Been Here Before

MortgagesWhen news hit that CMHC was nearing its legislative limit for issuing mortgage default insurance, the headlines were ominous.

It was like CMHC had never approached its insurance cap before.

In fact, it has—four or five times since 2003.

The closest it came was in 2007. At the time (year-end 2007), CMHC had used up $345 billion (99%) of its $350 billion insurance limit. That limit was later raised to $450 billion in March 2008.

Therefore, despite CMHC’s insurance in force now being over 90% of its current $600 billion government maximum, it is not in unfamiliar territory on a percentage utilization basis.

On an absolute basis, CMHC will set a new insurance-in-force record once it surpasses $600 billion (if and when the government raises its limit next).

Rob McLister, CMT

  1. Am I the only one who finds it just a little startling that CMHC’s insurance in force almost doubled in five years?

  2. So I guess the follow up question is: how much racetrack is left?
    At current rates of expansion, how long would it take to reach the legislative limit?

  3. The difference this time is that the government is in no mood to promote further credit growth. That’s quite a change from the last decade.

  4. The government will boost the limit eventually, maybe as soon as this spring. Whether they want to is irrelevant. They have to.

  5. Yes. There is no question they will boost the limit if it is reached. Cutting off the taps entirely would be an unmitigated disaster.
    However they will not do it without new restrictions. No idea what they will be, but they will be there.

  6. In markets like the U.K., the best rates & terms are offered to clients with low LTV.
    Thanks to cheap CMHC securitization, in Canada its complete opposite. The best rates & terms are offered to clients with large revenue generating, CMHC insured loans. That’s wrong on so many levels!

  7. That’s something I’ve always wondered about. Aside from reducing the monthly payments, Canadian buyers have little incentive to put down large down-payments.

  8. 600 billion …. I would say it’s time for a trillion :)
    Viva the credit !
    I guess the system we live in can’t exist without it.

  9. no, there’s much more room :
    we still have those digits available :
    quadrillion, quintillion, sextillion, septillion,
    and more than 15 more, each increasing it’s size with 3 zeros
    So … there’s still room to increase the ceilings :)
    Happy borrowing and profits for the banks !

  10. Nice post.
    Was the limit raised every time or did the market turn to the “private” insurers?
    Maybe someone here can answer a related question. When a bank forecloses on a house that is insured with CMHC who covers the cost of the paperwork and legwork of the foreclosure? And anyone know what that typically costs?

  11. They are good incentives, but somewhat external to the mortgage itself, are they not? One would think, naively, that if interest rates reflect default risk, and if default risk is at least somewhat correlated with LTV, that borrowers with low LTV mortgages would get better rates. But this doesn’t seem to be the case, because the CMHC levels the playing field.
    Perhaps I am wrong, and a Canadian mortgage borrower with 70% LTV on his purchase really does get better rates and terms than an otherwise comparable borrower with 95% LTV. But I am not a mortgage broker, so I can’t say.

  12. >>>’Aside from reducing the monthly payments, Canadian buyers have little incentive to put down large down-payments.’<<< How can they when housing prices more than doubled or even tripled over the past decade in many metropolitan cities? Cheap interest rates have artificially inflated the wealth of many Canadians. The vast majority of the population count the value of their home as the most significant asset comprising their net worth! The value of their home!!! Apparently the notion among many is that home prices would just continue to drift upwards at 6% or 7% per year, a higher real return rate than far riskier asset classes. People are in for a rude awakening. As we have seen in 2008, the markets have a nasty tendency to correct themselves once things are grossly out of whack.

  13. How can they when housing prices more than doubled or even tripled over the past decade in many metropolitan cities?
    It’s a chicken-and-egg thing, isn’t it? When it comes to mortgage borrowing, people have a tendency to go “to the max”. Inflection points in the trend of house prices vs. time tend to line up with changes in the CMHC mortgage insurance rules (our current run-up really got going when the mortgage cap was removed).

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