Risk Fee being paid to Government
This morning Friday November 29th 2013, the Canadian Mortgage and Housing Corporation (CMHC) released its quarterly financial report for the third quarter (iembedded below). If you look deep into page 9 of the report under the section "Fees payable to the Government of Canada" you find the following:
Pursuant to section 8.2 of the NHA, effective 1 January 2014, the mortgage loan insurance activity will be subject to a risk fee payable to the Government of Canada of 3.25% of premiums written and 10 basis points on new portfolio insurance written.
According to the CMHC quarterly conference call, Rob McLister originally shared on twitter that the 'risk fees' are going to amount to $50 Million in fees based on 2014 projected insurance volumes.
Updated 4:22PM Nov 29th 2013 >>>
It appears as though these changes are an attempt to mitigate risk to the Canadian public. As such the Government of Canada will be collecting 3.25% of the insurance premiums collected by CMHC and an additional 10 BPS on mortgages insured through portfolio or back end insurance. The idea here is that the money will be held in a "rainy day account" to protect Canadian tax payers.
Updated 4:15PM December 5, 2013 - Letter Sent to Brokers by CMHC Key Account Managers>>>
Re: Government Guarantee Fee Payable by CMHC
"Effective January 1, 2014, CMHC’s mortgage loan insurance activity will be subject to a risk fee payable to the Government of Canada of 3.25% of premiums written. An additional fee of 10 basis points will be payable on new portfolio insurance written. Since January 1, 2013, private mortgage insurers have been required to pay a fee of 2.25% of premiums as compensation for the protection provided by the Government of Canada. The fees compensate the Government for risks stemming from its guarantee of mortgage insurance. The guarantee fee of 3.25% that has been developed for CMHC takes into account the 100% Government backing of CMHC’s liabilities as compared to the 90% guarantee of the private mortgage insurers obligations to lenders. These new fees are not anticipated to have an impact on the availability or cost of mortgage funding, nor the cost of buying a house. We are reviewing the impact on our low-ratio portfolio insurance product provided to lenders."
According the Globe and Mail's, "Flaherty Charges CMHC New Risk Fee on Mortgages"...
"The fee is part of Mr. Flaherty’s continuing efforts to rein in CMHC’s activities and limit the risk for taxpayers."
According to a statement made by Charles Sauriol on the Canadian Mortgage Trends site "Ottawa to Charge CMHC a Risk Fee"...
"The new fees are not anticipated to have an impact on the availability or cost of mortgage funding, nor the cost of buying a house."
However that remains to be seen. Basically the 10BPS increase on mortgages covered with portfolio insurance will be passed on to Canadian lenders using portfolio insurance.
Canadian lenders may not add this fee as a seperate line item on mortgage pricing, but they will most likely include it in the cost of financing and it will eventually trickle down to the end consumer.
This move appears to be more about political posturing than anything.
If you want to learn more about the state of the Canadian mortgage market and some real good insight from someone on the top, consider watching this episode of Canadian Mortgage Hangout with CEO of MERIX Financial, Boris Bozic.