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CMHC’s Reins Get Pulled Back

CMHCCMHC is throttling way back on its mortgage insurance business.

That was the eye-catching revelation in its corporate plan released last week.

The nation’s largest mortgage default insurer plans to end this year with “just” $557 billion of insurance on its books. That’s notably less than most people expected, and 7.2% below its much-publicized $600-billion insurance limit.

Few outside of Canada’s second largest crown corporation know where its insurance balance stands today. CMHC hasn’t publicly disclosed that data since November 29, when it said it had $541 billion of insurance in force, as of September 30, 2011.

We thought we’d see a fourth quarter update in February with more up-to-date data. Unfortunately, as we discovered, CMHC delays Q4 data until it finishes its annual report—which CMHC tells us will come in the “spring.” (Perhaps it’ll arrive before the Q1 2012 report, which is due by the end of May).

Incidentally, this lag in Q4 data is a bit of a disservice to analysts. Delaying insurance and risk data by two to three additional months diminishes its value. Ideally, CMHC could at least put out an abbreviated Q4 report within 60 days (the timeframe it has allowed for its other quarterly reports).

In any event, CMHC says it now plans for an estimated 12% downswing in insured volume (units) in 2012. That’s no small drop and it caught many in the business by surprise.

Here’s a chart of the latest 5-year growth forecast for CMHC’s default insurance business:


CMHC is calling for 1.5% annual growth in the next five years, versus 13.5% in the previous five years!

With the government reluctant to raise CMHC’s $600-billion insurance limit, the crown corp. must now largely rely on portfolio run-off to give it more “cap space.” It has also been rationing bulk insurance.

Given all this, we don’t have to state the obvious, but we will. CMHC is undergoing a marked change in its business model, perhaps even in its mission.

No longer will it generously offer portfolio insurance (which lenders use to lower their funding costs on low-ratio mortgages). No longer will it have the same appetite for insuring rental and self-employed stated income mortgages. No longer will mortgage volume flow quite as freely, thanks to new market-slowing OSFI’s guidelines.

The government is clearly encouraging CMHC to taper back its volumes, as lofty home prices and debt levels stoke concern about mortgage default risk.

Not surprisingly, CMHC says “Volumes of CMHC’s Mortgage Insurance Activity are expected to be affected by a slight erosion of its market share, as private mortgage insurers move to regain lost market share.” (It will be interesting to see just how “slight” it is. This news must give competitor Genworth’s shareholders a warm tingle.)


Apart from the insurance-in-force data, we (as usual) combed through the mortgage commentary and plucked out stats that caught our eye. Here are some:

  • 72% of CMHC-insured mortgages are low-ratio (80% LTV or less)
  • Only 9% of CMHC-insured borrowers have less than 10% equity
  • Average equity in CMHC-insured homes is 45%
  • Average amortization period at initiation for CMHC-insured mortgages:  24.6 years
    (It’s 24.1 years for properties with 5+ units)
  • Average insured loan amount for 1-4 unit properties: $158,894
  • About 45% of CMHC’s high-ratio and rental business is comprised of rural areas, smaller markets or multi-unit properties (like rental housing, nursing and retirement homes), which are partly or fully unserved by private insurers.
  • Average credit score of insured borrowers: 723 (77% of insureds have a score over 700)
  • Multi-unit residential buildings comprise 27% of Canada’s housing stock
  • CMHC cited a 2008 KPMG study that found the Canada Mortgage Bond saved the Big 5 banks “18 bps,” on average, “compared to their next cheapest alternative source of long-term wholesale funding.” (That saved mortgage borrowers up to $174 million per year during the study period.)
  • 31% of Canada Mortgage Bond participants were smaller lenders in 2011, more than double the 14% rate prior to the global financial crisis
    (The CMB program offers the lowest cost of mortgage funding in the industry, a Godsend to smaller lenders trying to compete with banking giants)


Data Source: CMHC


Rob McLister, CMT