One of Canada’s major mortgage insurers has stopped disclosing numbers about the riskiest part of its balance sheet, where it has guaranteed mortgages for borrowers who now owe more than the value of their home.
Until the first quarter of this year, Canada Guaranty Mortgage Insurance Co. disclosed the share of loans it guaranteed for borrowers who had a loan-to-value (LTV) ratio greater than 100 per cent. Also known as an underwater loan, it means the principal of the loan is greater than the home’s market value.
In Canada Guaranty’s 2023 data reports, the metric is absent. Today, the highest LTV ratio it now discloses is for loans with an LTV above 95 per cent. These disclosures show its riskiest loans have more than tripled over the past 12 months.
The change in disclosure comes after The Globe and Mail published an article showing how Canada Guaranty and the other two mortgage insurers were increasingly guaranteeing underwater loans.
Mary Putnam, a spokeswoman for Canada Guaranty, said its “reporting is aligned with industry practice” in response to a query on why the company changed its disclosure.
“Delinquencies remain lower than prepandemic levels, reflecting strong portfolio quality,” she said in an e-mailed statement.
The LTV ratio is a key lending metric and the federal banking regulator considers anything above 75 per cent as risky. The higher the ratio, the riskier the loan is for the lender and the mortgage insurer that backstops the loan if the homeowner stops making payments.
The rapid rise in interest rates over the past year and a half has triggered a drop in home prices. It has also increased the cost of mortgages. These two factors – falling home prices and expanding loans – have increased LTV ratios. In some cases, these shifts have pushed homeowners underwater.
As of the end of last year, Canada Guaranty was backstopping nearly $4-billion worth of loans with an estimated LTV ratio above 100 per cent, according to disclosures on its website. That represented 5 per cent of Canada Guaranty’s outstanding insured mortgages for individuals, and was up significantly from the $532-million, or 0.74 per cent of its outstanding insured mortgages, in the fourth quarter of 2021.
Canada Guaranty’s previous disclosure practices were rare for the Canadian mortgage industry. Most major banks and the other two mortgage insurers, Sagen MI Canada Inc. and taxpayer-funded Canada Mortgage and Housing Corp., do not publicly report detail on LTV ratios over 100 per cent. The two other insurers’ highest reported category is for ratios greater than 95 per cent.
The Canada Guaranty disclosure had provided a tiny glimpse of the stress borrowers have faced after the Bank of Canada raised its benchmark interest rate to 5 per cent from 0.25 per cent over 17 months.
But for the first quarter of this year, Canada Guaranty broke with its tradition and stopped the disclosure. According to documents on its website, it has consistently provided information for underwater loans as far back as 2015.
Canada Guaranty’s amount of loans with an estimated LTV ratio above 95 per cent was nearly $15-billion, or 18 per cent of its outstanding insured mortgages for individuals, at June 30 of this year. That was up from nearly $12-billion, or 15 per cent of its portfolio, in the fourth quarter of 2022, and $4.27-billion, or 5.7 per cent of its portfolio, at June 30, 2022.
Its delinquency rate, the share of insured loans that were delinquent for a minimum of 90 days, was 0.09 per cent as of midyear.
Mortgage insurance is required if a borrower makes a down payment that is less than 20 per cent of the purchase price of the property.
Canada Guaranty also stopped disclosing the share of borrowers with amortizations greater than 30 years, and is now only disclosing amortizations greater than 25 years. The maximum amortization period for a borrower who requires mortgage insurance is 25 years.
But because interest rates have increased so dramatically, variable-rate borrowers with fixed monthly payments have seen their amortizations lengthen significantly as more of their monthly payments have gone toward interest and less toward principal.
That stress can be seen in most of the big Canadian banks’ financial statements. Borrowers with amortizations greater than 30 years accounted for more than one-quarter of their residential loan books, according to their results for the second quarter ended April 30.
When these borrowers renew their loans, they will be required to revert to their original amortization schedule unless they refinance and take out a new mortgage.