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-Insurance-Growth

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)

CMB-Volumes

Data Source: CMHC

 


Rob McLister, CMT

 

  1. So Rob, what do you think the reaction of banks and other lenders will be to these changes, and how will they affect the typical home-buyer whose mortgage would ordinarily be insured by the CMHC? Will home-buyers find it harder to qualify for a mortgage? Will rates depend on LTV?

  2. Genworth office banter this morning,
    “Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching, Cha-ching,Cha-ching, Cha-ching, Cha-ching, Cha-ching.”

  3. What’s Genworth’s government mandated insurance-in-force cap?
    At Dec 2010, Genworth reported $245 billion insurance in force. A Globe & Mail article implies Genworth’s ceiling is $250 billion.
    They seem to be bumping up against their ceiling to a greater extent than CMHC (ie. 540 out of 600 billion).
    Anyone know better?

  4. I believe the big unknown here is how much more will investors demand in compensation for private insured mortgages/HELOCs pooled into securities/covered bonds. There are three factors investors will consider when pricing risk vs return i) 10% private insures’ deductible not covered by the government ii) agency ratings iii) covered bonds issued by banks/financials are under a contractual framework, meaning they are not issued as senior debt granting protections under a default scenario.
    Any insight on this Rob?

  5. Watchdog,
    It’s as obvious as the collar around your neck. Lenders will want more down, higher interest rate, lend less, or some combo.
    Pick your poison, without insurance property lending won’t be what it used to be.
    But apparently Brad Lamb has no problem raising foreign money!

  6. Hi Joe,
    For high-ratio fully-qualifying owner-occupied applications, not much will change.
    For certain other borrower types, it will most definitely get harder to qualify. One example is the self-employed borrower without traditional income validation.
    Rates already depend on LTV in some cases, as is the case with certain non-bank lenders. For example, LTVs > 80% get better rates at some of those “monoline” lenders. This is largely a function of higher funding costs on conventional mortgages (since these lenders must rely on securitization).
    Banks, on the other hand, have the luxury of more funding options. As a result, most observers don’t expect them to up-charge on conventional mortgages.
    There are exceptions and various other implications, but it would make for a very long comment. :)
    Cheers…

  7. When CMHC talks about average equity, do they mean average equity at origination or average equity relative to the current market value of the property?

  8. It’s certainly counter-intuitive in some ways. It’s also reflective of investors’ desire for government-backing when buying mortgage securities. Whatever the case, most lenders will still offer their best rates on conventional mortgages.

  9. Given that interest rates are supposed to reflect risk, and mortgages with high LTV are at least nominally more risky (all else being equal) than those with low LTV, it’s probably even more than “counter-intuitive”.
    To me, it looks like the CMHC’s mission to “level the playing field” for high-LTV buyers has gone above and beyond — turning that playing field upside down.
    I got smacked around in another comment thread for saying that CMHC mortgage insurance can lead to a “moral hazard” situation, and this seems like a good example. It’s like investors are saying “I know these securitized mortgages are more risky, but I’ll choose them anyway because I know the government has my back.” One party gets most of the upside benefit, while downloading a lot of the downside risk to another party.
    I’m still waiting for someone to explain how this is not “moral hazard”. (Note that the argument doesn’t depend on whether the CMHC is itself in good financial shape, etc.)

  10. Self-insured lenders are probably cheering this development as they stand to see a surge in business considering that both prime lenders and CMHC are reducing risk and/or exposure to a highly overpriced real estate market and highly indebted consumerist society.

  11. For those who think that Genworth would fill the gap: think again! While there’s no doubt that Genworth would see an increase in business as a result of CMHC throttling back, Genworth have their limits and I highly doubt they’ll just pick up every deal that CMHC won’t touch. Moreover, during times of economic turbulence (and it’s safe to say we are still in uncertain times), investors who buy these mortgage bonds may insist on full CMHC backing.

  12. Hi Tomas,
    The private insurer cap (shared by both Genworth and Canada Guaranty) is $250 billion. It’s already been approved for $300 billion, but that new limit has yet to take effect.
    The $245 billion insurance in force figure you quote for Genworth is not pertinent to their limit.
    The number that matters is Genworth’s “outstanding principal amounts of insurance in force” (which includes an adjustment for amortization). That number is far lower than $245 billion. The latest reported value was $196 billion (Genworth estimate) as of December 31, 2010.
    The year-end 2011 figure should be disclosed any day now in Genworth’s 2011 “Annual Information Form.”
    Cheers…

  13. What part of CMHC’s original mandate gets them this deeply involved in portfolio insurance anyway?
    >Only 9% of CMHC-insured borrowers have less than 10% equity
    It’s 18% based on original property value. Given that high LTV must be recent purchases. The original property value is probably closer to the actual property value. Unless one rejects all notions of lofty valuations, I suppose.

  14. You have to account for the principal that people pay down. If you’re trying to gauge risk, original property value doesn’t matter. Equity today is what matters. Then you have to determine what THAT equity will drop to if home values fall.

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