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The dirty little secret of the Canadian Mortgage Industry…EXPOSED!

Ah, the comments section on social media these days, they're hard to read, but even they're harder to ignore when you see the absolutely false/misleading statements being made in them. While "fake news" has been all the rage lately (Thanks to Donald Trump's insane ramblings). Every now and then I see something that is so incorrect, I want, no, I must set the record straight on something that is costing Canadians billions and many don't realize the wool is being pulled in front of their eyes.

CMHC: EXPOSED

Over the past 10 years, Canada's major housing insurer (The Canadian Mortgage and Housing Corp - aka the CMHC) has raked over $20 (B)illion into their coffers (after expenses) from Canadians who are buying homes. This is a crown corporation and it posts record "profits" every year. The money is collected through mandatory mortgage insurance premiums. No, not for life insurance or fire insurance as is so often mistaken for. You see, when you purchase a home with less than 20% down payment, you are subject to having to pay what's known as "mortgage default" premiums which are mandated by the government. (ie. without 20% down, you can't escape them). What are they for? Well, in the event you don't pay, and the lender has to foreclose on your home, the CMHC steps in and bridges the gap on any costs that may be incurred by the lenders after disposing of the property.

So, any costs incurred to liquidate + funds of the sale of foreclosed home - remaining balance owed to lender = insured amount payable to... the bank/lender! This insurance is so that the banks money is NEVER at risk, they are guaranteed 100% reimbursement of any and all of their expenses should you not be able to pay for your home.

Case in point:

On closing day, you now owe $294,400 to your lender (as the $11,200 is not out of pocket, but built into the amount you now owe).

One might think that the vast majority of this $11,400 collected should be put away for that worst case scenario, yes? A reasonable person might think, but that would be false. The dirty little secret the government has been pulling over on homeowners is that they SPENT THE $20 BILLION. That's right, they took these earnings that were supposed to be kept in play in the event of any housing downturn - which even the most doom and gloom experts who have spent the last decade being wrong about the housing market can agree that a $20 Billion market correction would be a worst case scenario. However, all the  federal governments (past and present) have put them into the general revenue coffers and reallocated these funds AWAY from possible housing default liabilities.

So when I see someone state that "Canadian taxpayers shouldn't be on the hook for Canadians mortgage loans, should they default," I agree they shouldn't, but when you understand how the system works, you realize, they aren't. The risk premium has already been paid BY THE HOMEOWNER - (in after tax dollars) in the event of this very scenario.

THE SECRET

Now here's where the plot thickens even further. Over the past several years there have been significant increases to mortgage insurance premiums, and if we're still talking about first time home buyers (who tend to utilize this insurance more than any other demographic) we'll assume that they have scraped up the minimum 5% down payment required.  Since 2012, the rate to insure has gone from 2.75% (of the purchase price) to it's current 4.0%. This means even though we're currently in one of the lowest periods of default in more than 20 years, home purchasers are being "taxed" (because lets face it, that's what it's become) at a higher rate now than when defaults were higher (think the great recession of 2008-2010) and the CMHC even back then were still posting 8 figure profits.

Just imagine your auto insurance company who's been collecting funds from you year after year only to be told they don’t want to be on the hook if you have an accident, and now we’re going to make it tougher for you to buy a vehicle because we spent your premiums. Sound insane? I'd have to agree, we wouldn't stand for it right?

MIND YOUR OWN BUSINESS

Now, the latest round of rules that have come into effect on Jan 1, 2018 goes one step further and is mandating UNinsured mortgages which also present zero risk to the Canadian public because the vast majority of Canadians have considerably more equity than 50% of their homes paid for. So this latest round of rules that came into play is essentially government mandating public companies - the banks (who are arguably the most profitable businesses in Canada - having made over $60 BILLION in the last 12 months) how they can and cannot do business regardless of how good their existing (and obviously working) business practices and safeguards are, and how well capitalized they are. As I said, it’s a total farce.

If you still have trouble understanding this concept, consider how foolish it would be to have a national weather forecast, one that gave us an average of every temperature from every province from east to west and that's how we planned our day - doesn't make any sense either does it? The weather in Halifax is not likely to be the same as it is in Winnipeg, correct? Well, having a National Housing Policy that takes it's most at risk markets, and expects its most vulnerable markets to go along for the ride is just as ridiculous. One set of rules for more than 5000 cities, municipalities, districts, towns, etc. (according to StatsCan 2016 Census), all with differing socio-economic and political climates is not only irresponsible it's completely absurd. Why are we allowing this to continue?

If you've purchased or refinanced in the past decade, these rules and regulations have likely cost you thousands Let your Member of Parliament know that you're fed up!

TELL YOUR MP YOU'VE HAD ENOUGH!

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