Canada’s second-largest mortgage insurer plans to take advantage of government constraints on its Crown corporation rival, Canada Mortgage and Housing Corp.
Genworth MI Canada Inc. executives are making it clear that they see a business opportunity emerging as Ottawa hems and haws about whether to loosen CMHC’s shackles once again.
At the moment, CMHC is restricted to having $600-billion worth of mortgage insurance outstanding. Ottawa places limits on the Crown corporation because its insurance ultimately creates risks for taxpayers. It has increased the limit a number of times in the past, and raised it dramatically this decade, with the most recent move being from $450-billion to $600-billion in 2008.
The amount of insurance that CMHC had in force hit $541-billion at the end of September, meaning the Crown corporation is now bumping up towards its limit.
Finance Minister Jim Flaherty has not specifically stated that he won't increase the limit, but he has signalled that he wants CMHC to figure out a way to operate within it for now. Given the large amount of risk that taxpayers have already assumed from mortgage insurance, many industry watchers suspect that Ottawa won’t be hiking the limit again any time soon.
“Given economic conditions and concerns around personal leverage/housing in Canada, we would be surprised to see the government increase CMHC’s limit in the near term,” TD Securities analyst Jason Bilodeau wrote in a note to clients.
Some economists have speculated that, by leaving the limit alone, Ottawa will cool the housing market. Banks must insure mortgages when a borrower owns less than 20 per cent of the property. By increasing or tightening the supply of mortgage insurance, Ottawa is able to affect the broader housing market.
But, by maintaining the current limit, Ottawa may finally be lending a hand to the private-sector mortgage insurers - namely Genworth and Canada Guaranty - which have long complained that the government has given CMHC an unfair advantage, mostly by guaranteeing a larger proportion of its insurance. (CMHC’s insurance is 100 per cent backed by the government, while private sector mortgage insurance is backed to the tune of 90 per cent).
If Ottawa keeps the limit where it is, it will serve to level the playing field a bit for the private sector competitors that have been disadvantaged.
On a conference call with analysts Friday, Genworth CEO Brian Hurley brought up CMHC’s limit, and said “I just want to clarify that our business has plenty of capacity for 2012 and beyond.”
The private sector players still have lots of room to do business before they hit the $250-billion limit that Ottawa places on them collectively. And, new legislation that’s expected to pass in the next few months will increase that limit to $300-billion.
“There is plenty of runway for both entities in the private sector to grow with multiple years of production opportunity ahead of us,” Mr. Hurley said.
