Highlights from CMHC’s 2011 Annual Report

CMHCCMHC has inched closer to its $600 billion government-imposed default insurance limit.

The nation’s top mortgage insurer has just released its annual report showing its insurance in force as $567 billion (as of December 31). That’s up 10% from 2010 and is just 5.5% below its allowed maximum.

Despite its growing insurance levels, CMHC says it has plenty of room to meet Canadians’ core demand for mortgage insurance. CMHC suggests it can operate within its $600 billion parameters for two reasons:

  1. Runoff – CMHC expects about $60 billion of runoff (mortgages being paid off) annually, which will free up room for new business. In fact, CMHC projects its insurance in force will actually dip to $557 billion by the end of 2012.
  2. Bulk Insurance Rationing – 43% of existing CMHC insurance is low-ratio portfolio insurance (aka, “bulk insurance”). CMHC saw unexpectedly “large amounts” of demand for portfolio insurance in 2011. It now rations that insurance to control volumes.What is Bulk Insurance? Lenders buy this insurance on mortgages having at least 20% equity. It helps them lower risk, reduce funding costs and securitize closed mortgages (so they have money to re-lend).

We’ll get a more current picture of CMHC’s available insurance headroom when it releases its first quarter figures (due by month-end).

CMHC by the numbers

  • CMHC profit in 2011: $1.53 billion
  • Profit to taxpayers since 2002: $16 billion
  • Total insured units in 2011: 630,957 (This was 11% below plan “due to a weaker than anticipated homeownership market, the impact of changes to the Government’s guarantee parameters, and a slight drop in CMHC’s market share.”)
  • Portion of insurance aimed at under-served markets: 46.5% (This includes large multi-unit residential properties, nursing and retirement homes, and homes in rural areas and smaller communities.)
  • Reduction in refinance volumes following the new 85% LTV limit on insured refinances: 22%
  • Expected capital by year-end: Greater than 250% of OSFI’s required minimum (CMHC estimates its capital to be roughly 211% of OSFI’s recommendation, as of Jan. 1, 2012.)
  • CMHC arrears rate: 0.41%
  • Average lag between arrears and claims: ~1 year
  • CMHC’s stated probability of insolvency: Less than 1 in 200 (The “tail risk” includes ongoing negative GDP growth, unusually high unemployment and “significant house price depreciation lasting for a number of years.”)

The “typical” CMHC-insured borrower

  • Average outstanding mortgage amount: $162,157
  • Average equity: 44%
  • Borrowers with 20%+ equity: 75%
  • Borrowers with less than 10% equity: 8%
  • Insured borrowers with homes more than $400,000: 13%
  • Average credit score: 724
  • Borrowers with a credit score >= 700: 76%
  • Portion of insurance that’s high-ratio: 50%
    (Pierre Serré, Chief Risk Officer, notes that the majority of CMHC-insured buyers are first-time buyers and there has been no deterioration among these borrowers as measured by standard risk metrics.)
  • Ratio of high-ratio mortgages with fixed rates: 75%
  • Ratio of high-ratio mortgages with terms >= three years: 88%
  • Portion of high-ratio borrowers ahead of their scheduled amortization by 1+ payment(s): 33%
  • Average amortization at time of approval: 25 years

CMHC says it “does not currently publish information on total debt service ratio and average down payment for high ratio mortgages.” That’s disappointing because both are vital risk measures. The public, which is ultimately on the hook for any risk CMHC incurs, should be exposed to these numbers.

 

Condos

CondosFinance Minister Jim Flaherty recently told The Globe that his primary housing concern is “the condo market mainly, in Toronto and Vancouver.”

He added, “I also talk to developers, and I hear from some of them who are in the business of building condos that they don’t really have a plan, they’re just going to keep building them until people stop buying them. It’s not exactly a fiscal plan. It will lead to a crash.”

Bank of Canada chief Mark Carney recently echoed some of Flaherty’s concerns, saying: “What we’re really concerned about on an individual basis is…the people that come in at the end of the condo boom, if you will. It’s the people who stretch for that last dollar to get the house…”

For its part, CMHC said it is “monitoring” condo markets across Canada. It sees no clear evidence of “problematic” condo prices. In individual mortgage applications, CMHC said its underwriters consider the property type and market where the individual is buying.

CMHC concluded in its annual report that “…clear evidence of a (housing) bubble is lacking.”

Privatizing CMHC

Bloomberg reports that CMHC considered selling itself last year. This news follows comments by Flaherty suggesting the government may eventually privatize CMHC.

Australia did something similar in 1997. Analysis of the Aussie experience (as reported by Bloomberg) concluded that Australian homeowners pay “relatively higher margins on their mortgages than do Canadians” and “the (Australian) lending industry has become more concentrated and less competitive,” in part, due to a private insurer.

Regarding when CMHC might be sold (if at all), RBC Capital Markets says, “If it were to occur, we believe it would be unlikely to happen for a while.”

Not surprisingly, CMHC did not touch on this topic in its 2011 annual report.

Securitization

SecuritizationCMHC has two securitization programs, the NHA mortgage-backed securities (MBS) Program and the Canada Mortgage Bonds (CMB) Program. All mortgages in these programs are insured against default.

Some quick facts:

  • Ratio of all residential mortgages securitized through CMHC: 27%
  • Total 2011 mortgage securities guaranteed by CMHC: $117 billion (the 2011 “plan” was $52 billion)
  • 2011 CMB funding: $41 billion

“We expect our securitization guarantee programs to remain important pillars of lenders’ funding platforms,” CMHC says.

Interestingly, CMHC expected securitization to account for just 21% of mortgages in 2011 (versus the 27% actual). Its plan for 2012 is also 21%, a big drop if it happens.

Lately, CMHC has also been asking NHA-mortgage-backed-securities issuers for very long-term projections of their MBS issuance. A spokesperson tells us, “CMHC has always communicated with Approved Issuers to gauge potential business activity.”

However, the forecasts it is now requesting are reportedly up to 5 years in some cases—which is unusual, sources tell us.

CMHC says it’s doing this “to improve (its) forecast capabilities for guarantees on market NHA MBS by providing all Approved Issuers an opportunity to input into our market NHA MBS forecast.”

Some have speculated that CMHC is doing this for one or two other reasons:

  • To further limit or tweak its rationing system for low-ratio insurance, and/or
  • To evaluate new potential limits on issuance of MBS collateralized by insured low-ratio mortgages.

We’d remind folks that the above is pure speculation at this point.

This chart below shows how vital CMHC-backed securitization is to keeping funding costs low. Much of this relative cost-savings is then passed on to mortgage consumers.

MBS-Spreads

CMHC has a policy to support small lenders, which it says are “important in maintaining a competitive Canadian mortgage market.” (That’s a big understatement.)

The CMB has been the lifeblood of many smaller lenders. But interestingly, since 2008, schedule I banks have accounted for a greater portion of CMB distribution volume, pushing other lenders’ share down to 40% in 2011, from just under 60% in 2008.

CMB-VolumesBanks love the CMB program, and for good reason. CMHC says banks saved 18 bps in funding costs by securitizing via CMBs, compared to their next cheapest funding source.

emili

CMHC’s automated underwriting system, emili, has been tweaked. emili uses borrower, market, property, and fraud analysis to size up an applicant’s risk.

CMHC says it has updated emili’s models with “refreshed data” to enable “enhanced management of risks.”

Despite the changes, Mark McInnis, CMHC’s VP, Insurance Underwriting, Servicing and Policy, tells CMT: “We are not changing the overall risk appetite…Our policies have not changed in the last year, except where it relates to the Department of Finance parameter (changes).”

He says emili’s “level of applications referred to underwriters (should remain) about the same as it was before.”


Chart source: CMHC


Rob McLister, CMT

  1. CMHC says it “does not currently publish information on total debt service ratio and average down payment for high ratio mortgages.”
    I agree with you that this info is critical. It’s fine to say that the average CMHC-insured mortgage has 44% equity, but I want to know what the shape of the distribution looks like. How many borrowers have under 10% equity?

  2. I missed that in the flurry of numbers. But I would still like to see the distribution, and also how it changes from city to city.

  3. CMHC’s LTV portfolio shows 25% of loans are above 80% in 2011, but that is not solely based on principle payments, rather home price appreciation that’s included in their model. This is why CMHC always says homeowners made “extra” payments, not “extra principle” payments. http://i48.tinypic.com/2h4z7lj.png
    I don’t trust CMHC’s numbers at all.

  4. And I don’t trust yours.
    Of course LTV is going to be based on appreciation. Appreciation relates to current market prices which are used in LTV calculations.
    This is not a revelation for anyone….except for yourself apparently.

  5. Some important numbers are missing (at least from this article which is otherwise very good):
    What is the size of CMHC’s insurance portfolio? What is its net interest margin? What’s its capital ratio (I read 100x leverage somewhere… didn’t verify myself whether the number is right or wrong, but the above numbers didn’t refute it) I want CMHC to present numbers that give the readers a better sense of the risk that CMHC takes on.
    The numbers presented are manipulated to give a good feeling. Example: “Portion of high-ratio borrowers ahead of their scheduled amortization by 1+ payment(s): 33%” Who cares about the % of borrowers who prepaid? I am much more interested in the % of borrowers who are BEHIND by one payment.

  6. Read man, read.
    CMHC’s insurance portfolio: $567 billion
    Capital ratio: >2X OSFI requirements
    % of borrowers who are behind in payments: .41%

  7. I guess I didn’t phrase my comments properly.
    Yes, the insurance portfolio is $567B, but apparently that’s not the entire exposure of CMHC. See this link: http://www.mises.ca/posts/articles/a-second-look-at-the-cmhc/
    The capital ratio of >2x OSFI is even more fishy. Can’t they just put out a ratio similar to the tier 1 ratio that banks disclose? If anything, that would allow one to assess whether the OSFI req’t is too low in the first place!
    And the 0.41% arrears. It would be great if CMHC discloses how many are X month deliquent for X = 1,2,3, etc., instead of giving just a single number.
    Finally, no one is concerned about the 8% of the mortgages that would go underwater if house prices across the board drop 10%? It could quickly drives the economy to a bad vicious cycle, the opposite of what we have been seeing in the past few years.

  8. Analysis of the Aussie experience (as reported by Bloomberg) concluded that Australian homeowners pay “relatively higher margins on their mortgages than do Canadians”
    That proves that CMHC is underpricing it’s insurance relative to the free market. Despite all the talk about how little risk there is in CMHC’s portfolio, the free market still requires more compensation for that risk than CMHC is charging.
    So, why exactly is the government subsidizing the mortgage insurance business? Instead of subsidizing that they can get out of the business and lower our taxes instead. Then everyone can decide whether they want to spend the extra money on mortgage insurance or something else.

  9. Hi A. Tony,
    Thank you for bringing this to our attention. Mr. Serré’s position was taken from CMHC’s just-released annual report. Apparently that report doesn’t reflect his new role. The above story has now been updated.
    Kindest regards,
    Elizabeth

  10. So just to clarify, the person who was formerly Chief Risk Officer is now VP Capital Markets, and the former VP Business Development is now CRO? Lord help us.

  11. I agree. Instead of the treasury backing CMHC’s naive risk-on strategy, can’t the government simply allow each taxpayer to decide himself/herself whether they want to buy in to be an implicit underwriter for this moral hazard? One easy way is through the income tax system, when a taxpayer files his/her return they can indicate whether they want to apply for refundable tax credits that are derived from the purchase of CMBs or other MBS instruments that form the bedrock upon which the residential housing market is being propped up and, as a consequence, artificially inflated? This way, taxpayers can choose whether they have faith in the risk model as presented by CMHC and other government officials.
    To elaborate, those that don’t have faith, opt out of the tax credit and pay the fair share of tax they would have otherwise. Those that do, opt in and risk having the trade work against them later and hence incur a larger tax bill in future tax years should the trade blow up when the MBS environment collapses as a result of the housing market nosediving.
    Simple.

  12. 44% equity sounds low, especially considering the recent price appreciation the portfolio must be experiencing. And that 75% of the portfolio is bulk, not high ltv virgin homebuyers. It sure would be nice to have the equity broken out by vintage and type of coverage. The amount of data it would be nice to get out of CMHC is about 25x what they actually give out.
    But thanks for your legwork, Rob!

  13. That proves that CMHC is underpricing it’s insurance relative to the free market.
    It doesn’t prove that at all, but even if it did there is no scandal with insurer pricing. It’s been the same for years. The government backs home financing which lowers mortgage costs for everyone. This is not earth shattering information!
    For trivial risk we get a stronger more accessible market. If you don’t believe that, please share your contrary evidence. And don’t put us to sleep with price-to-rent or price-to-income ratios.
    Instead of subsidizing that they can get out of the business and lower our taxes instead.
    NEWS FLASH – CMHC already keeps taxes low. If you remove its $16 billion in profits we’d all be paying MORE tax!

  14. I am a recent reader of this newsletter and finding it a valuable resource. Thanks. I have worked in the mortgage business for years but have never known a process whereby a lender reports to CMHC when an insured loan is paid out. How does CMHC track and know that they will have $60B in ‘runoff’ annually? Anyone?

  15. I would like to know what the total CMHC fees collected in 2010,2011 and 2012 was and how much HST was generated for Revenue Canada on those insurance fees.
    It would also be interesting to know exactly how much CMHC paid out to lenders for losses incurred on insured mortgages and the breakdown of those losses by category and province and lender class.

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