That’s triggering a host of side effects for lenders, who are forced to pass along higher costs and reduced mortgage availability to consumers.
The Finance Department’s stated end game is to bolster housing stability. And that’s unquestionably vital to Canada’s long-term prosperity.
But that shouldn’t stop people from questioning whether the extent of these industry-wide changes is truly warranted. To start assessing that, let’s first consider the facts below from CMHC’s 2013 annual report.
Note: This data is from year-end 2013 unless otherwise noted.
CMHC Volumes & Profit
- CMHC plans to insure 66% fewer residential units in 2014 than its peak in 2009
- That’s 353,975 units this year vs. 1,048,736 units five years ago.
- CMHC has returned $18 billion in profit to taxpayers since 2004
- By comparison, Ottawa’s entire budget deficit for 2014-15 is projected at $2.9 billion.
- Policy tightening caused CMHC’s premium and fee revenue to drop $167 million in 2013. It should continue to fall as the government’s “de-risking” of CMHC continues. Portfolio Metrics
- Percentage of CMHC mortgages over 95% loan-to-value: 1%.
- Percentage of CMHC mortgages over 90% loan-to-value: 7%.
- Percentage of CMHC mortgages over 80% loan-to-value: 25%.
- Average CMHC-insured mortgage balance: $140,781.
- The average CMHC-insured mortgage at 95% loan-to-value: $248,000.
- Percentage of CMHC-insured mortgages over $400,000: 12%.
- Average credit score for regular CMHC-insured mortgages: 741.
- 741 is strong. It compares to 738 in 2012.
- 75% of CMHC’s borrowers had credit scores of 700+ at origination. For bulk insured mortgages this number jumps to 86%.
- Average equity of a CMHC-insured borrower: 45%.
- CMHC still doesn’t break down the average equity of its borrowers at origination. For example, how many put down less than 10% in 2013?
- Let’s hope that the company’s greater-transparency initiative starts yielding more telling data, including average debt ratios at origination, by LTV.
- Percentage of Canadian mortgages that are CMHC insured: 45.6%.
- CMHC insurance in force at year-end 2013: $557.1 billion.
- CMHC says: “Insurance-in-force is expected to continue to decline in 2014 [to $545 billion] when further government limitations on portfolio insurance are introduced.”
- That would be the third straight year it’s dropped.
- All indications are that its insurance in force will fall again in 2015, potentially en route to sub-$500 billion by year-end 2016 or 2017.
- CMHC’s available capital: 250% of OSFI’s required minimum.
- A record high.
- Claims paid: $436 million.
- This was the lowest in 5 years, thanks in part to lower unemployment and rising home prices.
- Total borrower arrears: 0.34%.
- Total delinquent loans: 10,033.
- A 6.3% drop from 2012.
- End of the Insured Mortgage Purchase Program: 2015.
- At that time, the government will be fully repaid (with interest) for the $69.3 billion of mortgages it bought during the 2008-2009 financial crisis.
- Percentage of Canadian mortgages securitized using a CMHC program: 31.1%.
- Projected 2014 securitization guarantees: $120 billion.
- Cost savings to lenders when funding a mortgage through the CMB, compared to regular NHA MBS: ~30 basis points.
- Estimated interest savings enjoyed by borrowers, thanks to the CMB program: $174 million per year (as of 2008).
- Percentage of lenders accessing the CMB program considered to be “small lenders”: 55%.
- versus 19% in 2006.
Let’s talk about this last point for a second. The Finance Department, and by affiliation CMHC, position themselves as going out of their way to help small lenders (and cultivate mortgage competition). But many of their actions have done anything but.
For example, the Finance Department and/or CMHC have:
- Slashed bulk insurance by $2 billion in 2014.
- Small lenders rely on this insurance to sell their mortgages to investors (who typically demand insured product).
- Hiked low-ratio insurance premiums:
- This premium increase on low-ratio transactional insurance directly increased costs for some smaller lenders on conventional mortgages.
- Started charging “risk fees” on CMHC bulk insurance:
- Further raising the cost of bulk insurance, upon which non-deposit-taking lenders rely.
- Cut 5-year fixed CMB allocations:
- From over $425 million per quarter in 2011 to under $250 million this year, according to a bank source.
- Banned CMHC insured mortgages in securitization programs not sponsored by CMHC:
- e.g., asset-backed commercial paper (ABCP), which some mid-size lenders were successfully funding themselves with.
- Promoted covered bonds as a key funding alternative:
- While a decent program for major banks, small lenders can’t issue covered bonds.
- Small fry can only hope to indirectly benefit from the added liquidity that covered bonds provide banks that buy their mortgages. But that liquidity comes at a higher price today since covered bonds can no longer use insured mortgages as collateral. (Investors happily accept lower yields for government-backed securities, and that trickles through to consumers by way of lower mortgage costs.)
- Cut back MBS allocations:
- No longer can a parent bank and that bank’s securities dealer have their own MBS allocations.
- Various small lenders rely on aggregators like TD Securities and RBC Dominion. Those and other funders must now share only one MBS allocation between their bank and their correspondent lenders (who fund through them). Less liquidity generally leads to higher mortgage capital costs.
Many of these measures directly improve the major banks’ competitive position versus smaller lenders, especially on conventional mortgages. That’s because banks don’t rely as heavily on securitization for conventional mortgage funding (compared to 2nd- and 3rd-tier lenders).
With housing on a far more stable footing, do we truly need this array of insurance restrictions which limit competion and inflate mortgage rates for Canadian families? If so, why exactly is the status quo so risky? These questions are not answered in the Finance Department’s and CMHC’s publicized reports.
On a positive note, CMHC is now providing equal allocations of portfolio insurance to all lenders. Small lenders will now get the same amount of this limited resource as the big banks. That should help a bit.
CMHC has also started surveying the approved NHA MBS issuers each quarter for their MBS demand. That will help when setting their allocations, and make it easier for securitization-reliant lenders to plan funding strategies. (Uncertainty can lead to risk premiums in mortgage pricing.)
On top of this, the Finance Department said in its 2014 budget: “CMHC will consider further flexible funding options for smaller lenders.”
The market awaits those options.