Thursday, March 24, 2011

CHMC, Fannie Freddie, Baby Meet Bathwater

The CMHC: Canada’s mortgage monster
“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.”
Moral Hazard, it isn't just for Wall Street.

Almost immediately, LePoidevin’s bosses at National Bank leapt to the CMHC’s defence.
Ah, Cassandra, poor Cassandra.

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.
Really? That's weird and/or convenient. In the U.S. they had to answer, but the oversight agencies had been defunded to the point of uselessness. A process that is repeating itself forthwith given the Republican takeover of congress. Absent direct oversight the only hope is the incentive structure has been set up rationally.

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.
Oh. Snap.

“The CMHC is influenced by the political process, just like [Fannie Mae and Freddie Mac] were in the United States,”
They were influenced by profit more, specifically bonuses to management. If you want an entity like this to act in the best interests of others, the compensation needs to be designed to mimic the larger risks and rewards. Moral Hazard was operating at many levels. And if you interview these guys from Countrywide, BoA, etc, they still claim they don't know what happened. They never watched the numbers that mattered because from their perspective of making money for their pocket, they truly didn't matter.

What is also roundly ignored is the role the Fannie and Freddie (and FHA) played after the crash, when every credit market was frozen, in providing a lender of last resort. People thought house prices fell rapidly as it was? Imagine no mortgages for months on end, at all. That is their true charter. We can get rid of Fannie and Freddie (and continue to ignore the real causes of the boom and bust), but without systemic repairs to the system that no one has the political will to make we are going to repeat this housing bubble, and be forced to recreate a Fannie/Freddie style entity to stave off another Great Depression when the markets again seize up. Be nice to actually address the real problems.

These types of entities can safely exist (Fannie and Freddie existed since 1938 and things went along fine until the deregulation of 1999/2000 that banned all oversight of derivatives), but their charter and their compensation need to be set down properly. Fannie and Freddie (and the 24/25 of the top mortgage lenders that didn't have to meet CRA, yet loaned out money to unqualified people) were allowed to operate in this reckless manner because the right people were getting rich off of it. Follow the money before following the politics. It's more likely to lead you to the root cause of the problem, and shed light on the solution, i.e., make management pay, personally, for losing other people's money.

CMHC is no different. The politics of housing for all is a convenient smokescreen. Who's making the money?

It points out that the Canadian mortgage system is fundamentally different than in the U.S. . . . lenders can generally go after homeowners who don’t make their payments.
I love this one. In a collapse there is no money to go after. This is no different than asserting that household balance sheets look healthy because you are including an inflated house value on the asset side.

says Serré, adding that rising home prices have also helped improve the debt picture.
Oh, there it is. What do I win?

Serré declined to comment directly on Macdonell’s remarks. “I’m not exactly sure what low or poor credit is,” he says. “But I want to make clear that our mandate is not to get people into home ownership, our mandate is to provide the housing of choice. The last thing we want, as a government insurer, is to get people in a position where they can’t manage their debt.”
What is "housing of choice"?

From the About Us page: Today, CMHC remains committed to helping Canadians access a wide choice of safe, quality, affordable homes, and making vibrant and sustainable communities and cities a reality across the country
Recent experience strongly suggests that, absent a equivalent-rent-adjusted limit on mortgage amounts, making mortgages more affordable simply makes housing unaffordable. Maybe you need to look at that charter again.