Genworth MI Canada Inc. is recouping the share of mortgage insurance business it lost during the financial crisis, amid rising calls for Ottawa to remove rival Canada Mortgage and Housing Corp.'s "unfair" advantage in the sector.
Although Canada's mortgage insurance system is a key reason why the housing market has held strong, there is room for improvement, critics say, and a more competitive system would lead to lower insurance fees for homeowners.
Think tanks such as the C.D. Howe and the MacDonald-Laurier institutes want legislators to re-evaluate the system and consider spinning off, or even winding down, CMHC's main mortgage insurance business, or giving its private sector competitors the same advantages that CMHC has.
Mortgage insurance from CMHC comes with a 100-per-cent guarantee from the federal government, while private sector competitors such as Genworth receive a 90-per-cent guarantee. The insurance is designed to ensure that the bank issuing the mortgage is repaid if the consumer defaults, but banks with mortgages that are insured by a private sector insurer have to set aside more capital to cover the remaining 10 per cent.
When the financial crisis heightened the importance of banks' capital levels, Genworth experienced a sharp drop in business. The net amount of premiums that Genworth wrote fell from $983.6-million in 2007 to $706-million in 2008 and $306-million in 2009. At the same time, CMHC's business grew.
"People are concerned about how big CMHC's exposure is - and the taxpayer takes direct responsibility for that - and are looking at whether there is a way to make the system better," Genworth's president Peter Vukanovich said in an interview Wednesday.
"It's not about Genworth, it's about the consumer," he stressed. "The current framework is good, but it could be better for home buyers."
Genworth reported its fourth-quarter results on Wednesday, which suggest that the company is beginning to recoup market share, said CIBC World Markets Inc. analyst Paul Holden.
"If there was a level playing field in terms of government backing, the private insurers, namely Genworth, would experience a significant increase in market share in a very short period of time," Mr. Holden said in an interview.
Genworth's profit came in slightly above the Street's estimate, as its net premiums written rose 22 per cent from a year earlier to $134-million, bringing the 2010 total to $552-million.
A paper released by the C.D. Howe Institute this week argues that CMHC's mortgage insurance business "subjects Canadian taxpayers to large, ill-defined risks." It suggests that CMHC begin backing away from traditional mortgage insurance and instead concentrate on the securitization market, in which home loans are bundled into securities that are sold to investors.
The institute also wants CMHC to be subject to official oversight by the country's financial regulator, as are its private sector competitors. Without proper oversight, the paper argues, taxpayers don't have a complete understanding of the risks they are exposed to by CMHC.
A paper by Jane Londerville, an associate professor at the University of Guelph, released by the Macdonald-Laurier Institute for Public Policy in November, noted that in 1997, CMHC lacked sufficient reserves to cover the claims being made, and Ottawa had to step in to ensure the agency had enough capital. Since then, CMHC has charged higher rates.
Ms. Londerville argued that CMHC's "unfair" advantage over private sector competitors is hurting consumers who buy mortgage insurance. A person buying a $300,000 house with a 5-per-cent down payment, for example, would pay about $8,000 for mortgage insurance - more if he were deemed a risky borrower.
She is calling on Ottawa to spin off CMHC's mortgage insurance business and to give the same guarantee to all mortgage insurers to create "a more home-buyer-friendly marketplace."
Along with Genworth, the other major competitor to CMHC is Canada Guaranty Mortgage Insurance, which was bought from AIG last year by a group led by the Ontario Teachers' Pension Plan.