The Canada Mortgage and Housing Corporation, the Crown corporation that provides mortgage insurance to high-risk home buyers, is to make an announcement tomorrow at 11 a.m. EST.
While the topic du jour has yet to be revealed, the impending statement has set the mortgage industry buzzing – will CMHC’s announcement alter the Canadian mortgage landscape or further restrict home buyers’ purchasing power?
It wouldn’t be the first time the CMHC would be used to restrict the mortgage market. Finance Minister Jim Flaherty has used the crown corporation four times already to introduce change, most recently last summer when the maximum for high-ratio (less than 20 per cent down paid) mortgages was cut from 25 years to 20, and the debt ratio requirements for mortgage qualification were tightened.
While we can only speculate what new developments are in store, here are a few choice possibilities… and the impact they could have on Canadian home buyers.
Scenario 1: CMHC Will Hike Insurance Premiums
Everyone who pays less than 20 per cent down on their home purchase must take out mortgage default insurance, which covers the lender’s losses should owners not make their mortgage payments. These buyers are considered high risk, and must have their default insurance premiums rolled into their mortgage payments (between one to 2.75 per cent of the mortgage value).
Premiums haven’t seen an increase since the late 90s, but Dr. Ian Lee, current program head at the Sprott School of Business at Carleton University, former mortgage lender and consultant for the government, says an impending rate rise could spur one this time.
“We don’t know when [rates] are going to go up, but everybody agrees that they are going to go up,” he says in an interview with Money Wise. “And we know that there will be a certain percentage of failures or defaults because of the increased interest rates. It may be a way to prudently, in advance, make some reserves for future projected losses.”
However Will Dunning, a regular CAAMP economic contributor and president of Will Dunning Inc., says that such an increase would be “unconscionable” since the mortgage insurance oligopoly already makes fat profits.
“CMHC already has more than $10 billion in reserves for mortgage insurance (as of the end of 2012). As well, it has paid billions in profits to the federal government over the years, which could have been added to the reserve. I can’t see this as a justification for a premium hike. The real reason would be to raise profits – paid by CMHC to the government and to increase the profits of the private insurers.”
Scenario 2: Tweaks To Down Payment Requirements
Currently, homeowners must pay a minimum of five per cent on their home purchases. Could they soon be required to save longer for larger down payments? Lee says that while altering down payments has been viewed as a “draconian” measure in the past, there are “many methods in mortgage lending to slice and dice.” He suggests that lowering the Total Debt Service and Gross Debt Service ratios (currently at 40 and 32 per cent respectively), would force Canadians to carry less credit – a measure in line with Flaherty’s mission to reduce Canadian household debt levels.
Scenario 3: An Increase To The High-Risk Threshold
Buyers must pony up more than 20 per cent to avoid paying mortgage insurance – and the CMHC could potentially hike that limit so more buyers would find themselves in the high-risk category. Doing so would mean more insurance premiums in CMHC’s pockets, but the move would be a double edged sword; because it’s a crown corporation, Canadian taxpayers are ultimately on the hook for failed insured mortgages. This exposure has been criticised by global economic think tanks and on the home front, and reducing it has been a close focus of Flaherty’s.
Scenario 4: Change The Qualification Rate For All Insured Mortgages
Buyers trying to get a variable mortgage rate or a mortgage term shorter than five years usually must also qualify for the lender’s five-year fixed posted rate, even if they’re getting a discounted mortgage rate. It’s the lender’s way of ensuring the buyer will still afford their mortgage should rates go up, and it prevents some buyers from taking on too much risk.
Dunning suggests the posted qualifying rate could become standard for all high-risk buyers, though such a move would be “drastic” and “catastrophic”. “Going to five-year posted for all insured mortgages would reduce total resale market activity by at least 15 per cent,” he says.
Scenario 5: CMHC Is Prepping For Privatization
There have been calls to privatize the CMHC and take the onus of unpaid mortgages off taxpayers’ shoulders. Currently the Crown corporation accounts for 80 per cent of all insured mortgages, with private insurers such as Genworth and Guaranty Canada covering the rest. However, before the CMHC can be sold, according to Lee, there needs to be some substantial detangling: the corporation also houses green building research, an extensive statistics department, and government housing.
“Another area is to make the CMHC more lean so it’s focused on just mortgages,” Lee states. “This would prepare them down the road for [privatization].”
He adds that even if a sale is on the agenda, tomorrow’s announcement is too soon to warrant immediate action. “ I don’t think this government moves quickly, they do things very slowly and very incrementally. If we even thought they were going to privatize, and I think one day they might, it will not be in this mandate, it will be in the next mandate assuming they’re [the Conservative government”] are re-elected.”