OSFI is tightening mortgage lending again. But this time, it’ll be less impactful for consumers.
The banking regulator issued its final Mortgage Insurer Capital Adequacy Test (MICAT) guideline last week. MICAT is the “framework for assessing the capital adequacy of mortgage insurance companies,” OSFI says, and it takes effect January 1, 2019.
According to National Bank Financial (NBF) analysts, insurers’ “base total asset requirement increases by 5% relative to current levels (which remains based on loan-to-value, credit score, outstanding insured balance and remaining amortization).” This applies to new insurance written.
Effect on Borrowers
We asked OSFI whether the new MICAT guideline may impact insurance premiums. It responded, “Overall, OSFI does not expect the new guideline to have a material impact on mortgage insurers.”
However, sometimes policy-makers’ idea of “material” is quite different from the industry’s. Regulators tend to downplay most rule changes, so we dug into this further.
It seems that there’s a fair possibility that consumers could see default insurance premiums rise in the new year because of this guideline.
Genworth Canada tells us that “if one reviews the history of recent capital increases, rational pricing responses have generally followed.”
NBF’s analyst made a more direct prediction: “We believe [CMHC and Genworth Canada] will offset the impact with increased pricing commensurate with the increased capital…”
All three insurers will have reviewed any 2019 premium hikes with OSFI by late fall. The last time OSFI boosted capital requirements on new mortgage insurance (the announcement was in 2016), the insurers then announced premium hikes in January 2017. One might expect similar timelines this time around.
But How Big?
Given OSFI’s slightly tighter capital rules, a pricing increase on transactional premiums is a distinct possibility. But it won’t be anything like the last increase in 2017.
Back then, insurers hiked transactional premiums 18-20% on average, Genworth says. This time, it’s not unreasonable to assume borrower-paid premiums might only jump 5% or less, give or take. Although, that’s not guaranteed.
On the portfolio (bulk) insurance side, it’s harder to say how much premiums will increase, for a number of reasons:
- Bulk premiums depend on the lender and mortgage pool (risk) characteristics.
- On an absolute basis, the premiums are much different when comparing transactional insurance to bulk insurance. Year-to-date, Genworth’s average transactional premium is about 3.50%, for example. On bulk insurance, it’s approximately 50bps.
- Bulk pricing has already increased significantly after the last OSFI guideline.
- Credit scores are higher and loan-to-values are lower on bulk insurance.
- Hiking bulk pricing has fewer political ramifications than hiking customer-paid transactional insurance.
- Lenders, who rely on bulk insurance for funding and pay the insurance premiums, are somewhat less price sensitive than consumers.
It is likely that private insurers boost bulk pricing at least somewhat, and investors will likely expect it. Unlike transactional insurance (where privates are price-takers due to CMHC’s dominance), on bulk insurance privates are price-makers (since CMHC is less active in that market).
On low-ratio securitized mortgages (which come with some of the lowest interest rates in Canada), the consumer impact should be modest if premiums do go up. At least we’d hope so.
For high-ratio mortgages, it’s possible we could see premiums jump anywhere from 10 to 30 bps on 5%-down financing. In other words, 95%-LTV borrowers could pay roughly 4.10% to 4.30% of their loan amount in 2019, versus 4.00% today.
That’s not going to dissuade many people from buying a house, but it does saddle homebuyers with yet another cost burden. And it begs the question as to why.
Why, after the gigantic premium increase last year, do consumers and the financial system need yet another cost increase? Regulatory capital levels keep rising as loss ratios keep falling and underwriting keeps getting tighter. Every stakeholder should be questioning OSFI about why current capital levels, which many industry insiders already deem as actuarial and regulatory overkill, are not sufficient.
For every dollar a consumer pays into a default insurer’s capital fund, it’s one less dollar they can spend on job-creating consumption, and it’s one more dollar they must earn to retire debt-free.
Sidebar: On a positive note (for mortgage insurers), OSFI says it will no longer require insurers to use updated credit scores in calculating capital requirements.
“Right now, the insurers need to guess how their homeowners’ credit ratings will change over time,” said Dan Eisner, CEO of True North Mortgage and Think Financial. “That is hard. The change will take away that uncertainty.”
Borrower credit scores tend to fall immediately after closing their mortgage and then climb again over the life of the mortgage.
So If I’m counting correctly this would make the 4th price increase in less than 5 years with the cumulative premium increase now approaching 50%. This is happening despite the big improvement in arrears rates, credit scores and other key metrics.
More interesting is where the extra fees are going.
ITEM ONE: on June 29th, 2017 CMHC issued a special dividend of $4 billion to the federal government mere months after the last 21% rate increase.
ITEM TWO: on August 1st, 2018 CEO Stuart Levings confirmed that once OSFI finalizes the 2019 capital formula they intend to distribute more than $33 million to shareholders. Apparently Genworth has a capital surplus.
Let’s call excessive insurance premiums what they are. Another liberal tax.
Well said KD & Summer – you took the words out of my mouth. And thank you for the article Rob!
As Brokers, let’s make sure our clients are aware of these facts, and to remember this come October 2019.
It is another good post in a very long history of being the most consistently insightful and intelligent commentator on our industry. One quick thought. The chances of getting anyone in the general public to understand how these changes effect their cost of borrowing is next to impossible. The politics of complex financial issues is hard. It takes massive media campaigns to move it an inch.