If you’re buying a home without 20% down, you generally need an insured mortgage. The insurer that assumes your risk of default will, in turn, charge you an insurance premium.
On Friday, the Financial Post ran an article about a former insurance executive who is lobbying to cut default insurance premiums by 15%. For someone putting down 5% on a $300,000 home (typical for many first-time buyers) that would shave $1,176 off their mortgage.
Let’s do it, right? Everybody’s up for saving a few bucks.
Unfortunately, there’s a hitch.
Are insurance premiums too high?
Spearheading this cause is Brian Bell, former VP at insurer Canada Guaranty. He argues that CMHC is overcharging Canadians since borrowers are now lower risk (due to all the recent government policy tightening).
“Canada has the highest MI Premiums globally and it is all paid up front as a single premium,” says Bell. “Most other markets are a monthly premium which is way better for consumers.”
Credit quality of new originations are the best they have ever been
Arrears are at all-time lows
Approximately 70% of CMHC’s portfolio is below 80% loan-to-value
A large portion of CMHC’s portfolio has been under repayment for 5+ years. (High ratio defaults generally take place in the first five years. He says they most commonly occur in year three.)
CMHC’s mortgage insurance division has averaged over $1.1 billion in net income over the past five years.
“Every other insurance company looks at their rates annually,” says Bell. “Why hasn’t [CMHC]?”
The likely outcome
Are insurance premiums going down? We’ll wager no—at least not anytime soon.
Finance Minister Jim Flaherty has been on a self-professed mission to decelerate the housing market. And, more notably, he has anxiously tried to trim the government’s exposure to mortgage insurance, which taxpayers guarantee. Discounting insurance premiums works counter to each of these ends.
Further to the risk factor, we can all agree that borrower quality has gone up in recent years. But so have home prices and consumer leverage. Meanwhile, incomes and employment have not kept pace.
Economists say home values, which remain near all-time highs, are overvalued by 10-20%+ using traditional metrics. There has been no lasting correction for years.
A severe sell-off may be unlikely, but if it does happen the firewall between CMHC and a taxpayer bailout is $19.4 billion1. That’s roughly how much CMHC has available to pay claims if things go bad.
How long would it take to burn through $19.4 billion? Bell doesn’t say. Nor does CMHC disclose this data. However, assuming 3% of CMHC’s book defaulted (three times the all-time record), that would trigger almost $17 billion of defaults. It wouldn’t be a total loss, however, since CMHC would recover value during liquidations.
It is clear that CMHC can withstand some severely adverse markets. Despite that, weakening its future reserves is not at the top of Ottawa’s priority list in an uncertain housing market.
If real estate did get hammered, dwindling reserves would potentially lead to further mortgage insurance restrictions. It’s arguably more in proponents’ interests for CMHC to have a solid capital base and keep mortgage insurance widely available, than to save on insurance premiums in the near term.
All this said, if you still want to support lower insurance premiums you can sign this petition. So far (as of press time) it’s got 43 signatures, if that’s any indication of the consumer outcry.
1 Includes CMHC’s capital and unearned premiums and fees reserved for potential future claims.
Rob McLister, CMT
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