New regulations will likely force mortgage insurers to hike premiums for homeowners by an average of 15 per cent next year, says the head of Canada's largest private-sector mortgage insurer.
"The industry needs to revisit premium rates because, in the absence of that, the returns on the business we start writing will be single-digit," Stuart Levings, CEO of Genworth MI Canada Inc., said in an interview. "And no business is going to write single-digit-return mortgage insurance."
Starting in January, Canada's federal banking regulator, the Office of the Superintendent of Financial Institutions, will require banks and insurers to hold more capital against mortgages in housing markets where home prices appear to be high compared to incomes, an assessment that includes Vancouver, Toronto, Calgary, Edmonton and Victoria.
Interactive: Explore how house prices are trending in Canada
The higher capital requirements will squeeze profits for mortgage insurers at a time when new mortgage loan growth is expected to slow because of changes to mortgage insurance rules announced by the Department of Finance last month.
While Genworth can opt to raise premiums on its own, it typically waits for its government-owned competitor – Canada Mortgage and Housing Corp. – to make the first move.
CMHC would not say last week whether it is planning to raise its prices, but it faces the same regulatory requirements as the private sector. The agency said it would announce the results of an annual review of insurance premiums at the end of the first quarter of next year. "Increased capital requirements are an important consideration in changes to premiums and do put upward pressure on premiums," the Crown corporation said in a statement.
CMHC hiked premiums by 15 per cent in June, 2015, for borrowers who had down payments of 10 per cent or less in response to earlier changes to capital requirements from OSFI.
Unlike the 2015 changes, which affected borrowers with smaller down payments, the proposed new rules from OSFI are actually more onerous for mortgages with bigger down payments, Mr. Levings said.
While Mr. Levings expects insurance premiums to increase an average of 15 per cent, premiums on portfolio insurance – insurance that lenders take out on loans with down payments higher than 20 per cent – could double or triple under OSFI's new rules, he said.
Higher capital requirements for the mortgage industry come on top of new rules Ottawa unveiled last month, including a higher income "stress test" for insured mortgages to borrowers with down payments of less than 20 per cent and restrictions on the kinds of mortgages that can be eligible for portfolio insurance.
Mr. Levings said the changes are expected to cut the volume of homeowner insurance Genworth writes next year by 15 to 25 per cent, and would curb demand for portfolio insurance by 25 to 35 per cent.
But the changes also bring new opportunities. Genworth has been in talks with some mortgage lenders over the prospect of creating a new type of insurance that could cover some of the mortgages that are no longer eligible for portfolio insurance.
"A number of lenders have reached out to us who have expressed an interest" in non-government-guaranteed mortgage insurance, Mr. Levings said. "But it's still very early on in terms of sizing the full scope of the opportunity."
With Ottawa in consultations over a plan to introduce risk-sharing into mortgage insurance, Mr. Levings said Genworth is also looking at whether it could offer insurance to lenders for the portion of the mortgage that would no longer be covered by a 90-per-cent government guarantee.
The potential to create a private mortgage insurance market largely depends on investor demand for private mortgage-backed securities. Non-bank lenders in particular have relied on mortgage-backed securities – pools of mortgages that are sold to investors – to fund their businesses. But virtually all of Canada's $426-billion mortgage-backed securities are controlled by CMHC.
The market for securities backed by uninsured mortgages – known as residential mortgage-backed securities (RMBS) – has historically been small in Canada. It all but dried up in the aftermath of the global financial crisis.
Ottawa has made several changes in the past few years to shift more of the housing market risks to the private sector.
But it is the most recent round of changes that has pushed lenders to look for new ways to fund a mortgage business that is increasingly shifting toward uninsured loans. "I think it has people thinking about other alternatives, with the main alternative being the possibility of an RMBS market," said Susan Hosterman, a director of structured finance at Fitch Ratings.
Genworth has been studying the idea of private mortgage insurance for a while, since Ottawa announced in 2013 that it planned to restrict how lenders use portfolio insurance.
The government delayed implementing new regulations until this year and is gradually phasing them in. That has helped limit appetite for alternatives to taxpayer-backed insurance.
But with the new mortgage insurance rules hampering the growth plans of the country's non-bank lenders, "this now reinvigorates that demand," Mr. Levings said.
Tamsin McMahon