The federal government’s mortgage insurer is reorganizing to adapt to falling demand for its core insurance products because of tighter federal mortgage rules.
Canada Mortgage and Housing Corp., a Crown corporation that insures mortgages for home buyers who do not have at least 20-per-cent down payments, is increasing its focus on insuring apartment buildings and administering social housing programs to offset its shrinking home-mortgage insurance business.
The changes are part of a strategy to reduce CMHC’s exposure to the residential housing sector after risk levels were allowed to soar during the financial crisis. A series of policy changes in recent years has left CMHC backstopping fewer residential mortgages while focusing on the government’s social-housing priorities.
“It’s a shift for sure, definitely it’s a very significant development,” CMHC’s chief commercial officer Romy Bowers said. “But CMHC is constantly evolving over time.”
Of the many housing-policy shifts unveiled since 2011, two in particular – both introduced in 2016 – saw demand for CMHC-insured mortgages shrink dramatically. One made bulk portfolio insurance far more expensive for banks to purchase, and another created tougher stress-testing rules for individuals seeking insured mortgages, ensuring they could afford their mortgages even if interest rates were to climb.
In one year between 2016 and 2017, the volume of bulk portfolio insurance sold to banks fell by almost 80 per cent to $5.2-billion from $24.1-billion, while homeowner insurance volumes fell 23 per cent to $29.6-billion from $38.6-billion.
More broadly, from 2013 to 2017, the agency’s total volume of annual insurance sales fell by more than 40 per cent to $53.6-billion from $91.5-billion, even as housing sales boomed.
CMHC’s total insurance-in-force is dropping, hitting $480-billion at the end of 2017, down 15 per cent from the peak in 2011.
Because of slowing demand, staff involved in the homeowner insurance and portfolio insurance operations are shifting into other areas that are still expanding, Ms. Bowers said.
One such area is mortgage insurance for people buying or constructing apartment buildings with five or more units. In a bid to encourage more growth of rental properties in tight markets, CMHC has made insurance prices for multiunit buildings more attractive, which makes banks more willing to loan at better rates.
“We run this as a commercial business, so we have to be sure the pricing is adequate for the risk,” Ms. Bowers said. “We have to have a reasonable level of pricing, but we feel we have some flexibility in providing discounts for certain public policy alternatives.”
The agency’s other growing focus is on the National Housing Strategy (NHS), a 10-year program launched in 2017 to increase spending on social-housing programs. It will provide up to 100,000 new housing units for vulnerable people, including seniors, Indigenous people, veterans and people living with mental-health issues.
CMHC was already administering funds for Canada’s social-housing programs, but its role will become far bigger with the new NHS funding, which will total $40-billion over 10 years.
Even with the homeowner insurance declining, CMHC’s revenue climbed by 33 per cent in 2017 to $6.15-billion, with about half its total revenue – $3.2-billion – coming from NHS appropriations.
In another shift of focus, CMHC is also overseeing a new Rental Construction Financing Initiative, unveiled in 2016. Over four years, it will provide $3.75-billion in construction loans to builders of new apartment properties, with a target to develop 14,000 units.
When CMHC was formed in 1946, its primary mandate was to develop housing for veterans returning from the Second World War. It got into the business of providing mortgage insurance in 1954, protecting banks against the risk of default, but also took on other roles over the decades, including developing and renting out low-income housing in the 1960s and ’70s.
Mortgage insurance has taken on a particularly dominant focus over the past decade, however, as the federal government helped to stabilize Canada’s banks during the 2008 and 2009 financial crisis
CMHC bought $69-billion of insured mortgages from the banks over the two-year period, and also allowed the banks to greatly increase their use of bulk portfolio insurance to protect their portfolios of uninsured mortgages, providing more stability to the banking system.
The result was a major increase in CMHC’s mortgage-market exposure, with its total insurance-in-force climbing by 64 per cent to $567-billion by the end of 2011 from $345-billion before the crisis in 2007, leaving CMHC bumping up against is maximum insurance threshold of $600-billion.
CMHC’s bulk portfolio insurance lending to banks more than doubled to $243-billion by 2011 from $103-billion in 2007, which meant that product alone accounted for almost two-thirds of CMHC’s growth during the financial crisis.
The result was that the federal government took on far more risk to support Canada’s housing market, guaranteeing not just traditional insured mortgages, but also large volumes of uninsured mortgages covered by CMHC’s portfolio insurance.
As the crisis waned, the government launched a series of policies that had the dual goals of curbing consumers’ increasingly risky borrowing practices while also unwinding some of the housing sector exposure.
“The intent was never to shock the market but do it in a manageable way,” Ms. Bowers said. “There was an awareness that CMHC had played its role, but now it had to right-size itself.”