CMHC goes from insuring 90% of new mortgages to only 50% ? and that's as low as it plans to go

  5/29/2015 |   SHARE
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Canada’s national housing agency says it’s now insuring a record low 50 per cent of new residential mortgages, and it doesn’t intend to let it drop any further.

Canada Mortgage & Housing Corp. Chief Executive Officer Evan Siddall said that after years of cutting its share to reduce taxpayer risk to the $1.2 trillion mortgage market, the agency plans to hold firm. CMHC’s stake of the new mortgage-insurance business has dropped from about 90 per cent during the 2008 financial crisis, and a pre-crisis low of 57 per cent.

“We’re very comfortable with our market share around 50 per cent,” Siddall said at Bloomberg’s Toronto office May 22. “It’s important for us to have a substantial presence in the marketplace so that we can give access and information to Canadians, we can give good policy advice to government” and can act as a shock absorber in case of a financial crisis.

The agency insured 175,169 new home loans last year worth $41.7 billion, which comprised 54 per cent of the market and that’s dropped to about 50 per cent so far this year.

The vow to retain half the market may limit growth of private rivals such as Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co. Shares of Genworth MI, part-owned by Richmond, Virginia-based Genworth Financial Inc., have risen 36 per cent in the past two years as its market-share rose, compared with a 19 per cent gain in the broader Standard & Poor’s/TSX Composite Index.

Legal Cap

CMHC had $543 billion of mortgage insurance in-force, or total mortgages it insures, at the end of 2014, according to the agency’s annual report. That’s just below its legal cap of $600 billion and down 4.1 per cent from 2012.

Residential mortgage credit at banks and non-banks totalled $1.2 trillion as of March, according to figures from the Bank of Canada.

Genworth MI had $365 billion in insured loans as of March 31, according to financial documents. Canada Guarantee, co-owned by the Ontario Teachers’ Pension Plan, is closely held and doesn’t disclose insurance in-force.

Brian Hurley, executive chairman of Genworth MI, said last year he expected CMHC to command only a third of the market in the future.

CMHC is “still going to have a third of the market and two-thirds of the market can go to the private sector,” Hurley, then CEO of Genworth MI, said at a Sept. 4 financial summit. “How are they going to get there? That’s a good question. One easy path could be the limiting they’ve done over the last few years.”

‘We’re Comfortable’

Current Genworth MI CEO Stuart Levings said the company offers value above the government-backed insurance agency.

“We believe we are the mortgage insurer of choice — when a lender has a choice they pick Genworth,” Levings said at Bloomberg’s Toronto office. “It’s admirable for a competitor to say ‘I’m going to maintain a certain share level.’ I respect that. We as a competitor will continue to fight for market share in a responsible prudent, manner.”

“Canada Guaranty has experienced significant growth over the last several years by increasing our customer base and deepening current lender relationships,” Mary Putnam, spokeswoman from Canada Guaranty said in an e-mail statement. “We are well positioned for increased market share.”

CMHC would boost marketing, customer-service efforts, and perhaps lower premiums, if CMHC’s share of the market slid much below 50 per cent, Siddall said.

Gains Tougher

“We’re comfortable for two reasons at our all-time low market share: we have vigorous, healthy competitors,” Siddall said. “And because we’ve adjusted to having that market share and managing it.”

Siddall, previously an adviser to former Bank of Canada Governor Mark Carney, spent more than a decade in the financial sector at firms including Goldman Sachs Group Inc. and Bank of Montreal.

CMHC can hold onto its 50 per cent stake “pretty easily,” Paul Holden, a Toronto-based analyst at Canadian Imperial Bank of Commerce who covers Genworth MI, said by phone Tuesday. “The implication on Genworth is probably that future market-share gains are going to be a lot tougher to come by.”

Three of the eight analysts who track Genworth MI rate it a buy and five say hold. The average 12-month stock price target is $39.50, 18 per cent above its closing price of $33.60 on Wednesday.

The company reported profit rose 13 per cent to $107 million in the first quarter from a year earlier as premiums grew 55 per cent to $130 million.

Shorter Amortization

CMHC is 100 per cent backstopped by the government so as arrears arose during the 2008 financial crisis, lenders including Royal Bank of Canada and Toronto-Dominion Bank, turned to the agency to insure more mortgages. Genworth MI is 90 per cent guaranteed by the government in cases of default.

The federal government has actively sought to limit CMHC’s role as home prices have surged in Canada. Toronto home prices jumped 48 per cent to an average $545,400 in April from the same month in 2008. In Vancouver, they rallied 19 per cent to $673,000 over the same period.

The department of finance made CMHC insurance unavailable to homes above $1 million, lowered the maximum amount homeowners can borrow against the value of their homes to 80 per cent and cut maximum mortgage amortization periods several times to 25 years. A mortgage with less than a 20 per cent downpayment must be insured in Canada.

Risk Sharing

CMHC itself increased mortgage-insurance premiums by 15 per cent last year and this year raised premiums on mortgages with less than 10 per cent down, with the change coming into force June 1. Oakville, Ontario-based Genworth MI followed suit with its own premium increase. CMHC also no longer insures second homes or condominium construction financing.

CMHC is speaking with the government on a new risk-sharing model, Siddall said. The department of finance is leading talks with banks, and the housing agency and other federal departments are supporting with policy and research, Siddall said.

“I’ve talked about risk sharing with lenders as a sound idea and so has the Minister of Finance, and that work’s still going on,” Siddall said, referring to Joe Oliver. “It could have different design features.” Two possible options are a deductible structure where lenders take the first hit if a loan goes sour or one where the loss is shared, Siddall said.

CMHC doesn’t expect Canada’s hot housing market to suffer a sharp correction, Siddall said.

That’s because CMHC regularly conducts stress tests that include catastrophic events such as global economic deflation and a U.S.-style housing crash, modelling the impact of a 5 per cent rise in unemployment and a 30 per cent drop in home prices. Even in those worst-case scenarios, the agency would have enough capital to weather them, Siddall said.

“Markets go up and markets go down and we’re in a period right now where markets are a little up,” Siddall said. “We don’t see the conditions that could cause it to have a sharp correction.”

Bloomberg News

Home Buyers, Mortgage Insurance, Real Estate Market