CHIP, the country’s top provider of reverse mortgages, is doing fewer of them.

In fact, the company originated 42% fewer reverse mortgages in Q2 2009 than it did a year ago.

In its earnings report yesterday CHIP said: “Despite strong demand, (it) expects that originations during the third quarter will be between 50% and 60% of…Q3 2008.”

The main reason appears to be a capital-constraint.  CHIP simply doesn’t have enough low-cost capital and liquidity.

To fix this, CHIP intends to become a full-fledged Canadian bank.  That will enable it to accept deposits, which should hopefully enhance its capital position.  CHIP expects governmental approval of its bank in time for a “third quarter” launch.

Chief Executive Officer, Steven Ranson, said: “HOMEQ (CHIP’s parent company) continues to withstand the effects of extremely uncertain economic conditions well beyond our control…”  These conditions forced CHIP to make several changes in the last 12 months.  For example:

• “In mid 2008, to counteract the effect of capital market volatility, (CHIP) increased the interest rate charged for new mortgages.”
• “Steps have been taken to reduce the average mortgage amount for new customers.” (LTV is also down from 30% to 28% on its latest crop of mortgages)
• “Marketing activity has been scaled back, overhead expenditure is being closely monitored and sales territories have been rationalized.”

Until CHIP’s new bank comes online, the above changes may continue to have a negative effect on origination volumes.

On a positive note, the company is seeing improvement in the credit markets.  It says spreads have finally “returned to historical norms after deviating significantly over the last 2 years.”

CHIP has been in business for over 20 years and has a portfolio of roughly 7,000 reverse mortgages.