CMHC’s Annual Report Documents its Contraction

CMHCCMHC is safer and better managed than it has been for years. But it nonetheless continues to pare back its mortgage insurance business at the Finance Department’s urging.

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

  • Shrinking-ProfitCMHC 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%.
      • Credit-Scores-MortgageAverage 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.

      Risk Exposure

      • 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.
      • claims-paidCMHC’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.

      Securitization

      • Percentage of Canadian mortgages securitized using a CMHC program: 31.1%.
      • Projected 2014 securitization guarantees: $120 billion.
      • securitizationCost 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.
      • Canadian-Mortgage-BondsCut 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.

      mortgage consumer costMany 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.

  1. I was always told the rule of thumb is “if your delinquency is below 1%, you’re not taking enough risk.” Theirs is below HALF of 1% so perplexing as to why they continue to eliminate programs.

  2. This is really fantastic analysis: detailed, thorough and bracketed by real insider knowledge of what the result of the policy changes will end up being. Great job Rob.
    One point about an insurer. Insurers are not lenders, the truth is even after all the stress tests and credit risk studies lenders have a quarter to quarter focus. Insurers think more about what could happen two years or five years from now.
    I am not Garth Turner but when a 850 square foot house off the Danforth in Toronto sells north of a million dollars, if I was an insurer I would start to think about risk mitigation.

  3. Yes – let’s operate a multi-million dollar organization on a rule of thumb that some anonymous person made up…..

  4. Total insurance in force= $557.1 B, times 7%,
    the % of loans greater than 90% LTV= $39 billion exposure….Ottawa’s total proposed deficit for 2014-15 is $2.9 billion.
    Ottawa…. we have a problem
    A perfect storm of rising unemployment & even a small decrease in housing values would be catastrophic.
    What is glaringly obvious by its exclusion is the lack of risk exposure by region. Where are the numbers for greater Toronto & Vancouver? Excluding those numbers is statistically akin to excluding the smokers from a list of those with lung cancer!
    As for $18 Billion “profit”….please. A government agency making a profit is the tax payer being hosed twice.

  5. Mr. Butler, allow me to echo your compliments to Rob on another outstanding article. Thorough and informative.
    However, I am a little confused regarding the second part of your post regarding risk mitigation. Firstly, I am not aware of any correlation between the level of underwriting risk and sale price, all other relevant factors being equal.
    Secondly, as I’m sure you are aware, as of Jan. 1st 2014,a new risk fee of 3.25% of premiums written and 10 basis points (0.10%) on all new
    portfolio insurance was imposed on CMHC. Shortly thereafter (May 1st), CMHC increased its premiums by 15%, presumably to help offset the costs of said risk fee.

  6. So, who is benefitting from this “false” fear?
    Its been 6 years since market disruption…this false fear is like waiting for the big earthquake to happen in the Pacific Northwest!
    Huge opportunity for CG and Genworth…will they step up?
    Huge opportunity for credit unions…..oh wait, most of them are non banks wanna be banks but don’t want you to think they are like the banks!
    Huge opportunity for ET, HT et al and the privates

  7. I have to agree that seeing some of these CMHC stats broken down both regionally and by date of origination (as mentioned in the original post) would be very useful.
    One would think that the regional aspect would be particularly important, given the huge variation in price-to-income levels around the country.
    Working from 2011 median household income data (StatsCan) and January 2014 average price data from the real-estate boards, ratios of average sale price to median household income are 8.8 (Vancouver), 7.6 (Toronto), 4.9 (Calgary), 3.6 (Ottawa).
    Comparing more recent data, and using median prices rather than averages, would both be preferable, but I think the trends here are informative.
    I would presume that the CMHC has this data, as it would be important from an insurance perspective, but chooses not to publish it for some reason.

  8. Mr. O’Gorman. While I agree with your ability to calculate the amount of insurance in force with regards to that which is greater than 90% LTV, I take issue with your assessment of actual “exposure”. Your description of the risk is greatly overstated.
    A $39B loss would occur only under the following conditions: 1) Every property with an LTV of 90% or greater actually defaults. 2) Every property that defaults realizes zero recovery from foreclosure, which would require that real estate values fall close to zero.
    As for the $18B profit realized by CMHC, I applaud it. I fail to see how taxpayers are getting hosed once, let alone twice. CMHC premiums are paid by specific borrowers, not taxpayers in general. Your assertion in this regard requires further explanation.

  9. @David
    What would you look for in the Toronto and Vancouver numbers?
    Are Toronto and Vancouver homeowners more likely to default?
    If so, how much more likely?

  10. To Appraiser
    a) Agreed that would mean that all loans >90%LTV would be total losses. Although the deals may not initially go into default, they could easily be

  11. Writing less new business is less PROFITABLE but not taking on new risk at the top of a housing market is a way to avoid some future losses.

  12. So lets have the private insurers take up the slack and all of their profits can be reinvested elsewhere as opposed to returned to the government.
    It is such a misinformed public that actually thinks reducing CMHC – while encouraging private insurers to get bigger – is somehow good for Canadians.
    Genworth Financial Canada is still owned 57.5% by its US parent, which means everytime it issues a dividend that money is going to the US. Typical Canadian attitude to dismantle a Canadian institution for the benefit of our US friends.

  13. to rhr
    Don’t put words in my mouth.I am a strong supporter of the original CMHC concept.However it has gone to hell in a hand basket in recent years. In the past CMHC has done fantastic things to stimulate a near moribund construction industry (1992), stabilize a major residential downturn in Alberta (1979). It insured mortgages on affordable homes, not Mc Mansions. It kept prepayment penalties on insured mortgages to a max of three months interest. CMHC has made it possible for people in Ecum Secum N.S. to Inuvik, NWT to have access to mortgage default insurance to help them get reasonably priced home financing. It brought in MBS lending.
    In my opinion CMHC has gone downhill drastically in the last 15 or so years, losing its focus on “Helping to House Canadians” & changing to “Let’s Help the Banks Stuff their Pockets”. It took orders from the banks instead of the other way around. Insuring mortgages without an adequate appraisal process, consequently aiding in innumerable “boost & flip ” frauds, which lead to higher property taxes. Following, not leading, the competition in allowing IRD penalties on insured loans. Now whether these are the result of CMHC’s executive leadership(or lack thereof) or inappropriate interference by its political masters, is to be determined. As the agency responsible for implementing the fed’s housing policy it’s done a less than stellar job in recent years.
    There is a real need in Canada for a well run, government owned,mortgage default insurance company. What we have is complacent bureaucracy, that is not filling the real housing needs of Canadians.

  14. Seems to me that this argument could be used to advocate for the Canadian government to get into or stay in any number of profitable businesses.

  15. What other industry in Canada has explicit government backing for private companies to the extent the Department of Finance provides it?
    Is the Ontario Teachers Pension fund backing the insured program at Canada Guaranty?
    My point is that the general public and a surprising number of industry participants associate private mortgage insurers with reduced risk for taxpayers, when I would argue the exact opposite is true.

  16. Good post!
    Yet you fail to recognize that the government has taken steps to rein in this trend in recent years.
    1) They have reduced and now eliminated the ability to refinance a home above the 80% LTV mark;
    2) They have imposed a maximum cap on not insuring ANY home purchase with a purchase price above $1.0MM. While this still might seem extreme to a taxpayer in Bathurst, NB, Timmins, ON, or Prince Albert, SK, this is now basically nothing more than a typical 2500 sq ft home in any one of Vancouver, Calgary, Toronto or Montreal! These are not “MC Mansions” by any stretch!
    3) CMHC no longer insures investment (rental) properties with less than 20% down.
    4) They have returned to a maximum 25 year amortization period, down from 40 years to 35 years to 30 years!
    5) They have required debt servicing qualification based on a 5 year Bank of Canada rate, versus the massively discounted fixed and/or variable rates available in the market over the past 4-5 years, to at least account for fairly significant interest rate increases over the next 5 years.
    6) Just last fall, they implemented much tighter income requirements for insured mortgages, both from a documentation stand point and tightening the confirmation requirements for variable incomes!
    7) Just recently, they have eliminated their “stated income” program, thereby requiring self-employed customers to actually prove their incomes.
    8) They have also eliminated their “second-home” program, recognizing that home ownership is about owning one home, not multiple homes!
    I am not an employee of CMHC or any federal government agency or institution, but it is difficult to support your argument that either CMHC or the government has been nothing but a “complacent bureaucracy” over the last 4-5 years! In my opinion, they have been proactive in introducing incremental changes in the underwriting process that reduces the exposure of all Canadians, while at the same time balancing the tight rope and not triggering a catastrophic collapse of property values!

  17. Every bone you pick here is immaterial and debatable to say the least. Yes, some CMHC policies have been ill advised in hindsight, but none of its policies, even in aggregate, have added so much risk to the system as to outweigh the benefits CMHC provides. Never forget where we’d would be without CMHC keeping the mortgage market competitive and giving ALL Canadians housing options.

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