The Canadian Mortgage and Housing Corporation (CMHC) is considering reducing the number of mortgage underwriting applications the agency processes in order to mitigate borrowing amid a drop in house values and an increasing debt crisis.
The move is a response to the alarming debt levels that are mounting during the coronavirus pandemic, and the economy is expected to contract up to 42% in the second quarter. During the coronavirus pandemic, the Canadian government imposed strict lockdowns as a move to decrease the rapid spread of the deadly coronavirus. As a result, millions of Canadians soon found themselves unemployed, causing household debt levels to jump to historic highs. In the meantime, the value of homes and housing prices have been dropping to unprecedented levels, causing the CMHC to become concerned.
Over the next year, CMHC is anticipating house prices to drop anywhere between 9% and 18%, which would result in many homeowners losing a significant portion of their house value. The average house price is typically around $300,000, and a first time home buyer is expected to put at least 5% down; with the current direction of the economy, that house purchase can translate to a loss of up to $45,000. Then in the event of an insurance claim, the CMHC will bare the responsibility of covering the loss in the home’s value. As a result, the CMHC is strongly considering putting a pause on a number of new underwriting applications in order to shield itself as well as taxpayers from financial losses.
Information for this briefing was found via Bloomberg and the Canadian Mortgage and Housing Corporation. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.