CMHC Hiking Insurance Premiums



Homebuyers with less than 20% down are going to pay more.

CMHC is hiking mortgage insurance rates for the third time in three years. Premiums are jumping up to 0.65 percentage points on the highest LTV mortgages, effective March 17, 2017. Here’s the new premium table:

But high-ratio hikes aren’t the only story. Premiums on mortgages between 65.01 and 80% LTV are soaring too.

At 80% LTV, the premium is almost doubling to 2.40%. That will push up interest rates among lenders who currently pay this premium for their customers in order to securitize the mortgage.

CMHC had a conference call this morning about the increases. Here were some takeaways:

  • It says these premium hikes are due mainly to OSFI’s capital requirement changes, which took effect January 1.
  • OSFI’s new capital requirements include a formula based on LTV, credit score, location and other things. Oddly, this formula disproportionately targets (increases the costs for) mortgages in the conservative 65.01 to 80% LTV bracket.
  • Bulk insurance premiums have increased similar to the low-ratio transactional premiums, says CMHC.
  • The insurer says it has communicated bulk pricing criteria to lenders (although the securitizing lenders I’ve spoken with cite considerable obscurity in bulk pricing, which has led many of them to transactionally insure their mortgages instead).
  • Roughly two-thirds of CMHC’s business is in the 95% LTV category, said CMHC, and about 4% of its transactional insurance is used for low-ratio customers.

Steven Mennill, Senior Vice-President, Insurance, said that CMHC is “Not doing this to affect housing markets…” and doesn’t think it will have a significant effect on competition.

Mortgage finance companies would vehemently disagree. Higher premiums have already limited competition in the low-ratio market where MFCs must charge rates that are up to ¼ point higher on 80% LTV deals (compared to last fall).

Big banks, which don’t need to rely on insured mortgages for securitization purposes, now have more pricing power than ever—at least since the dawn of NHA-MBS. And no one should blame banks. They’re not writing these rules. But from a consumer standpoint, Joe Borrower is getting the shaft, which leads us to the legislated purpose of the National Housing Act:

“The purpose of this Act, in relation to financing for housing, is to promote housing affordability and choice, to facilitate access to, and competition and efficiency in the provision of, housing finance, to protect the availability of adequate funding for housing at low cost, and generally to contribute to the well-being of the housing sector in the national economy.” (emphasis ours)

The recent decisions by the Department of Finance, OSFI and CMHC appear to twist or flout these essential provisions of the National Housing Act.

Policymakers argue that such measures are warranted for the stability of the market. That’s a whole other debate, one that’s not well supported by any publicly available mortgage risk data (default rates, overall credit quality, equity levels, etc.).

Suffice it to say, Canada’s mortgage industry never required an unlevel competitive playing field to create stability. But that’s what these new premiums have now given us.

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Comments

  1. Comment avatar

    Reed Harris    

    Good thing current homeowners will never pay a cent to CMHC, since refinances are completely VERBOTEN.

    New (young) buyers are seeing the cards get progressively stacked against them, one small cut at a time. No wonder they are cynical.

     
  2. Comment avatar

    Aaron    

    This is not good for the broker channel. This new rule change only gives more business to the banks and increases the competitiveness among brokers.

     
  3. Comment avatar

    Ryan Kirwan    

    Hey Rob,

    I’d be interested to see what the costs are for CMHC when mortgage default arises.

    When a Lender makes a claim to CMHC, what is the Bank on the hook for and what does the Mortgage Default Insurance Premiums cover?

    Some expenses off the top of my head would include legal fees, property maintenance costs, appraisal costs and realtor commissions. Anything else? I’m hoping the bank doesn’t get to recoup the lost interest costs, as it was the one who brought the deal to CMHC.

    Maybe your next Post? LOL!

    Thanks!

     
  4. Comment avatar

    Ray Russo    

    This was an informative article, thanks Robert. I feel now, more than ever, people considering to make a purchase in the GTA need to be more diligent. People need to entrust the right professionals that have the foresight to navigate around these challenging times. Before you make a large investment, you need to know your cash flow, have a savings plan, and talk to your pro’s in advance to properly prepare for a purchase in the GTA.

     
  5. Comment avatar

    Curious UWer    

    Did GE and CG follow suit?

     

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