Last week CMHC eliminated some more mortgage insurance offerings. Effective July 31, for example, it will no longer insure amortizations over 25-years or $1 million+ properties with low-ratio transactional insurance. (More details here)
Canada’s largest insurer says this was a business decision. But most business decisions maximize profit and/or significantly reduce risk. These changes don’t necessarily do that, making it appear more like a political decision.
That seems especially true given that CMHC’s low-ratio insurance changes affect just 3% of its total homeowner insurance volume. Moreover, these changes apply to low-risk mortgages where people have 20%+ equity on the line. Surely CMHC could devise actuarially sound pricing and make these programs even more profitable than they already are, as opposed to cutting them altogether.
The good news is that this is the end of CMHC’s internal mortgage insurance review. That suggests there won’t be any more major mortgage insurance rule changes this year – unless they come directly from the Department of Finance or OSFI (OSFI is still finalizing B-21).
A few related updates:
- Genworth says it is not changing any parameters of its low-ratio transactional business following CMHC’s announcement.
- Genworth says 5-10% of its revenue comes from low-ratio transactional business.
- We understand Canada Guaranty also has no current plans to follow CMHC's move.
- Despite media reports stating otherwise, CMHC is still insuring properties over $1 million, using portfolio (bulk) insurance.
- Amortizations up to 40 years also continue to be eligible for portfolio insurance. But we’re not aware of any prime lenders doing over 35 years.
- CMHC has now imposed maximum debt service ratios on low-ratio transactional insurance.
- The low-ratio changes announced by CMHC do not apply to portfolio insurance. That’s because CMHC’s portfolio insurance product was reviewed in 2013 and adjustments have already been made and announced (effective January 2014).
- The end of transactional insurance for amortizations over 25 years will hurt some small lenders who use this insurance to securitize those products. Those lenders must now turn to a private insurer. Genworth says “it's too soon to predict” the resulting impact this may create on its volumes.
Rob McLister, CMT (email)
Great article Rob, and I couldn’t agree more with your assessment that the recent million dollar threshold changes announced by CMHC are purely political.
In fact there appears to be no empirical evidence of any kind to justify the $1M limits, other than the belief that it sounds like a big number to the general public and therefore must be somehow prudent.
As you’ve stated in this article and previously, the amount of insurance in force affected by these changes is negligible. The theory of course being that very few million dollar sales were high ratio to begin with. As I recall, less than 1% of CMHC business was affected.
To further illustrate my point allow me to present some emprical evidence and research of my own. I am an appraiser as well as a registered real estate broker and a member of the Toronto Real Estate Board. As such I have access to MLS data and statistics.
Since the implementation of the million dollar sale price limit for insured mortgages, the number of sales over $1M in the GTA has increased 20% for freehold properties and 25% for condominiums.
Perhaps more remarkable is the percentage increase in sales of properties over $1M over the past 2 years. In 2012, 5% of sales on TREB were in excess of $1M. In 2013, when the new rule took effect, the number increased to 7%. The latest stats for the month of May indicate that fully 9% of total sales on TREB were over $1M! Clearly, the lack of availabilty of CMHC insurance in this price range is irrelevant.
Pure politics. You bet.
Thanks Appraiser. Interesting stats.
Maybe someday someone will have the political cojones to start a dialog around indexing the $1 million insurance cap in major cities. Barring that, CMHC’s mandate should officially be changed to remove references to helping “all Canadians” “access a wide variety” of housing options. That clearly don’t apply to hard working Canadians trying to buy a single family house in Toronto or Vancouver.