Refinance Activity Plummets 40%, Says CMHC

CMHCTighter mortgage rules are hurting CMHC’s default insurance business. This is most evident in insured mortgage refinances, which have plunged a remarkable 40%.

That’s due in part to the government’s move on March 18, 2011 to limit insured mortgage refinances to a maximum of 85% loan-to-value (instead of 90% previously).

That rule continues to force thousands of Canadians to pay higher interest rates on debt that they used to be able to refinance and consolidate. The government’s hope is that this will encourage homeowners to borrow more responsibly, knowing that they can’t rely on home equity to bail themselves out.

Overall, CMHC says its insured mortgage volumes were down 13% Y/Y. That’s 20% below the volumes it anticipated. It attributes this to:

  1. A cut in the maximum amortization on insured high-ratio mortgages (from 35 years to 30 years)
  2. Weaker housing activity
  3. A drop in its mortgage insurance market share.

The above statistics come from CMHC’s second quarter (Q2) financial report. The nation’s largest default insurer must now issue these quarterly reports to comply with the revised Financial Administration Act.

Here are a few other tidbits from CMHC’s Q2 report:

  • CMHC predicts that “posted mortgage rates should remain relatively flat for most of 2011 before increasing slightly in 2012.”
  • It says “Claims volumes (on mortgage defaults) have been lower than expected.”
  • The average credit score of a CMHC-insured high-ratio mortgage is 723 (vs. 720 last year).
  • CMHC’s arrears rate is 0.42% (near the industry average of 0.41%).
  • The average amortization of a CMHC-insured mortgage:  24.6 years (vs. 23.9 years in the same period of 2010).
  • The ratio of CMHC-insured mortgages with 20%+ equity: 72% (vs. 69% one year ago).
  • 26.7% of residential mortgages were securitized (vs. 26.2% last year).

Other notes from CMHC’s 2010 annual report:

  • CMHC is the only insurer serving multi-family residential (5+ units), nursing and retirement, and many rural and smaller markets. These areas comprised 44% of its high ratio business in 2010.
  • CMHC says it limits risk such that its probability of insolvency is less than 1 in 200 (0.5%). It stress tests its portfolio with risk models that factor in 10,000 economic scenarios. Among other things, those scenarios assume both extreme unemployment and significant home price depreciation lasting “a number of years.”
  • 70% of CMHC-insured borrowers have Beacon scores over 700.
  • CMHC earned $1.76 billion in 2010. Since 2001, it has contributed $14 billion (in taxes and profit) towards reducing the government’s annual deficit.

 


 

Rob McLister, CMT

  1. A 40% drop…This doesn’t shock me at all…working as a mortgage broker/financial planner. I’ve noticed this extra 5% came in very handy to pay off debts and reinvest some of fruits of the refi.Now, some of my clients barely have enough remaining to invest once they’ve paid off their debts. Unfortunately, in my opinion this will not deter borrowers to stop buying things on credit. Car loans, credit cards, c/lines are too easy to obtain. Clients will not auto-discipline when it comes to these matters. The Gov’t should have cleaned up the borrowing parameters on unsecured credit.
    Canadians’ homes were one of the rare untapped resource to secure some kind of financial nest egg by using the equity. That missing 5% hurts canadians a lot more than the Gov’t thinks it helps…

  2. It would be really interesting to see the average amortization and equity level for CMHC-insured mortgages as a function of the year of home purchase. I don’t think CMHC provides this kind of data, though.

  3. Hi Rob,
    I wonder if you could clarify the 40% drop in refi’s for me.
    I take it that the 40% drop is in reference only to the CMHC portfolio of insured mortgage refi’s and not the entire (non CMHC) HELOC market?
    I so, any idea how big the CMHC insured refi market is in relation to the overall HELOC market?
    And isn’t it true that the big banks never really lent over 80% LTV on HELOC’s in the first place?
    Thanks.

  4. Hi Appraiser,
    Thanks for the note. You’re correct on both counts.
    That 40% decline is in CMHC-insured mortgage refinances only (and not HELOCs or uninsured mortgages).
    And yes, the big banks have traditionally limited HELOCs to 80% LTV.
    The HELOC market is $215 billion, representing 22% of all Canadian mortgages according to CAAMP. About 2.64 million Canadians have a HELOC, out of 9.45 million owner-occupied households.
    Cheers…

  5. Agreed. 90% LTV refinances should at least be available for strong high Beacon applicants. What purpose does it serve to make someone with a great job and great credit pay subprime rates for a 90% refinance? The 85% cap was nothing more than knee-jerk short-sighted rule making by our friend Jim Flaherty.

  6. I always get a chuckle with articles that refer to the governments plan to ensure more conservative spending among Canadians. If Countries around the world are falling into debt, and the U.S. can mitigate how they themselves can get out of their own debt (raising their debt ceiling, and make changes in spending) why can’t the average homeowner?

  7. Rob,
    could you put the 40% drop in a bit of context? For example any idea how the pattern has changed over the last five or six years? Personally Flaherty’s failure to deal with the unsecured debt crisis and the outrageous spreads banks are now getting on credit card lending caused me to do the unthinkable last election – vote NDP. I now find it a bit curious that the Canadian Bankers Association has yet to release April credit card data – perhaps they are concerned that the combination of data showing growing use of high priced credit cards and publicity around Layton’s death would generate support for Layton’s signature issue – credit card reform. Or maybe the CBA is just slow.

  8. Hi RR,
    Thanks for the note. I unfortunately don’t have the 5-6 year refi trend at my fingertips. You’d have to go through CAAMP reports to find it.
    I can tell you this though: 18% of mortgagors refinanced to withdraw equity in 2010, according to CAAMP. As of this spring, equity take out volumes were down 17% from the fall 2010 numbers.
    That could drop more once the impact of the 85% refi limit is factored in.
    Although, it remains to be seen if low rates will offset volume losses due to tighter mortgage rules.
    Cheers…

  9. I wonder if this government was thinking about borrowers who become “lender orphans” on renewal because they got a 90 or 95% LTV mortgage 4 years ago through a lender such as GE Money, Wells Fargo, Accredited etc. I see numerous qualified clients coming up for renewal who are still well above the 85% threshold but can’t refinance through CMHC/Genworth due to gov’t rules, and their existing lender won’t renew. Without access to other funds they’re forced to sell their family home despite making years of perfect payment history at bonused rates. Their sale proceeds are close to nil. These home owners forced out of their home are a unfair casualty of the governments policies. Exceptions need to be made. Especially since the gov’t will let them buy the exact same house next door with 5% down…it’s hard to see the common sense in that.

  10. Doug,
    excellent point. Any idea how CMHC would treat someone forced to sell due to refinancing rules but otherwise qualified to buy another same value house at 95%? Would someone in fact be able to port their mortgage to the new property with minimal transaction costs?

  11. Hi RR,
    Someone forced to exit a subprime mortgage would not be CMHC insured, so there is nothing to port.
    If the homeowner wanted to move to a prime lender, and their LTV was > 80%, they’d need to pay an insurance premium. When a borrower pays CMHC a premium on a refinance, CMHC is barred from insuring over 85% LTV.
    Rob

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