Canada is changing a first-time home buyer program to limit its exposure to losses. The Canada Mortgage and Housing Corporation (CMHC) made unannounced changes to the First-Time Home Buyer Initiative (FTHBI). The program, which sees the government take a stake in a successful applicant’s home purchase, is now limiting its downside exposure. Only a few months ago, when it was thought home prices would only go up, taxpayers were going to have unlimited upside. Now that prices are falling, Canada quietly updated the program to limit exposure to losses.
First Time Home Buyer Program
The First-Time Home Buyer Initiative (FTHBI) is a shared equity program for new owners. Successful applicants see the
speculator government take a 5 to 10 percent stake in their home. The idea is to reduce the outstanding balance and lower monthly payments for the owner. It frees up a little more cash for households and the government shares in the gains and losses.
Since it reduces monthly mortgage payments, policymakers sell it as an affordability measure. It’s not. This is technically referred to as a demand inducement scheme. Demand inducement schemes are designed to stimulate demand and thus raise prices. Really, what they’re doing is making it more comfortable to carry higher debt loads. Stress tests still limit borrowers, but some find lower payments more palatable.
The program has poor uptake, and that’s not a surprise — you’d have to be terrible at math for it to make sense. It may sound smart to reduce leverage to “save” money, but then you’re paying more for the “help.” Since home buyers still have to qualify for the extra debt, they can already pay the mortgage comfortably. If you believe home prices will continue to climb more than a ~3% variable rate mortgage, you aren’t saving money. You’re paying the most expensive loan you’ll have.
First-Time Buying Program Might Be A “Capital Cushioning” Program
The timing of the program left a lot of questions since it appears to also be a “capital cushioning” program. These are programs used to transfer assets from low-use owners (investors) to high-use ones (families) during rising risk. Investors are more likely to default than owner-occupied mortgages, and accept bigger losses.
During the US bubble, the government ried to transfer some of the risks this way. The narrative is poor people defaulted at subprime lenders during the ’08 bubble. In reality, it was high credit score investors using subprime lenders that defaulted at a higher rate. They needed more leverage, so they sought it at a subprime lender.
Borrowers with subprime credit scores defaulted only a little higher than usual. They held onto their negative equity home and rode it out for years. Naturally, by moving more of these assets from investors to owner-occupiers, lenders reduced risk. The only problem is this comes at the expense of poor people, which isn’t the feel good story the government sells it as.
Canada Quietly Changes The Program To Put A Cap On Annual Losses
Naturally, the program received criticism, especially around the rollout period. They are encouraging more leverage and incentivizing desperate buyers right before rates rise. They’re also using taxpayer capital, meaning taxpayers shoulder some of these losses. Of course, now the program has a new caveat — the state has limited its maximum loss exposure.
Yesterday, the program was quietly updated without announcement with new limits. The maximum loss the speculator state will take is 8% per annum, with the owner assuming the rest of the risk. As prices fall, they’re selling households on the upside — you’ll only have to pay them 8% maximum per year if prices rise.
There we have it. The program encourages first-time home buyers to leverage up during this limited-time offer. If things go well, you’ll pay an 8% max interest instead of the ~3% interest a variable rate mortgage costs right now. If prices fall, you’re on the hook for any of their losses greater than 8%. When a program has greater benefits for the administrator than the user, it’s best to take a few extra moments and consider if it’s worth it.