CMHC sees amount of mortgages it insures shrinking this year amid tighter housing market rules
Posted on May 15, 2014 in Mortgage Market Updates and NewsGarry Marr
The nation’s largest provider of mortgage default insurance keeps shrinking and that seems to be okay with the people now running Canada Mortgage and Housing Corp.
CMHC, the Crown corporation that still controls the majority of the insurance market in Canada, Monday released its annual report for 2013 and its forecast for 2014 which show a business contracting slowly.
It also shows the Ottawa-based agency is doing more and more to tighten its books and create a lower risk profile, now that it is being run by former investment bankers rather than bureaucrats.
The agency said this year that its in-force insurance portfolio will drop to $545-billion after hitting $557-billion in 2013. The year before it was $566-billion.
Rob McLister, editor of Canadian Mortgage Trends, noted the number of units CMHC insures annually has plunged 67% from its peak in 2009.
He said that’s a direct result of the finance department’s actions to slow the housing market and offload mortgage risk to the private sector.
“CMHC will insure fewer and fewer mortgages in coming years. Don’t be surprised if its market share drops below 50%, given time. This slow retreat will directly benefit its private competitors,” said Mr. McLister, in a email. “It may also (further) curb access to low-cost government backed mortgage funding. That could add modest upward pressure in mortgage costs for consumers.”
Dominion Bond Rating Service says the largest private player, Genworth Canada, has about 30% of the mortgage default insurance market while Canada Guaranty, a more recent entrant, is at about 10% to 12%. That would leave CMHC with just 60% of the market after some estimates once had them as high as 80%.
The Financial Post reported this month that some of the policy changes being brought out from CMHC were being directed by the department of finance which would like to see a reduction in Ottawa’s exposure to the mortgage market.
CMHC said in April it would get out of the business of insuring second homes and require self-employed Canadians to have third-party income validation. Earlier in the year it announced it was hiking mortgage insurance premiums across the board.
CMHC’s 2013 Annual Report details how CMHC’s mortgage loan insurance and securitization activities have promoted the stability of the housing market and the financial system,” said Evan Siddall, chief executive of CMHC, in a statement. “The quality of the loans in our insured portfolio underscores our ongoing commitment to robust risk management practices that help support market discipline in mortgage lending, while minimizing taxpayer exposure to the housing sector.”
One of the drivers for the drop in CMHC’s business is government restrictions that limit how much portfolio insurance — low ratio loans — the Crown corporation can take on. The allocation limit for new portfolio business will shrink this year to $9-billion from $11-billion.
The agency says mortgage repayments are now more than offsetting new insurance being written. CMHC also said of people with fixed mortgage rates, one third are ahead of scheduled amortization by at least one extra mortgage payment per year.
The agency says average borrower equity in its portfolio is stable at 45%. It says it paid out $436-million in claims last year, a $96-million decrease or 18% decline from a year earlier.
Arrears also continue to decline and were down to 0.34% last year, a 0.01 point decrease from 2012.
Finn Poschmann, vice-president of research at the C.D. Howe Institute, said it was “gratifying” to see CMHC emphasizing on managing downside risk so prominently in its annual report.
“On the financial side, the reported growth in capital is significant. With a sound capital base and an insurance book of a more manageable size, the financial arm of CMHC is starting to look more like a valuable financial asset,” said Mr. Poschmann, in an email.
He said the annual report is clear in a number of places that the agency has been told to reduce and better manage its risks and avoid expanding the taxpayer-backed role. Ottawa backs CMHC-insured loans 100%.
“In other words, slow the growth of the CMHC-insured portion of the market, let the uninsured market do more of the funding, and leave space for the private insurers pick up more of the market that suits their risk profiles,” said Mr. Poschmann.
The Crown corporation said in 2013, mortgage loan insurance and securitization activities accounted for $1.7-billion of net income. Over the past decade CMHC has contributed $18-billion to the government.