Dealing With Private Insurers is Now More “Necessary”

3911 rp R2 CG_SiteFinance Minister Flaherty has publicly stated his preference for a privatized default insurance system. (See: Selling CMHC’s Insurance Arm…)

Now, coincidentally or not, the government has officially increased the private mortgage insurance ceiling to $300 billion while leaving CMHC’s limit stuck at $600 billion.

Last week, Andy Charles, president and CEO of Canada Guaranty, offered us his take on the government’s insurance-in-force policy:

“My view is that the increase in the (private insurer) limit is a strong indication that the Department of Finance would like the private mortgage insurers to take on more of the housing market risk, thereby placing private capital ahead of public capital in terms of managing the government’s exposure to the market.”

He adds: “To the lenders, it is a clear indication that doing reasonable business volumes with the private mortgage insurers has become much more of a necessary condition today than in the past.”

Indeed, many lenders would face higher funding costs if it weren’t for Genworth and Canada Guaranty providing low-ratio insurance. By insuring low-ratio mortgages, lenders can more easily sell them to investors, and/or reduce their capital costs. The prior go-to source for this type of insurance was CMHC, which drastically cut back on it about a year ago.

To private insurers, the government’s actions to slow CMHC’s expansion have been a market share gift. Looking ahead, “There are no constraints to Canada Guaranty’s growth in the market,” says Charles, whose company added Scotiabank, ING Direct and RBC as customers this year. He expects significant new growth in 2013, albeit in a “disciplined manner.”



Sidebar:  Despite all this, some mortgage investors still prefer to buy CMHC-insured mortgages due largely to their 100% federal guarantee. (By contrast, there’s only a 90% government backstop in the remote chance that a private insurer goes under.)



Rob McLister, CMT

  1. Only a government would be asinine enough to take a very profitable, crown owned jewel like CMHC and gut it. When the fed’s are the guarantor for everyone, this doesn’t bring any risk balance for the taxpayer whatsoever.
    Obviously, the fed’s are preparing CMHC for a fire sale. What they are not counting on is the fallout for everyone the day Genworth or Canada Guaranty acquires CMHC and monopolizes the market.

  2. Crown corp profits are a tax Mr Banker.
    Plus read the Globe article. The story claims Flaherty and Carney would have went ahead with plans to sell CMHC if the global economy hadn’t faltered.
    Curious: which do mortgage brokers prefer, status quo or less CMHC, more Genworth & Canada Guaranty???

  3. Any and all $$$ taken into gov’t coffers is a tax.
    Recall your Billy Shakespeare Mr. Munny: “…a rose by any other name would smell as sweet”.

  4. So since any profit made by a crown corporation is a tax, it is only right that they should all lose money or at least forgo making a profit to benefit Canadians…. Tomas, do you really think your head is screwed on right?

  5. The same way any nationalized company who owns a major section of the market drives prices higher for consumers. The smaller players with lower limits simply just “match” CMHC rates because they can and they have no incentive to compete on price, since they have a limit on how much share they can have. The insurance costs are much lower than what CMHC charges.
    Almost all nationalized/state companies have higher overhead, lower margins, and lower productivity. See Ontario Hydro/OPG, PetroBra, etc. CMHC is no different, they are the Fannie Mae of Canada, and as such will be more willing to risk public capital.

  6. But calling stinkweed a rose does not enhance it’s aroma. There is nothing inherently wrong with taxes if they are providing good value when delivering necessary services that the private sector can’t or won’t deliver. Personally I would rather have CMHC (and by extension the government) receive the profits for being on the hook than have a private company receive the profits with the government being 90% on the hook.
    If the private company wants the profits, there has to clearly be NO government agreement to backstop a failed insurer, and explicit denial to all potential investors in the insurer that the government is providing no guarantees.

  7. You need to get your facts in order. CMHC has a 100% sovereign guarantee that is not enjoyed by its competitors. That lets it earn surplus profit, all of which is returned to taxpayers. CMHC’s profit reduces our tax. It doesn’t add to it.

  8. Sell, sell, sell! Whether you want to deem the insurance as a “tax” or not, taxpayers are on the hook every time the government will need to bail someone out – as would be the case with any defaulted mortgage covered by CMHC. Stop putting the pressure on the taxpayer’s shoulders, and let only people who can AFFORD homes buy them!

  9. Taxpayers are still ‘on the hook’ when it comes to private insurers. The only difference is the profits enjoyed by private insurers are returned to shareholders and not the tax paying public.

  10. The best free economic advice, I can get from my next cabby, thanks very much. But seriously, if you studied any economics at all, you know the benefits of competition in any market. As long as the government wants to participate in default insurance, via CMHC, there will never be enough competition, the market will remain oligopolistic at best, and the biggest looser is the consumer.
    The cost of default insurance in Canada is not only overpriced, it lacks real value. A direct result of poor competition.
    If you are interested, read more from my petition – – Oh, and please sign if you agree. Thanks!

  11. Yes, and that too is my point. Genworth is still 90 per cent covered by the government, meaning that we are still on the hook. I’m all for fully privatizing Genworth too. People who can’t afford the down payment shouldn’t get the home. And yes, that means it should be really tough to get that insurance, which it would be if it was fully privatized. It is harder to get that down payment today, and that’s tough. Unfortunately, that’s also just the way it is right now – to protect taxpayers. Fully privatized insurance would protect them even more.

  12. Does anyone know which broker lender subscribes to Canada Gauranty’s LOW DOC stated income product to 80% LTV?
    Thank you in advance

  13. CG’s main broker lenders are Scotia, First National and Street. Not sure if they all choose to participate in stated income conventional insured or not.

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