CMHC Insurance Update 2020

The CEO of the Canada Mortgage and Housing Corporation (CMHC), Evan Siddall, is urging lenders and mortgage default insurers to tighten underwriting and qualification standards in order to salvage the economy. Mr. Siddall made the request in a letter to CMHC-approved lenders and the country’s two other mortgage insurers. Some details of the letter were first leaked to Bloomberg on Wednesday, after which Siddall made the letter public. All this was brought about by CMHC’s decision to tighten its underwriting policies earlier this year on July 1 for high-ratio borrowers. The policies included lowering debt serving limits and increasing credit score requirements. These changes were implemented by CMHC alone. Canada Guaranty and Genworth Canada, its competitors, were under no obligation to follow suit.

Thus, CMHC has lost a market share considering that mortgage deals which no longer qualify for CMHC insurance are now being referred to the other two insurers. According to industry insiders, lenders are now sending more deals overall their way.

In the letter, Siddall wrote: “There is no doubt that we have willingly chosen to forego some profitable business that our competitors would find appealing,” adding that the CMHC is “approaching a level of minimum market share” required to be able to protect the market in times of crisis.

“While we would prefer that our competitors followed our lead for the good of our economy, they nevertheless remain free to offer insurance to those for whom we would not.”

He went on, “Please put our country’s long-term outlook ahead of short-term profitability.”

Siddall Accused of Fear-mongering

Some industry experts answered back, finding fault with Siddall’s choice of wording, especially when he talked about a “dark economic underbelly to this business that I do not want to expose.”

In an interview on BNN Bloomberg, Paul Taylor, the President and CEO of Mortgage Professionals Canada said that, “I think the type of language that is used in this letter is really only serving to drive fear in some instances,” “We should be thinking about the long-term economic prospects of Canadians here.”

Taylor countered Siddall’s statement that lenders’ lending practices are putting them at risk.

He said, ““Quite a lot of lenders feel that they are already prudently managed. We have not been issuing loans indiscriminately in Canada,” and added that, “We definitely do have some macroeconomic challenges ahead, for sure, but I think they’re quite overstated, frankly, in Mr. Siddall’s letter.”

The founder of RateSpy.com, Rob McLister, was in agreement. He reported to the BNN that insurers and lenders are already being “extremely conservative” in their underwriting practices.

He asserted that, “Nobody wants to take a house back. No lender or insurer wants to lend such that their arrears rate is noticeably above average, because then they stick out and bad things happen. The cost of capital goes up (and) regulators clamp down. There are so many incentives that people don’t understand in this business to keep lenders doing the right thing.”

The Mortgage Stress Test is Part of The Problem

Also, Siddall put forth another argument, one he’s made consistently throughout his tenure as the chief of CMHC. He stated that Canadians are taking on too much debt, something that could eventually put the whole economy at risk.

On mortgage stress testing, Siddall’s letter reported that the Bank of International Settlements shows national household borrowing above 80% of gross income intensifies the drag on GDP growth, and that Canada is now approaching a ratio of 115%.

He wrote, “It is CMHC’s responsibility to reverse this trend.”

Some people are of the opinion that there are other factors involved, not just the “risky” lending as Siddall states.

McLister mentioned to BNN that, “debt ratios are high because of two main things. Number one, CMHC and policy-makers dropping the ball with respect to generating housing supply,” adding, “There’s not enough housing supply for middle-class Canadians who need houses. Number two, the debt ratios are high because they’re being stress tested.”

He made an observation: ‘current homebuyers with an average market rate of 1.99% for an insured 5-year fixed mortgage now have to be able to meet the 280 basis points above their actual rate, or 4.79%.’

“That is unrealistic, it’s unnecessary, and it’s why debt ratios are so high.”

Taylor reverted to the worrying issue of the mortgage stress test being significantly higher than the current contract mortgage rates.

On CMHC’s more stringent underwriting rules, Paul argued that they’re “effectively telling consumers they can only use 28% of their income to service a mortgage and own a home. I’ll bet you there are a lot of renters across the country that are paying significantly more than that.”