As chief risk officer for mortgage insurer Genworth MI Canada Inc. during the global financial crisis, Stuart Levings had a front-row seat to the meltdown in Alberta's housing market.
"Alberta was literally a housing bubble going into 2008," he says. "House prices went up 15-20 per cent a year, two to three years in a row. It was unheard of."
When the crisis hit, home prices fell 25 per cent and unemployment doubled. Genworth's losses spiked and lenders flocked to the safety of its government-run rival, Canada Mortgage and Housing Corporation.
Since taking the helm as Genworth's president and chief executive officer in January, Mr. Levings is once again keeping a particularly close eye to Alberta since oil prices began their steep plunge.
Fault lines are not yet showing in the province's housing market. But, he said, they're coming.
"It's too soon," Mr. Levings said in an interview. "Our expectation is we'll start to see [mortgage delinquencies] potentially in the second half of this year, so third quarter, fourth quarter it will start to pick up."
Alberta is unlikely to face the same steep crash it did in 2009, he said. But Mr. Levings expects unemployment could go as high as 7 per cent and home prices to fall by as much as 8 per cent to 10 per cent in Alberta this year.
That has prompted the company to take a closer look at its Alberta business. Roughly half of Genworth's new insurance policies get evaluated by a computer algorithm that can approve or reject a deal in 30 seconds. The rest gets a more thorough review by an underwriter.
This year the company is sending more of its Alberta business to underwriters and the rejection rate has risen slightly, to around 8.5 per cent, compared with its typical average of 7 per cent.
A former subsidiary of General Electric Co., Genworth Canada was spun off from its U.S. insurance operations in 2009, although the American company, now called Genworth Financial, remains the majority shareholder. The Canadian operations were hit with a credit downgrade in November, dragged down by its American shareholder, which is struggling under the weight of its U.S. long-term care insurance business.
As a small but growing player in Canada's mortgage insurance industry, Genworth lives perennially in the shadow of its government competitor CMHC.
Since 2009, it has grown to capture nearly a third of the Canadian market, while CMHC has shrunk from nearly 80 per cent to little more than half. (A third private player is Canada Guaranty.)
Its growth has been spurred in part by CMHC's pledge to reduce taxpayers' exposure to the housing market and Mr. Levings expects Genworth will continue to capitalize on the government's plans to pull back further.
Genworth continues to insure mortgages for self-employed borrowers and investment properties, and has also stepped in to fill the void left by CMHC restrictions on new portfolio insurance, which allows lenders to insure bundles of uninsured mortgages so that they can sell the mortgages through CMHC's securitization program. That has helped boost Genworth's business among regional banks and smaller lenders.
Most recently, the company got a boost from CMHC's decision to raise insurance premiums on borrowers with down payments of less than 10 per cent. Genworth had long complained that premiums were too low given the regulatory requirement to hold more capital reserves, particularly for the highest-risk end of the market.
"We would say now we think pricing is adequate," Mr. Levings said.
As a private sector player, Mr. Levings said the company has worked to distinguish itself by being more flexible and entrepreneurial than its government rival. That includes going to great lengths to avoid borrowers defaulting on its insured mortgages.
It runs a homeowner assistance program that allows lenders to extend amortization periods up to 40 years. It has also paid off borrowers' missed payments if it thinks it can avoid foreclosure. The company once spent $20,000 to help a woman renovate her basement so that she could rent it out for $1,000 a month, which helped Genworth avoid a six-figure claim.
"I'd happily cut a cheque for $10,000 to a bank and know that that person is going to be current and able to keep their mortgage," Mr. Levings said.
He estimated Canada's housing market is 8-per-cent overvalued, although that runs as high as 10 to 12 per cent in Toronto and Vancouver. Even so, he argued that first-time home buyers, Genworth's prime business, present less risk given that they have been largely shut out of those two markets because of stricter mortgage rules and rising prices.
First-time buyers represent roughly a quarter of the national housing market, but their share falls to "single digits" in Toronto and Vancouver, he said.
Ottawa has been steadily tightening mortgage insurance rules. Mr. Levings suggested policymakers tread carefully when introducing any new rules, including a proposal by CMHC to force lenders to share more of the risk, possibly through a deductible on mortgage insurance.
Lenders already share some of the risks given they cross-sell mortgage borrowers on other products, like credit cards and lines of credit, that aren't insured.
"If this is about making lenders more diligent in the underwriting, we think they already have skin in the game," Mr. Levings said.
Any push to cool the housing markets in Toronto and Vancouver by making it tougher for first-time buyers to qualify for mortgage insurance is likely to backfire, given those markets are being fuelled mainly by wealthy and move-up buyers who can put down hefty down payments and don't require mortgage insurance.
"You can't continue to tighten the mortgage insurance rules," he said. "All you're doing is squeezing what is already a very small piece of the pie by now."