Since 2008 the nation’s largest mortgage default insurer has been on a mission to reduce its risk exposure. Yesterday that mission continued with CMHC announcing that it would stop insuring both second homes and self-employed borrowers without traditional proof of income.
Canadians have used these two programs for the last nine and seven years respectively.
But these are not the only adjustments CMHC has in store. It put the market on notice that “This is the first set of changes” we should expect, as a result of its internal insurance business review.
Thankfully, at least one private insurer is not making knee-jerk changes because of this news.
Andy Charles, CEO of Canada Guaranty, told CMT:
“We are currently reviewing the announcement and potential implications…(The) overall materiality of the change is modest but indicative of an evolving market dynamic…(We have) no current plans to alter our product offering but, as indicated, are reviewing…”
What’s behind CMHC’s announcement?
Terminating these programs appears to be a business decision by CMHC.
Sources tell us that the insurance regulator, OSFI, was not behind this decision. (OSFI doesn’t generally impose product restrictions on individual institutions.) Moreover, there is no indication that this news is directly related to the recently released B-21 guidelines.
We’re also awaiting comment from the Department of Finance. In recent years its leadership has clearly indicated a desire to see less government involvement in the mortgage market. (CMHC is 100% backed by the federal government.)
CMHC says these two programs only accounted for a combined 3% of its unit volume.
It claims this should not have “a material impact” on the housing market. (Mind you, this is yet another instance where CMHC is withdrawing and/or limiting its programs. All of these “immaterial” changes may ultimately combine to slow the market further.)
There is no word yet on whether the second-largest insurer, Genworth Canada, will follow suit. It’s in its quiet period before earnings so it couldn’t comment.
Even before this news, it was clear in talking with CMHC sources that it plans to meaningfully reduce its insurance business. This will create further opportunities for private insurers and self-insured lenders (e.g., Equitable Bank, Home Trust, Optimum Mortgage, certain credit unions, private lenders, mortgage investment corporations, etc.)
The last day to submit CMHC-insured “stated income” and second home mortgage applications is May 29 (but many lenders may set a cut-off date earlier than this.)
The majority of Canada’s 2.7 million self-employed borrowers prove income in traditional ways (for example, using a 2-year average of income from their NOAs, grossed up by 15% to account for write-offs)
Self-employeds who can’t prove income traditionally, and Canadians who buy a second home with less than 20% down, will be left with these options:
Prime lenders who insure through private insurers (assuming the privates keep their “low-doc” and second home programs intact)
Non-prime institutional lenders, who finance up to 85% loan-to-value (less in non-urban areas) at higher interest rates
MICs and private lenders who finance up to 80% with even higher rates and fees
Private lenders who offer second mortgages in urban areas above 80% loan-to-value
Anyone with a CMHC-insured residence will no longer be able to obtain, or co-sign for, an additional CMHC-insured mortgage. There are two exceptions:
Bulk-insured mortgages are not affected by this particular rule (“The rules apply to all transactionally insured homeowner mortgages, both high and low ratio,” says CMHC spokesperson Charles Sauriol. “The rule does not apply to loans that are bulk insured — (i.e., CMHC’s Portfolio insurance product.”) Lenders purchase bulk insurance on mortgages with 20% equity or more, typically so they can resell these mortgages to investors.
CMHC-insured rental mortgages are also unaffected (“There is no limit on the number of CMHC-insured rental mortgages a borrower may have,” Sauriol adds.)