduce potentially massive, government-backed mortgage lending and insurance schemes.
In the U.S., a multi-headed beast stands as warning at the edge of Hades: Fannie Mae, Freddie Mac, and Ginnie Mae, among other agencies, collectively guarantee many trillions in mortgage debt. The implosion of the U.S. model, in 2008, sent financial shockwaves around the world, and the pieces are not yet put back together. Canada, having felt the shock hard, carefully has been walking away from government backing for housing finance.
The European countries, where many housing markets had simultaneous regional implosions, seem to have instead developed a fatal attraction to government housing finance assistance. The irony is that to this point they had mostly been free of it – bank mortgage lending is mostly funded by covered bonds and deposits.
Italy’s new measure is the simplest. The government owns Cassa Depositi e Prestiti, CDP, an institution eerily like the Caisse de dépôt et placement du Québec, or CDP, and it manages Italians’ savings, in “support of growth of the country,” by investing in firms where it sees “significant national interest” in holding a large stake. And the Italian government, having detected a significant interest in the housing sector, has directed the institution to make €2-billion in mortgage loans for new home buyers.
Other Italian lenders – perhaps seeing the government’s backing of a competitor – enthusiastically support legislation that would offer guarantees for another €70 billion in new mortgage loans. Why the government would do so is a mystery, considering the high Italian home ownership rate, and the low share among them who carry mortgages. Whatever, in for a penny, in for a euro.
The Dutch proposal is sweeping. The government aims to create its own Fan and Fred, to relieve bank balance sheets of huge quantities of mortgage lending. The new agency will bundle banks’ mortgage portfolios and sell bonds backed by them; previously the government had mostly insured them. The initial plan is to back €50-billion in new lending, in what is arguably the riskiest market in the EU, and to which the Dutch government is already directly and indirectly exposed to the tune of hundreds of billions of euros.
When up and running, the Netherlands will have an organization that is strikingly similar to the U.S. model – and to that of the Canada Mortgage and Housing Corporation. Of course, the Canadian government carefully has been pushing CMHC to do less, not more.
What is odd about the Dutch scheme is that regulatory requirements are pushing banks to cut back on lending, and other regulations intentionally limit competition in mortgage markets – arguably not a bad idea, given the extraordinarily high private debt burden the Dutch carry. Not only that, until recently it was common for loan to value ratios (LTVs) to exceed 100%, and interest-free loans of up to 50% of home value were permitted as well.
The U.K., however, wins for ingenuity, if not risk management. For some time the government has been operating the Funding for Lending Scheme, which directs cheap funding to banks and building societies, to encourage them to lend lots.
Having failed to reflate the U.K.’s burst bubble of a housing market, the government decided it needed more: the Help to Buy program, which is really three programs. First is a special provision, “NewBuy,” (the Brits have all the best names), which enables 5% downpayments, or 95% loan-to-value mortgages, on new build homes – normally the minimum downpayment would be higher.
Under the second part, the just unveiled Help to Buy equity loan scheme, the government offers interest free loans, for five years, covering up to the 20% of the purchase price. The maximum purchase price is £600,000, the scheme is open to first time buyers and those “all those looking to move up the housing ladder.”
That might seem daft as a bag of hammers to Canadian eyes, and it is. But there’s more. The British have never been big on government-backed mortgage insurance, evidently a failing from their point of view, so they are entering the market with the “Help to Buy: mortgage guarantee scheme.”
The new U.K. scheme would offer mortgage insurance to homebuyers, first-time or tradeups, bridging the 80% to 95% mortgage LTV range, otherwise uncovered. Surprisingly, the government says it wants a bigger market share for high LTV loans; supportive analysts approvingly cite the Canadian model, as delivered through CMHC.
These are remarkable trends, and plainly unnecessary in the Italian case. The best light one can put on the Dutch scheme is that it might be better than what they had before, and it will shore up the largest banks, which is good for their shareholders, and arguably the financial system. The British plan is mind boggling, and understandably under fire from elsewhere in Europe.
Amid the mortgage market demons, Canada seems positively angelic. We could do better yet, by restructuring CMHC in preparation for its becoming a private institution whose risks are borne by private investors. For the moment, though, that we are not on the fiery route to Hades is something to be glad of.
Finn Poschmann is vice president, research, at the C.D. Howe Institute