Canada's Condominium Magazine

CMHC proud of its declining mortgage business

Not many corporations would boast that their business was shrinking, but Canada Mortgage and Housing Corporation (CMHC) is not your typical publicly traded Bay Street entity. CMHC is a Crown corporation, its “shareholders” are the taxpayers of Canada, and it reports to them (us) through Parliament. The corporation released its first quarter financial report today and happily reports that the total amount of insurance-in-force decreased by $4 billion. It expects the decline to continue, gradually, as normal mortgage repayments continue to offset new insurance written.

The reason for the satisfaction with the reverse growth is simple. The corporation’s government masters ordered it. The legislated limit to the mortgage insurance that CMHC can underwrite is $600 billion. The late finance minister Jim Flaherty made it clear that he was not comfortable with that high a level of exposure to the housing market. Since then, CMHC has been working at reducing that exposure, and the $4 billion cut just announced brings its current level down to $539 billion.

How do they do it? “Ensuring overall portfolio quality through prudent underwriting reduces the risk associated with the mortgage loan insurance business,” says the CMHC statement. In other words, it is harder to qualify for a CMHC-backed mortgage. The average credit score for CMHC mortgagors was 746, it says, much higher than used to be considered adequate (anything above 600 is considered “good”). Homebuyers also had more money for their down payments: the average debt service ratio—the percentage of household income needed to cover mortgage payments and property taxes—was 26 per cent, a reasonably comfortable level by most standards. Anything below 40 per cent is considered acceptable. The strength of the portfolio can be seen in the low rate of arrears (0.34 per cent) and falling claims, down 8.8 per cent form a year ago.

Mortgage rates are not expected to rise before the end of 2015. We forecast the five-year rate to lie within the 4.00 to 5.50 per cent range in 2015 and 4.20 to 6.20 per cent range in 2016. Low mortgage rates will continue to support housing demand; however, the uncertainty surrounding lower oil prices, the upward trend in the inventory of completed and unsold units and the growth in house prices in larger Census Metropolitan Areas (CMAs) are expected to have some dampening effect for Canada’s new housing market.

CMHC also increased its rates for borrowers with less than a 10 per cent down payment on a home. That change, which raises insurance premiums by 15 per cent, comes into effect on June 1.

In its mortgage backed securities business, which operates commercially and without taxpayer support, CMHC says it guaranteed $23 billion in new securities. It is authorized by Ottawa to provide up to $80 billion, as well as $40 billion in Canada Mortgage Bonds.

While not entirely rosy, given the troublesome state of world oil prices, CMHC’s outlook for Canada’s housing market is generally positive and steady for the year going forward. Economic growth will be between 1.5 and 2.4 per cent for 2015, potentially a little higher next year. Unemployment will decrease “marginally” to between 6.6 and 7 per cent. Housing starts and resales were both up in the first quarter compared to a year ago, but the yearly totals for both are expected to be about the same as last year’s.

On the question of mortgage rates, which have been so low for so long that many may have stopped even thinking about them, CMHC says it does not foresee any possibility of a rise before the end of this year.

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