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One aspect that isn’t discussed very much is the explicit government backstop of mortgage finance. This allows the banks to lend with impunity. Low rates alone don’t explain why banks are giving out ridiculous mortgages to people who can’t afford them. The explicit government insurance is the key.

Starting in 2001, the CMHC expanded their NHA Mortgage Backed Securities program. The banks create the mortgages, bundle them into securities, the CMHC puts a GUARANTEED stamp on them, and investors buy the securities. Those securities are as secure as Government of Canada bonds. This is now an $11 billion per month operation, with about half a trillion dollars worth of mortgages guaranteed by the full faith and credit of the crown. Investment flows to the guaranteed mortgages instead of to productive businesses.

It would be one thing if these guarantees went into 30 year mortgages for normal families, with the goal of creating stability for citizens, but they’ve gone into all kinds of speculation and chicanery.

The other one is the explicit government guarantee of ALL residential mortgage insurance, public and private. The Protection of Residential Mortgage or Hypothecary Insurance Act was passed in 2011, and guarantees the payment of mortgage insurance benefits for private insurers (for a 10% fee) even if they go bust. The moral hazard is incredible. Why invest in risky commercial ventures when residential mortgages are guaranteed?

Look behind the curtain of Canada’s “strong, stable, and prosperous” banking sector and you’ll find the government quietly propping the whole thing up.

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