Canada Mortgage and Housing Corp.’s profits rebounded in 2010, even though it insured far fewer homes than it planned to.
The federal crown corporation, which has come under more scrutiny since playing a pivotal role in the country’s housing market during the financial crisis, released its annual report on Thursday. The figures show that CMHC insured just 643,991 homes last year – 187,091 less than it had expected.
But its profits soared to $1.77-billion, up from $931-million in the previous year, as both its bread-and-butter insurance business and its securitization business earned more than forecast.
While its revenues fell slightly below targets, lower-than-forecast interest rates resulted in big gains on some financial instruments that CMHC holds. And the premiums and fees that the crown corporation earned were higher than planned, while expenses and insurance claims were down.
Banks in Canada must ensure that mortgages for which the home-buyer has a down-payment of less than 20 per cent are insured, either by CMHC or one of its private-sector competitors, namely Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance, which was bought from AIG last year by a group led by the Ontario Teachers’ Pension Plan. The insurance compensates the bank if the home-buyer defaults on their mortgage.
The boost in profits for CMHC comes even though the demand for mortgage insurance dropped last year, because both the construction of new homes and sales of existing homes were lower than anticipated, especially in the second half.
And as it became easier for banks to tap into various sources of funding for their mortgage loans, they had less desire to buy CMHC’s “portfolio insurance.” That insurance, which was big in 2009, covers an entire portfolio of lower-risk mortgages. Obtaining insurance on those mortgage portfolios makes it easier for banks to securitize or sell them off, enabling them to reduce their funding costs and lend more.
Finally, as the economy improved, banks were increasingly willing to fund multi-unit residences – including nursing homes and retirement homes – on an uninsured basis, further reducing demand for CMHC insurance, the mortgage insurer said in its annual report.
Ottawa created CMHC in 1946 to house returning war veterans. Its role in the country’s housing market has expanded since then, and the government turned to the crown corporation to stoke the flow of credit during the financial crisis by implementing a program designed to help the banks’ mortgage businesses lend more.
All told, the volume of insurance that CMHC provided was $106.1-billion in 2010. It had planned to provide $123-billion. It now expects that the figure for 2011 will be $120.8-billion.
Despite the decrease in volume, profits from its insurance business came in at $1.28-billion, up from $742-million in 2009.
And the securitization business, which focuses on Canada Mortgage Bonds and mortgage-backed securities, earned $526-million, up from $69-million last year, thanks to unrealized gains on derivatives.
CMHC, which has 2,100 employees, guaranteed slightly more than $95-billion in Canada Mortgage Bonds and other mortgage-backed securities in 2010.
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