Evan Siddall, CEO of CMHC, recently released a letter to CMHC-approved Lenders that said, in part, "There is a dark economic underbelly to this business that I want to expose”.
He may be referring to mortgages the other two insurers -- Genworth and Canada Guaranty – continue to approve. Why should that be an issue? Well, on July 1, CMHC changed its underwriting guidelines, making it more difficult for home buyers to qualify for a mortgage.
It appears that Siddall may not be happy that the other insurers didn’t follow their lead, as they have done in the past, and it looks as if lenders have started using CMHC less often.
Here’s a quick review of mortgage default insurance. Anyone with less than a 20% down payment, and borrowing from a financial institution regulated by the Bank Act, must purchase mortgage default insurance. Those with more than 20% do not have to buy that insurance but lenders have been purchasing it on behalf of these clients because the loans were more easily securitized with federal government backing.
CMHC, which controls the bulk of the mortgage insurance market, is 100% backed by the federal government. The two private insurers, Canada Guaranty and Genworth Financial, control the rest of the market and are 90% backed by Ottawa. Their limit is $350-billion each. This gives CMHC a slight advantage over private mortgage insurers.
Here’s some CMHC history: CMHC was created in 1946, and was known as the Central Mortgage and Housing Corp. The mandate of CMHC was to administer the National Housing Act and the Home Improvement Loans Guarantee Act. Essentially it was created to help soldiers returning home from the war access affordable mortgages.
By the 1950s, CMHC was in the affordable public housing business. The agency’s social policy portfolio expanded, with assisted housing and assisted home-ownership programs, on-reserve housing, and green energy and conservation programs. CMHC also grew its mortgage loan insurance program by requiring those with low down payments to purchase mortgage insurance.
Taxpayers have often raised concerns that backing mortgage insurers is risky business and can end up costing them as it did in 1979 when CMHC didn’t have enough in reserve to cover claims and needed government assistance. Since then, CMHC increased premiums and have been more cautious about maintaining its reserves.
It seems that Siddall’s message may not be aligned with the signals from OSFI, the Department of Finance and the Bank of Canada. All of them are using language to instill confidence and encourage credit. For example, the Bank of Canada announced recently, the likelihood of rates remaining low for a significant period of time, which encourages mortgage credit.
Also, most mortgage lenders are large, well-managed companies that have assessed the risk against their performance, internal capabilities, investor appetites and market opportunity, which make good business sense.
There are, of course, valid concerns about increasing consumer debt loads of Canadians, and it’s important that Siddall share their expertise and knowledge with consumers.
However, Siddall’s letter could be read as anti-competitive. He is asking his customers to stop sending as much business to the private Insurers and redirect some of that business back to CMHC. "We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit …. We require your support to prevent further erosion of our market presence,” he wrote.
This doesn’t really help consumers.
Oversight is vital. Having strong regulations and guidelines are necessary. That said, it’s probably not a good idea to tell lenders how to run their businesses.
The mortgage broker value proposition is predicated on choice, product breadth and knowledge, and can be a great model for mortgage insurers. Competition leads to better outcomes.
We should continue to monitor key indices such as debt ratios, unemployment and arrears to ensure we maintain prudent lending practices. This, however, may not be the time for rhetoric and fear-mongering.
Owning a home should remain an aspirational goal for all Canadians.