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Canada Mortgage and Housing Corp. sold more insurance to support condo development than it implied when it officially dropped the product last week.
The insurance is controversial because it facilitated the construction of new condos by making it cheaper and easier for developers to access financing. Economists, the Bank of Canada and former finance minister Jim Flaherty have all said in recent years that they’re worried too many condos are being built in cities such as Toronto.
CMHC announced last Friday that it would not be offering any more insurance on condo construction financing, effective immediately. The insurance made banks more likely to lend money to condo developers. CMHC has not sold any of the insurance since 2011, it said.
The announcement implied that the Crown corporation only sold this type of insurance for fewer than two years. “CMHC introduced its multi-unit condominium construction product in 2010 to assist developers’ access [to] insured financing during the construction phase of condominium projects,” the press release stated.
But the amount of outstanding insurance that CMHC had covering condo construction peaked at nearly $1.6-billion in 2009 and stood at more than $1.55-billion in December of 2008, according to data that the Crown corporation provided to The Globe and Mail on Monday in response to questions.
A spokesman for CMHC said in an e-mail on Monday that “in June 2010, CMHC released an Advice to lenders to formalize and communicate updated CMHC policies with respect to condominium construction mortgage loans. While CMHC had provided mortgage loan insurance for condominium construction prior to 2010, loans were underwritten on a case-by-case basis, there was no formal product and policies were not formally communicated to Approved Lenders. The 2010 announcement was intended to ensure a clear understanding in the industry of the minimum underwriting requirements.”
CMHC cut the product as part of a review it undertook of its business. Earlier in the year it said that it would stop insuring mortgages on second homes as part of the same review, which is now finished. The review came in the wake of a change that the federal government made to CMHC’s mandate, which meant that the Crown corporation would have to start ensuring that its activities contributed to the stability of the country’s financial system. That meant cutting products that could encourage borrowers to take on too much debt or that added risk to the housing market.
In April, 2009, former CMHC chief executive officer Karen Kinsley wrote a letter to BILD – an industry group that represents developers in the Greater Toronto Area – that said “CMHC has seen a sharp increase in interest by borrowers and lenders to obtain insured condominium construction financing.”
“In particular, CMHC has been approached to discuss transactions that in the past would have been funded without CMHC insurance,” she wrote. “To put this in perspective, in 2005 CMHC insured only 630 condominium units across the country. By 2007, this number had increased to over 3,400 units, and last year, we insured nearly 5,200 units. So far this year, CMHC has had discussions on projects representing a potential 4,500 units of new condominium construction.”
To put that into perspective, 13,820 condo units were completed in the Toronto area in 2008, and 9,161 were completed in 2009, according to research firm Urbanation Inc.
Ms. Kinsley wrote that the higher interest in the insurance was partly due to the fact that, in the wake of the financial crisis and recession, fewer banks and lenders were financing condo construction, and those that were weren’t willing to take as much risk. The letter noted that the industry said it was facing financing issues.
“Finally, by way of context, of the 21 complete applications submitted to CMHC in 2008, 20 were approved for mortgage insurance, and after further discussions with the developer, the last one was approved in 2009,” Ms. Kinsley wrote to BILD.
CMHC’s spokesman said on Monday that the amount of outstanding insurance on condo construction loans (which had been nearly $1.6-billion in 2009) was about $1.08-billion in December, 2010, $879.2-million in December, 2011, $890.4-million in December, 2012, $425.6-million in December, 2013, and $377.7-million in March, 2014.
The amount outstanding is the total that is still in force at that time. It would fall as developers pay back their loans, and would rise if CMHC sold more of the insurance. CMHC’s spokesman said the number ticked up in 2012, even though CMHC said it stopped selling the product in 2011, because it takes developers time to draw down their loans. “An approved construction loan can be advancing for several years before closing out,” he said. “The outstanding amount will increase over the construction period until it is fully paid out.”