Good Morning,

 

I hope you enjoyed your weekend! 

 

 

Well there have been a lot of changes with CMHC in the last few weeks,.  CMHC, in my view point, is slowly looking to turn to privatization.  The government has expressed time and time again that they want to limit the increase of taxpayer-backed mortgage insurance.  They don’t know where the housing market is going but if there was a chance of a collapse (highly unlikely) this would mitigate the public tax dollar exposure.

 

 

 

CMHC has increased insurance premiums (effective May 1st) and removed stated income and self employed products (effective May 30th).  Details below:

 

 

 

 

 

Loan-to-Value Ratio

 

 

Standard Premiums

 

            (Current)

 

 

      Standard Premiums

 

   (Effective May 1, 2014)

 

 

Up to and including 65%

 

 

0.50%

 

 

0.60%

 

 

Up to and including 75%

 

 

0.65%

 

 

0.75%

 

 

Up to and including 80%

 

 

1.00%

 

 

1.25%

 

 

Up to and including 85%

 

 

1.75%

 

 

1.80%

 

 

Up to and including 90%

 

 

2.00%

 

 

2.40%

 

 

Up to and including 95%

 

 

2.75%

 

 

3.15%

 

 

 

 

 

CMHC announcing that it would stop insuring both second homes and self-employed borrowers without traditional proof of income.

 

Canadians have used these two programs for the last nine and seven years respectively.

 

But these are not the only adjustments CMHC has in store. It put the market on notice that “This is the first set of changes” we should expect, as a result of its internal insurance business review.

 

Thankfully, at least one private insurer is not making knee-jerk changes because of this news.

 

Andy-CharlesAndy Charles, CEO of Canada Guaranty, told CMT:

 

“We are currently reviewing the announcement and potential implications…(The) overall materiality of the change is modest but indicative of an evolving market dynamic…(We have) no current plans to alter our product offering but, as indicated, are reviewing…"

 

What’s behind CMHC’s announcement?

 

  • Terminating these programs appears to be a business decision by CMHC.

     

  • Sources tell us that the insurance regulator, OSFI, was not behind this decision. (OSFI doesn’t generally impose product restrictions on individual institutions.) Moreover, there is no indication that this news is directly related to the recently released B-21 guidelines.

     

  • We’re also awaiting comment from the Department of Finance. In recent years its leadership has clearly indicated a desire to see less government involvement in the mortgage market. (CMHC is 100% backed by the federal government.)

     

Canadian-HousingMarket impact

 

  • CMHC says these two programs only accounted for a combined 3% of its unit volume.

     

  • It claims this should not have “a material impact” on the housing market. (Mind you, this is yet another instance where CMHC is withdrawing and/or limiting its programs. All of these “immaterial” changes may ultimately combine to slow the market further.)

     

  • There is no word yet on whether the second-largest insurer, Genworth Canada, will follow suit. It’s in its quiet period before earnings so it couldn’t comment.

     

  • Even before this news, it was clear in talking with CMHC sources that it plans to meaningfully reduce its insurance business. This will create further opportunities for private insurers and self-insured lenders (e.g., Equitable Bank, Home Trust, Optimum Mortgage, certain credit unions, private lenders, mortgage investment corporations, etc.)

     

Housing-and-mortgage-trendsBorrower impact

 

  • The last day to submit CMHC-insured “stated income” and second home mortgage applications is May 29 (but many lenders may set a cut-off date earlier than this.)

     

  • The majority of Canada’s 2.7 million self-employed borrowers prove income in traditional ways (for example, using a 2-year average of income from their NOAs, grossed up by 15% to account for write-offs)

     

  • Self-employed who can’t prove income traditionally, and Canadians who buy a second home with less than 20% down, will be left with these options:

     

    • Prime lenders who insure through private insurers (assuming the privates keep their “low-doc” and second home programs intact)

       

    • Non-prime institutional lenders, who finance up to 85% loan-to-value (less in non-urban areas) at higher interest rates

       

    • MICs and private lenders who finance up to 80% with even higher rates and fees

       

    • Private lenders who offer second mortgages in urban areas above 80% loan-to-value

       

  • Anyone with a CMHC-insured residence will no longer be able to obtain, or co-sign for, an additional CMHC-insured mortgage. There are two exceptions:

     

  • Bulk-insured mortgages are not affected by this particular rule (“The rules apply to all transactionally insured homeowner mortgages, both high and low ratio,” says CMHC spokesperson Charles Sauriol. “The rule does not apply to loans that are bulk insured — (i.e., CMHC's Portfolio insurance product.”) Lenders purchase bulk insurance on mortgages with 20% equity or more, typically so they can resell these mortgages to investors.

     

  • CMHC-insured rental mortgages are also unaffected (“There is no limit on the number of CMHC-insured rental mortgages a borrower may have,” Sauriol adds.)

     

 

 

Updates on Stated Income & Second Home Programs 

 

 

CMHC surprised the market last week by eliminating its insured second home and stated income programs. Many believed that the Department of Finance (DoF) had something to do with it.

 

We asked the DoF directly. Here’s what they told us:

 

“CMHC's decision to discontinue its Second Home and Self-Employed Without 3rd Party Income Validation mortgage insurance products (both high and low ratio) is the result of the Corporation's review of its mortgage loan insurance business…

 

The CMHC changes are aligned with the Government's continued efforts to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance, as noted in Economic Action Plan 2014. The Government has not amended regulations related to these products.”

 

Brian-Hurley-GenworthCMHC's withdraw from this space will create opportunity for private insurers, at least for the foreseeable future.

 

On Genworth Canada’s conference call yesterday, CEO Brian Hurley said, “These are two (programs) we are evaluating right now."

 

The self-employed program is about 5% of Genworth’s business, notably more than CMHC. The secondary homes program is only 1-1.5% of its volume.

 

“(There is) no mandate for us to follow (CMHC),” Hurley added. “These two particular products perform quite well for us.”

 

Genworth’s evaluation has led to just one change so far. Today the company announced that it is reducing the maximum number of allowable units under its Vacation/Second Home program from two units to one unit.

 

Fortunately for self-employed borrowers, it has left its stated income product alone, saying today that, “Upon review of the current Business for Self Program, we will not be making any amendments to current product guidelines.”

 

The company also clarified that “There will be no amendment to the maximum number of Genworth-insured properties per borrower.” CMHC said last week that it would "limit the availability of homeowner mortgage loan insurance to only one property (1-4 units) per borrower/co-borrower at any given time."

 

Update: After this story first went to press we received confirmation that Canada Guaranty is not changing its stated income program. Like Genworth, however, Canada Guaranty will limit its second home program to one unit, effective May 30.

 

Rob McLister, CMT