Friday, March 9, 2012

My Open letter to Mr Flaherty

The Honorable Jim Flaherty
Minister of Finance

March 9th 2012

Dear Minister

I am writing to you as a concerned citizen worried about the effect a housing slow-down will have on the financial well-being of the CMHC and of our country.

As you are no doubt aware the CMHC has now reached the level of leverage attained by Fannie Mae and Freddie Mac in the US prior to the US housing collapse.

The CMHC is supposed to make home ownership more accessible to Canadians, however by its actions it is having the opposite effect.

1) Insuring investment property purchases surely takes homes out of the housing stock.

2) Rates are at all time lows, banks are falling over themselves to lend at very low rates and prices are at all time highs. To provide insurance at such a time to vulnerable borrowers is setting these borrowers up for disaster should there be the slightest change from the current ideal circumstances and exposing us all to excessive risk.

The result is that the CMHC has, in my opinion, been a significant factor in the recent huge and unsustainable rise in home prices across Canada and decline in affordability.

This rise in house prices gives the impression of wealth, and certainly increases the net worth of current owners. However new entrants into the market and those who 'move up' are left struggling with such huge burdens of debt that there is little money left over for discretionary spending and no capacity to deal with set-backs in employment or income.

Would it not be sadly ironic, that having watched the debacle in the US from front row seats, we nevertheless march onwards and repeat their same mistakes.

I am sure Canadians would not look kindly on the legacy of a Finance Minister who allowed this to happen unfettered. The CMHC seems to have taken on a life of its own and has moved into areas that increase their size and importance but are well away from their stated mandate.

May I offer some suggestions, at this late hour to mitigate the risk we are all now exposed to:

1) Do no allow the CMHC to increase its lending ceiling. We are already at $540 Billion, that is higher per capita than Freddie Mac and Fannie Mae were to the US tax-payer.

2) The CMHC should get out of insuring investment property. That is more risky and is reducing the stock available for other owner-occupiers.

In fact the CMHC should have its horns clipped significantly. As mentioned, insuring vulnerable lenders at all time low rates and all time high prices is doing no one any favours. I would encourage you to continue on your path of tightening lending requirements.

Privatizing the CMHC would be the ideal solution to allowing the market-place to properly evaluate risk and reduce the burden on the tax-payer.

3) The Board of the CMHC needs to revamped. I have reprinted the names and occupations of the Board members taken from the CMHC site, below:

Dino Chiesa
Toronto, Ontario
Chair of the Board of Directors, CMHC
Principal, Chiesa Group

Karen Kinsley
Ottawa, Ontario
President and Chief Executive Officer

James A. Millar
National Capital Region
The Sussex Circle

Brian Johnston
Toronto, Ontario
Monarch Corporation

André G. Plourde
Montréal, Quebec
President, Groupe immobilier de Montréal Inc.

Sophie Joncas
St-Hubert, Quebec
Chartered Accountant

E. Anne MacDonald
Pictou, Nova Scotia

Michael Gendron
Edmonton, Alberta
Chief Financial Officer
Mancap Group

Rennie Pieterman
London, Ontario
Partner, Practical Plumbing Co. Ltd.

Where are the academics, the high level actuarial talent watching out for the tax-payers' interests, where are the impartial voices whose livelihoods are not tied to housing? Does this board seem to you reasonable for overseeing many Billions of tax-payer exposure? The IMF doesn't seem to think so.

Clearly you have concerns about rising household debt and the high price of housing, as you have voiced caution many times publicly. However talk alone is not enough, we need action.

We need to rein in one of the largest enablers of this debt explosion, the CMHC, and reduce the liability that we will all face once there is a correction in housing.

Canadian banks have already shown with their ultra-low rates, cash back mortgages and stated income loans that despite their rhetoric and reputation they are following the same pattern as the US banks prior to their housing collapse, let us at least try and mitigate some of this by removing the CMHC's gasoline from the fire as much as possible.