|THE RENEWAL OF TRUST IN
Commission of Inquiry into the Quality of
Condominium Construction in British Columbia
|Submitted to the Lieutenant-Governor in Council|
Government of British Columbia
by Dave Barrett, Commissioner
|Chapter Two:||The Framework of|
Residential Construction Continued
CMHC is a crown corporation and is the federal government's housing agency committed to affordable housing through mortgage loan insurance, research, and information transfer. Until the mid 1970's, CMHC played a major role in stimulating housing in Canada, especially in direct-assisted home ownership through co-operative housing, social housing, or rental accommodation in major urban areas. Historically, CMHC has played a significant role in consumer protection. This has slowly been eroded because of government budget cuts and downsizing.
"... back in the 60s and the 70s we played a policing role, an enforcement role and it wasn't uncommon to have CMHC inspectors on the jobsite frequently and guiding the work that's been done, but over a period of time that probably started in the mid 70s and concluded in the early 80s, we moved to a position of primarily providing the insurance to financial institutions ... and we rely upon others to do the inspection and to ensure that the building meets the appropriate building codes."
Jim Lynch, CMHC
It should be recognized that this very important, regulatory consumer role was being dismantled at the same time CMHC was expanding the housing-ownership market by providing, for first-time home buyers (now expanded to all home buyers), mortgage loan insurance to financial institutions. Basically, in return for a premium from the home buyer, CMHC agreed to protect the bank, credit union, trust company, or other qualified financial institution against borrower default. In turn, financial institutions could provide mortgages to clients purchasing homes with as little as 5 percent down payment, compared to the 25 percent down payment required by law.
Of the 70,000 multi-family units built in BC's lower mainland between 1990 and 1997, 35,000 were low-rise, frame apartment-type buildings. These were mostly condo tenure and approximately 12,000 were insured by CMHC. In addition, CMHC provides mortgage insurance for resale units. CMHC does not have information to quantify the resale market it protects, but a conservative estimate would be an additional 10 - 20 per cent, bringing its overall exposure to the at-risk market in the range of 40 - 50 percent.
"(CMHC) does expand the market for builders to build having access to low downpayments ... when you have a hot market and you have a demand that is there, prices rising, that it could bring people into the market who might have an inferior product ... we've reserved funds on the basis of past performance. To my knowledge we've made no specific reserves for the circumstances we're dealing with today.
Jim Lynch, CMHC
The Commission's terms of reference has been to investigate the area of leaky condominiums. However, the definition it has embraced includes all types of residential construction. There are over 250 co-operatives in BC, with about 14,000 units. Water damage and dampness have been a major concern. CMHC administered the programs under which these co-ops were built. It would appear there are serious flaws in this program, including:
CMHC, because of downsizing in role and responsibilities by the federal government, terminated its role as housing inspector and regulator. It then transferred its consumer protection role, in residential construction, to the private market. At the same time, it maintained a level of consumer expectation, not only because of its historical role, but also because it required an appraisal (paid for by the consumer) to be undertaken on CMHC-insured mortgages, as well as requiring home warranty protection. Clearly, its requirements provided an implied degree of consumer protection, not borne out in practice.
The consumer should not take for granted that the appraisal or inspection undertaken at the time of mortgage approval is a substitute for adequate on-site inspection during construction.
|Recommendation #46: That financial institutions, or CMHC, provide to the borrower, a complete copy of any appraisal or inspection conducted in the process of obtaining mortgage loan approval.|
The people who have benefited most from CMHC's activities, during the past 15 years, have been the developers, builders, real estate marketing firms, real estate agents, New Home Warranty, and financial institutions. The homeowners hit by the condominium crisis -- initial beneficiaries, because they were able to purchase a home -- have lost out.
"In routinely insuring residential mortgages on questionably inspected new, converted and resale homes, CMHC does not appear to have demonstrated reasonable fiduciary responsibility."
Nona Saunders, Condominium Home Owners Association
Detailed recommendations for federal government and CMHC involvement in the solution to this serious problem, are provided in Chapter Three. However, the general principle upon which the detailed recommendations have been developed, is that the federal government and CMHC involvement is not only desirable consumer protection policy but, because of the magnitude of the problem faced by residents, a lack of support could threaten the solvency of CMHC who, in turn, guarantees the banks' position. This position is about 40 percent of the mortgages in the market.
Even if CMHC could afford to make payment on a significant portion of the foreclosures, the debilitating affect on the economy would be significant, particularly in light of the fact that, even when CMHC pays, the homeowner is still liable for the mortgage. The only group who benefits under a passive approach are the financial institutions.
"There are people who have the funds that are able to put forward to meet the assessments as they come due ... but even if 10 percent of these owners are rendered insolvent as a result of leaky problems, that makes 16,000 individuals in this province who could immediately make an assignment under the Bankruptcy and Insolvency Act and walk away."
Rupert Shore, Lawyer
|Recommendation #47. It is imperative that the federal government and CMHC provide a significant contribution toward homeowners who have been hurt by this crisis of quality, not only to alleviate the threat of bankruptcy for individual homeowners, but also to protect the solvency of CMHC, and the stability in the residential housing market of British Columbia.|
One final area of concern respecting both CMHC's and the financial institution's approach to providing financial resources to meet special levies, is the tendency for gross debt service ratios (GDS) to become dangerously high such that the homeowner has difficulty meeting day-to-day living expenses.
|Recommendation #48: That CMHC and financial institutions recognize the impact of GDS ratios on consumers with a view to providing lower cost, longer amortization solutions to consumer special levy needs.|