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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