CMHC = The Ultimate Evil

This June past, Jane and I bought a house. It's a pretty nice house in our opinion, though being in Toronto and right beside York University, it is more than a little expensive. The experience of contemplating buying a house was the first thing to bring me into real contact with the ultimate evil that is the Canadian Mortgage and Housing Corporation (CMHC). Why is CMHC the ultimate evil? Because they take your money and give you nothing in return. Read on.

First, let's look at how it works: Some guy, we'll call him 'Derek', wants to buy a house. He's just out of university and his cash reserve is... shall we say... low to non-existant. He goes to a bank and says: 'Having gone to university, I've now got a pretty good job that will pay (...let's say...) 100,000/yr. Unfortunately, I don't have much of a downpayment'. The banks says: 'We'd be happy to do that, but we are required by law to take out insurance on that mortgage to protect our investors against the possibility that you might default. This, you see, allows us to lend out money to higher risk people, which the insurance company defines as anyone who can't pony up 25% of the home value. In other words - you'.

Now Derek, who is much smarter than me, thinks to himself: 'OK, that sounds reasonable. I mean that's kindof like our healthcare system after all - people who can afford to pay a little more to help people who are actually 'high risk' to get a mortgage. And obviously it can't be that much, I mean, what is the default rate in this country? Plus, when people default, their house is sold and the bank makes back it's money unless the house has actually lost value, which hasn't happened in the last 15 years. And even then, the highest housing price losses in the last 30 years were only 25% on average, so they're not really ensuring the bank for very much money'. He says to the bank guy: 'Interesting. I have 5% down on a $350,000 house. How much is this insurance?'

Then the bank guy drops the bombshell: 'Let's see... ... that'll be $9,625'.

Now Derek, who again is much smarter than myself, is instantly pissed. Why? After all, ~10,000 on 350,000 doesnt sound all that bad. Only 2.75, in fact. But Derek knows that the value of insurance is the probability that they will have to pay up times the amount that they'll have to pay up. So Derek thinks: 'OK. I'm a fair guy. Let's pretend for a moment that the default rate in Canada is as extraordinarily high as it is in Utah, around 4%. That means that if I defaulted on my mortgage at before paying any of it off and my house lost all of it's value, the fair insurance rate is about $14,000. So far so good. But on top of the very high default rate, there are two thing in the above scenario that are so unlikely as to be virtually impossible: One, I would have to instantly default on the mortgage. And the big one: My house would have to go from being worth $350,000 to $0. So lets take the worst case scenario for that as well - Toronto in the early 1990's depression. Housing value losses were 25% on average. That means I should really take 4% times $87,500, which is $3,500. And that is an absolute worst case scenario.

Now, if you are unimpressed with these back of the envelope calculations, try this article on for size. Pay particular attention to the beginning where the author tells us how much the CMHC took in in 2004 (1.1 billion!) to how much it payed out in claims (51 million!). That means the insurance is worth about 5% of what we pay for it! I'm thinking that I'm going to lay off auto insurance (which is worth about 76% of what we pay for it) for a while and focus all my ire on this scam that I am required to pay into. My MP is going to get a very tersely worded letter. Very terse indeed.