Last week, it was reported that CMHC was fast approaching it’s limit for mortgage insurance outstanding based on restrictions set by Ottawa. At the end of September, 2011, the Crown corporations had hit $541 billion of its $600 billion limit. In 2008 the limit had already been bumped from $450 -billion to the $600-billion mark and many industry insiders are not expecting that another exception will be made this time around.
Ottawa’s prudence in the matter may come from an effort to slow the housing market or out of concern for additional risk to the tax payers. CMHC is best known for providing mortgage default insurance to lenders when homebuyers are investing less than 20% in the purchase or refinance of a property ( reffered to as a high ratio mortgage). Should an insurerd mortgage go into default, CMHC reinburses the lender for the mortgage amount, thereby protecting banks and financial institutions loss due to mortgage default.
However, CMHC also insures high risk products such as mortgages for self employed individuals as well as bulk insuring both high and lower risk, low ratio mortgages to increase bank liquidity. This bulk insuring of low risk mortgages is most likely to be the focus of any pull back we see from CMHC in the near future.
To the average potential homebuyer, this means that lenders may increase rates on conventional mortgages ( where a homebuyer is putting MORE than 20% down when purchasing) because these products will no longer be insured and will have to sit on the lenders own balance sheet, so to speak. This ties up bank funds and is therefore more costly to the lender, thus the increase to the interest rate.
Also, we may see more lenders removing riskier product from their offering such as stated income products and mortgages for self employed individuals. At the very least we’ll probably see an increase to these interest rates as well.
In addition, some non-bank lenders whose entire portfolio is backed by CMHC may really struggle or even go by the wayside. Conversely, we may see the smaller, private lenders pick up the slack on the riskier mortgages that may soon be taken off the menus of the major banks.
Lastly, lenders and homebuyers may be saved in the short term by the country’s private sector mortgage default insurers, Genworth and Canada Guarantee. These companies are currently allowed to take on $250 billion of liability between them and recent legislation will see that limit bumped up to $300 billion. Genworth has already commented that they are well positioned to take on plenty of business for 2012 and beyond.
Read more about the history of CMHC and the purpose of mortgage default insurance here.