CMHC funding cap means changes coming

Monday, February 27, 2012

The Canada Mortgage and Housing Corporation (CMHC) recently announced that it was within 10% of reaching its mortgage $600 billion funding cap. A number of lenders immediately reacted by restricting or eliminating their Business for Self and Stated Income programs. A few also tightened their guidelines for New to Canada programs. It's not yet known how this will impact the housing market in general but for now, the private-sector mortgage insurers - namely Genworth and Canada Guaranty may get a boost. These two companies have oft-complained that the government has given CMHC an unfair advantage by guaranteeing a larger proportion of its insurance. CMHC's insurance is backed 100% by the government, while private sector mortgage insurance is only 90% backed. "The result of the CMHC announcement means an increased demand for private mortgage insurance," said Andy Charles, president and CEO of Canada Guaranty in an interview with TMG. "We have not yet reached our cap and I assume that the current private mortgage insurers will realize a greater share of the market." In a conference call with the Globe and Mail on Friday, February 3rd, Genworth CEO Brian Hurley brought up CMHC's limit, and said "I just want to clarify that our business has plenty of capacity for 2012 and beyond. There is plenty of runway for both entities in the private sector to grow with multiple years of production opportunity ahead of us." Homebuyers who put down less than 20% are required to pay for mortgage default insurance either through CMHC, Genworth or Canada Guaranty.  However, the banks may also take out mortgage default insurance for borrowers who have down payments greater than 20%. This allows banks to more easily bundle the mortgages and raise money on the capital markets with covered bonds backed by the mortgages. For Sheila Bianchi, a TMG broker working in Nova Scotia, the recent CMHC announcement is not material. "We're just going back to the way we did business 10 years ago," she said. "CMHC's funding cap is a result of bulk insuring conventional mortgages so now clients have to pay. Business for Self and Stated Income programs are being cut back and perhaps in some cases they should." Morgan Vaughn, Lending Solutions Manager for TMG the Mortgage Group Ontario hasn't seen an increase in declines since the CMHC announcement but says there will definitely be changes coming for certain borrowers. "It's interesting that the biggest contribution to CMHC reaching its cap is bulk insurance so that lenders need to have less on reserve" he said. "So what we're starting to see are lenders putting the onus on borrowers to pay the equivalent to the default insurance fee upfront." Vaughn sees two possible scenarios: the government will increase the cap and/or lenders will get rid of their less risky programs such as Stated Income programs. Ottawa did increase its cap in 2008 from $450 billion to $600 billion as the global financial crisis led banks to increase focus on their cash reserves. Vaughn believes it will cost more for certain types of borrowers. "In addition to paying fees, they may be looking at higher down payments and even higher interest rates. Over the last few years at this time we've had changes to mortgage rules and there are more to come," he said. More worrisome for Vaughn is that any more changes to the mortgage rules will slow the housing market, which could mean job losses, which would have an impact on defaults and the economy.  Boris Bozic, president and CEO at Merix Finanacial shares Vaughn's concern about the potential for slowing the housing market and where that could lead. "The government has to look closely at the impact on employment when it decides to tighten the rules," he said. "The housing industry makes a significant contribution to the GDP and to the country's overall economic health. As well, the spinoffs to other industries such as retailers like Home Depot are enormous." Bozic also believes that there are definite changes coming to the way lenders conduct their businesses. "We were all surprised at CMHC's announcement and we have evidence of lenders pulling certain programs but we don't know for how long. Clearly the Stated Income and Business for Self programs will be impacted, and that's interesting because the Business for Self mortgages is one of the safest portfolios." he said. "The government could raise the ceiling - having a sovereign guarantee is nice - however, that raises questions. How much do we want to fund? Do we price the insurance higher? Do we tighten up the rules? We have to be careful because we don't want to slow the market too much." In the short term, the private insurers will start getting more business however Bozic said they also have ceiling issues. "We have to take a closer look at the funding caps and determine if they are appropriate for today's market and if there is a more equitable way of providing capital relief for lenders." Finance Minister Jim Flaherty has not specifically stated that he won't increase the limit, but he has signalled that he wants CMHC to figure out a way to operate within it for now. More study of the impacts of these decisions is what's needed according to Jane Londerville, Associate Professor at the University of Guelph who teaches real estate financing and has written numerous papers on the subject. She is also an advocate for reexamining the role of CMHC. "Instead of making knee-jerk decisions, we need to look at the whole system of mortgage financing and the role of CMHC needs close examination," she said. "Banks are insuring things they aren't required to insure for capital relief. We don't know what the impact will be with any of the changes. If we studied these issues it may be that nothing needs to be changed or that certain areas just need tweaking." Londerville said that these changes in criteria for lending started as a reaction to the U.S. housing crisis. "Our sub-prime market was not the same, so we don't really know if we needed to tighten our criteria at all."