CMHC reports growing share of mortgage insurance clients close to underwater on loans

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Canada’s federal mortgage insurer is increasingly guaranteeing loans where the borrower’s equity is eroding to little or nothing.

Canada Mortgage and Housing Corp. (CMHC) released fourth-quarter financial results Thursday showing that a growing share of its insurance is covering homes where the loans are close to or underwater as the recent drop in home prices has eroded borrowers’ equity.

The agency updated a key lending metric that calculates how much homeowners owe relative to their property value. Called loan-to-value or LTV, it measures the risk for the lender and the mortgage insurers that cover banks against losses if borrowers default on their mortgage payments.

A loan is considered riskier if it has an LTV ratio above 75 per cent, meaning the homeowner owes more than 75 per cent of the property’s value.

CMHC’s results show that the amount of outstanding loans with an LTV ratio above 95 per cent was $10-billion in the fourth quarter of last year. That represented 5.8 per cent of its portfolio and is nearly five times higher than the same period a year earlier when $2.3-billion of its insured loans accounting for 1.2 per cent of its portfolio had an LTV above 95 per cent.

The disclosure provides a glimpse into how borrowers have fared after the Bank of Canada hiked interest rates and threw the mortgage market into disarray.

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Michel Tremblay, the agency’s chief financial officer, said CMHC “continually monitors the profile of our business and will adjust our underwriting going forward as needed.”

The agency’s results mirror its competitors in the private sector. Canada Guaranty Mortgage Insurance Co. disclosures show its proportion of loans with an estimated LTV ratio above 100 per cent increased by more than six times to nearly $4-billion in the fourth quarter of last year. That represented 5 per cent of its outstanding insured mortgages for individuals, according to Canada Guaranty’s quarterly portfolio metrics. That is up from $532-million, or 0.74 per cent of its outstanding insured mortgages in the fourth quarter of 2021, according to the disclosures.

Sagen MI Canada Inc. had $14-billion, or 10 per cent, of its outstanding insured mortgages with an effective LTV ratio over 95 per cent in the fourth quarter of last year. That’s compared with $7-billion, or 5 per cent, of its outstanding insured mortgages in the same period in 2021, according to its recent financial disclosures.

Over the spring, home prices have started to rebound. That will increase the amount of equity in a borrower’s home and lower the LTV ratio.

CMHC’s Mr. Tremblay said that the agency expects that strong employment levels and the outlook for the market over the next two years will result in a stabilization and an eventual reduction in this ratio.

The agency said its share of the mortgage insurance market was similar to a year ago. The agency has been trying to recapture market share after losing ground to its competitors by unilaterally tightening requirements for borrowers in June, 2020. CMHC reversed course in mid-2021 but the damage had been done. CMHC’s chief executive Romy Bowers said its market share is currently about 35 per cent. That compares to 47 per cent prepandemic.

Ms. Bowers said the agency was pleased with the progress it is making and said it is “working very hard to earn the business.”

The agency was providing insurance to 871,332 homeowners with $179-billion in outstanding mortgages in the fourth quarter of last year. That compares to 951,651 homeowners with $193-billion worth of mortgages in the same period in 2021.