CMHC’s Insurance Volume Dives 37%. The Repercussions

CMHCThe new mortgage insurance rules were intended to affect “less than 5% of new home purchasers.” That was Finance Minister Jim Flaherty’s estimate from last June.

So far, he’s been pretty close to the mark. In the three months ending September 30, CMHC’s insured-purchase volumes are down 6%. (That drop isn’t due entirely to the rule changes, however.)

What Flaherty did not publicly predict was the extent to which high-ratio refinances, conventional securitized mortgages and smaller lenders would be impacted by Ottawa’s changes.

To start with, CMHC-insured high-ratio refinances (those with less than 20% equity) have plunged 22% Y/Y. CMHC attributes this to government policies that “effectively eliminated the high-ratio refinance market.”

On top of that, CMHC says its “portfolio (insurance…a.k.a. bulk insurance) volumes were approximately 98% lower” in Q3. That’s a direct result of it limiting “access to its portfolio product.”

That’s had noticeable effects on small lenders. According to one executive we spoke with, lenders like his can buy only 20-30% of the CMHC bulk insurance it could purchase just one year ago. And the big banks are also restricted, having been capped at $1 billion annually. Compare that to the $17 billion worth that Scotiabank bought last December alone. (More on why this matters below…)

The $600B ceiling

In total, CMHC booked a whopping 37% less insurance last quarter. That’s 54,435 fewer housing units that were insured in just a 3-month period, quite a drop.

CMHCCMHC now has $575.8 billion of insurance outstanding, a number that’s held steady since Q2. This puts CMHC just 4% under its $600 billion government-imposed limit.

CMHC is surviving within this limit because: (a) it rations bulk insurance, (b) its guidelines are now tighter, and (c) borrowers are paying down their principal at a rate of $60-65 billion a year—which makes room for new insurance.

Had the government not imposed its new mortgage rules, some think CMHC might have bumped against its $600 billion limit next year. (Policy makers certainly gave that some thought when drafting the new mortgage restrictions.)

The last games in town

Private-Bulk-InsuranceWith CMHC pulling some bulk insurance cards off the table, Genworth and Canada Guaranty are now the go-to sources for lenders needing additional portfolio insurance.

“Canada Guaranty remains a portfolio insurance provider for its customers and lending partners,” says its CEO Andy Charles.

When allocating bulk insurance to lenders, he adds: “We take an overall relationship approach that is based on both low- and high-ratio business.”

Genworth has a similar approach. It “selectively participates in portfolio insurance under [a] clearly defined risk appetite and disciplined pricing approach.” Genworth wrote $2.7 billion in bulk insurance last quarter with “solid pricing” and a target of “mid-teen ROEs.”

Net effects

With bulk insurance as a carrot, private insurers will put a dent in CMHC’s market share. So, if Flaherty wants more insurance in the hands of the privates (as he suggests), that’s exactly what he’s going to get.

Unfortunately, the demise of CMHC bulk insurance has repercussions. It’s made life distinctly more challenging for monoline lenders who rely on securitization and don’t take deposits. (Remember, institutional investors usually don’t buy prime mortgages from smaller lenders, unless they’re insured. For many monolines, even their low-ratio mortgages must be insured.)

As a result, non-balance sheet lenders are now:

  • Increasingly reliant on private insurers – Lenders needing more bulk insurance have been driven into the arms of Genworth and Canada Guaranty. And that insurance is being sold on the insurer’s terms, meaning a lender often has to commit to routing an equal Private-Mortgage-Default-Insurersor greater amount of flow insurance through that insurer. (And who can blame Genworth and Canada Guaranty for that?)
  • Forced to upcharge borrowers – Certain lenders must now factor the added expense of flow insurance into their conventional-rate pricing models. They can no longer offer the best rates without passing along that insurance cost to consumers—especially on rental or stated income financing.
  • More limited in their funding options – Investors often refuse to pay the same for a privately-insured mortgage as they would to buy a CMHC-insured mortgage. That limits the range of investors that monoline lenders can turn to. (Fortunately, the risk premium on privately-insured mortgages is now significantly less than it was following the liquidity crisis.)

Consumer Impact

Mortgage-ConsumersOf course, when times get tougher for lenders, times get tougher for consumers. How so, you ask?

  • The above liquidity constraints directly increase a small lender’s high-ratio funding costs.That’s a problem because second-tier lenders keep the big boys “honest” on pricing. Don’t forget, banks are generally best-price-matchers, not best-price-setters. When funding options dwindle, funding sources (many of which are banks) react to lender demand by raising prices. Small lenders are then forced to charge higher interest rates, which means banks don’t need to match rates as aggressively. It’s a cycle where consumers ultimately lose.
  • Less CMHC bulk insurance means less liquidity for conventional mortgages, and thus higher rates.That’s true even though conventional borrowers put down more money and are supposed to be lower risk. (To outsiders, this inverse relationship between loan-to-value and rates is one of the biggest paradoxes in our business today.)
  • Options for harder-to-securitize and higher risk prime mortgages – like rental and BFS applications – shrink considerably.

The mortgage business has shifted towards conventional lending where barriers to competition have risen (assuming you don’t have a big balance sheet, that is). But there’s a flicker of light at the end of the tunnel.

One lender executive we spoke with today says higher rates could eventually spark renewed interest in Canada’s asset-backed securitization market. “A 4% coupon would make (selling) uninsured conventional mortgages more viable,” he says. For consumers and mortgage originators, that could be a pleasant silver lining to higher interest rates.

Other CMHC numbers of note:

  • Texture with numbersCMHC’s average high-ratio mortgage balance is $176,838.
  • The nation’s top insurer made $1.16 billion of profit in its first three quarters. It’s made $17 billion over the last decade.
  • Year-to-date, its losses on claims are 5% below plan. Its arrears rate is 0.34% and trending lower.
  • CMHC’s Canada Mortgage Bond (CMB) guarantees—which small lenders rely on—fell 7% Y/Y.
  • That said, it guaranteed 37% more securitized mortgages overall—“driven by increased issuance of Market NHA Mortgage-Backed Securities (MBS)…”A side note: If you’re curious why MBS has grown so much, here’s what one lender told us:CMBs are basically pools of mortgages packaged into bonds, which are then sold to investors. Lenders who get their funding from the CMB market are required to replace these mortgages as borrowers pay them off. To fund these “replacement assets,” lenders have increasingly been using MBS. MBS funding is more costly than CMB funding, but lenders don’t have to worry about replacing mortgages like they do with CMBs.

Rob McLister, CMT

  1. I think that Monoline lenders need to lobby the insurance carriers to allow second mortgages up to 85% to 90%. I’m not sure if all the Monoline lenders allow a second behind as yet.
    If the insurers won’t do the full 80% Plus LTV, then just insure to 80% and let the broker community help clients with private top-up second mortgages.
    The market can remain solid if the insurers are reasonable.

  2. “banks are generally best-price-matchers, not best-price-setters”
    So true. Isn’t it just miraculous how a bank’s “best rate” becomes even better when you bring it a competing offer?

  3. I can’t believe our government thinks it is doing people a favour by shutting down refinances. Any moron knows this will simply force people to carry more high interest credit, and we all know who wins in that scenario.

  4. Another interpretation is that it will force homeowners to actually start paying off their debts instead of using their houses as ATMs… What a concept…

  5. That ATM analogy is so tired.
    Sometimes people refinance to reasons beyond their control. Sometimes they refinance to invest and generate more income. Don’t be so quick to judge what’s best for your neighbour.

  6. Completely agree … tell the person who’s spouse has cancer that they must go bankrupt … because Flaherty knows what is best. It is very difficult to expect a millionaire to understand the challenges of everyday people. Politicians truly don’t get it … in their business if you fall short on your budget you just raise taxes or cut performance. that is sometimes impossible for the average Canadian. Banks make more from a $10K credit card than from a $300K mortgage over 25 years yet Flaherty attacks the $300K because that will look better on the percentages and won’t affect his pay cheque. If he attacked the true culprit of household debt – 20%+ on credit cards, he knows, and so do we, that he would be out of a job almost overnight.

  7. Mortgage critics don’t like acknowledging real life exceptions like this. They feel it weakens their position. In reality, it’s their unrealistic black and white stance on things that weakens their position.

  8. By your logic, the government should put limits on how much you can withdraw from your savings and chequing accounts, because hey, we don’t want you to be able to draw on your own assets like it’s a bank machine now do we? If I own the equity in my house, what business is it of Mr. Flaherty’s how I manage it?
    This from a government that thought it was intruding on peoples’ personal freedoms to have a 20% chance of having to fill out a census form one every five years. Yeesh!

  9. Who is Flaherty to lecture borrowers on financial prudence when all he does is let the deficit keep growing? $26 billion this year alone!
    Never take advice from someone who doesn’t follow his own.

  10. “…Banks make more from a $10K credit card than from a $300K mortgage over 25 years”
    Rob McLister…this statement deserves correction?
    Chris, buddy, if you can’t do math you should withold comment on Flaherty.

  11. You’re right. Its not really his business if you want to borrow against your home and can find someone who will lend you the money.
    But if you want the CMHC to insure that transaction…..well, surely you can see how that is precisely the responsibility of a prudent minister of finance?

  12. The department of finance has supported high-ratio refinances for years with no problems. Telling a guy with an 800 credit score that he can’t refinance to 90% is just politics. There is no other justification for it. All Flaherty has done is penalize hard-working Canadians who need to refinance. I’m counting the minutes until he is out of office.

  13. Kevin, my understanding is that this only applies to CMHC insurance? If you can find a lender who will take the 90% refinance without the insurance, then no problem.
    Of course, if you can’t find any such lender (or only at a high interest rate), well doesn’t that tell you something about the inherent risk?

  14. “Small lenders are then forced to charge higher interest rates, which means banks don’t need to match rates as aggressively. It’s a cycle where consumers ultimately lose. ”
    You make one flawed argument in that you assume higher rates is automatically bad for consumers. It isn’t the case if rate rise “moderately”, say 5 year mortgages at 4% … BUT house prices DROP to more normal levels. If the house you want drops from 500K to $375K then all of a sudden that interest rate increase isn’t so bad.

  15. Hi RO,
    The rate differential that quote refers to (i.e., the difference in rates with and without aggressive competition) would have a small and debatable impact on home prices. But it would have a material impact on borrowers’ savings.
    Moreover, while falling home prices are helpful for folks waiting to buy into the market, they’re not necessarily helpful for the far greater number of Canadians who lose equity. It depends largely on the size of price decline. A natural correction could be heatlhy. The 25% drop that you reference, however, would not be a net win for consumers.

  16. Kill chmc and let Mortage insurance go to totally to private hands and have the real compitutaion between banks and let government bank finance Mortage lower than 10% down payment,cut the waste in government have
    balance budget law and finance minister to preach only what he practice.

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