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Business Commentary The Liberals’ CMHC mortgage madness is another subprime crisis waiting to happen

A construction worker shingles the roof of a new home in a development in Ottawa on Monday, July 6, 2015. A federal housing agency is setting an aspirational goal of providing every Canadian with an affordable home by 2030 in a plan that lays out a path of experimentation to make it happen. THE CANADIAN PRESS/Sean Kilpatrick

Sean Kilpatrick/The Canadian Press

Are you a first-time homebuyer who is feeling priced out of the market? Don’t worry about saving more money—go see Cammy the Mortgage Closer instead. You probably know the agency, officially known as the Canada Mortgage and Housing Corp. (CMHC), as the federal mortgage insurer. But starting in September, it will also offer home loans to help property newbies just like you.

Here's how it will work: Under the CMHC First-Time Home Buyer Incentive announced by Finance Minister Bill Morneau in his March budget, the agency will share the cost of buying your first home in exchange for an ownership stake. After you front the minimum down payment, the CMHC will spot you cash worth up to 10% of the purchase price of your new digs. You'll get an insured mortgage with lower monthly payments, and all that topup cash is interest-free. Cammy doesn't have to be repaid for its equity stake until you sell your home.

If this offer sounds too good to be true, that’s because it is. This is a subprime lending plan that ought to raise red flags with taxpayers, who backstop the CMHC. The incentive is clearly aimed at millennials who can’t afford homes in the country’s largest cities. The Trudeau government, which cooked up the program with a federal election looming this fall, wants to curry favour with this sizable voting bloc. As a result, CMHC will dole out $1.25 billion over three years—an inducement that will most certainly fuel higher home prices in major markets and stoke risks in the financial system.

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Part of the problem is that the CMHC will give the biggest incentives to buyers who purchase new homes—up to 10% for new builds, but just 5% for existing ones. The government says that will encourage more residential construction in major cities. But new homes can’t be built overnight, so demand could eclipse supply for a long time to come—meaning the program could actually drive up home prices in the interim by widening this gap.

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Most concerning, however, is that the CMHC is assuming more risk for partisan gain. In the aftermath of the financial crisis, the federal agency spent years reducing taxpayer risks by deliberately decreasing its exposure to the housing market. As part of those initiatives, it stopped providing mortgage insurance for second homes and those worth more than $1 million. The agency also ceased coverage for some selfemployed homeowners who lack thirdparty documentation of their incomes.

In effect, the new plan targets risky borrowers. Although the purchase price of the home will be capped at four times a borrower's annual household income, the program is available only to first-time buyers who have household incomes under $120,000 a year. Since a down payment is just one of the slew of costs associated with owning a home, it's easy to see how cash-strapped borrowers could get in over their heads in housing markets like Vancouver or Toronto.

Other jurisdictions, including Australia and the United Kingdom, have experimented with these shared-equity mortgages. They've found drawbacks that Canadians ought to keep in mind. For one, the resale process for homes that are jointly owned is more complicated. Loan covenants restrict certain types of transactions, which has resulted in a “limited resale market for shared-ownership properties,” according to a 2014 report by UK Finance, a lobby group for British banks and other lenders.

Homeowners could also find it very costly to buy out their lender's portion of the equity down the road. “Depending on future changes in house prices, repayment of the equity stake could be a relatively expensive option,” the report says.

Besides, the last thing Canada needs is more alternative lending programs for illiquid consumers. Canadian households are already shouldering $2.2 trillion in debt, and the lion's share—some $1.4 trillion—is in mortgage loans.

Instead of encouraging more risky borrowing, Ottawa should be helping consumers save money to build more equity in their homes. It can start by cutting personal income taxes to boost take-home pay. Provinces and cities, meanwhile, need to alter land-use and zoning rules to increase housing supply.

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Making the CMHC the country's newest loan arranger for financially challenged millennials is not the solution.

Rita Trichur is the financial services editor with The Globe and Mail. You can reach her at rtrichur@globeandmail.com or on Twitter @RitaTrichur

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