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The Canada Mortgage and Housing Corporation ( CMHC ) complex in Ottawa.Sean Kilpatrick/The Globe and Mail

Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims.

The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.

In its second-quarter results, released Wednesday, CMHC said that its losses on mortgage insurance claims rose to $168-million for the three months ended in June, up from $144-million in the same period of 2011 and $154-million in the first quarter of this year.

That's part of the reason why profits from CMHC's core mortgage insurance business fell to $255-million, down from $341-million. The earnings were also hurt by paper losses on a mutual fund investment that suffered when international stock markets fell.

Part of the reason for the growing claims losses of late has been the dramatic increase in the amount of insurance that the Crown corporation has in force. Indeed, claims have not risen as fast as the size of CMHC's portfolio.

Amid growing concern about taxpayers' exposure to mortgage defaults, Ottawa has been taking steps to curb CMHC's growth and has placed the housing agency under the watch of the country's banking and insurance regulator.

The amount of insurance that CMHC has in force crept up to $576-billion at the end of June, closing in on the $600-billion limit that Ottawa is now enforcing on the Crown corporation. To keep the amount in check, CMHC has dramatically cut the amount of portfolio insurance that it is offering to banks.

And it said that its future sales of mortgage insurance will continue to be offset as each year Canadians pay off about $60-billion of mortgages that it has already insured.

CMHC said that it has been spending more money on so-called "work-outs," in which the mortgage insurer and banks work with struggling borrowers to find a solution – such as deferred payments – to keep them in their home.

"Fewer borrowers are in arrears and severity is coming down, which should translate into lower claims losses in future periods," said CIBC analyst Paul Holden. CMHC's largest competitor, Genworth Canada, had second-quarter losses on claims of $48-million, down from $50-million in the same period a year ago and $56-million in the first quarter of this year.

Genworth CEO Brian Hurley said in an interview that he's feeling confident about the company's performance, and he doesn't expect that home prices nationwide will drop to the degree that some of the more bearish forecasters are suggesting.

"I would bet that in 2013 and 2014, we'll see some corrections," he said.

"Meaning we won't see the five [or] six-per-cent home price appreciation we've become used to, it will be more like minus one or zero, with some pockets of course seeing more than that. But I don't see a big swing to the bad, I think it's going to be years of cooling."

"Condos is a watch area for us here in the GTA, and the high end of Vancouver is a watch area for us," he added.

"We don't play in that space too much."

A Genworth and Conference Board of Canada report suggests that a growing population and rise in the number of baby boomers will support demand in the national condominium market. Resale prices for condominiums in seven of the eight cities studied are expected to rise a bit next year, while the report forecasts a 2-per-cent decline in prices in Vancouver.

CMHC said that the moves that federal Finance Minister Jim Flaherty made this summer to tighten the housing market, including reducing the maximum length of insured mortgages to 25 years from 30 years, will cause homeowner insurance volumes to be lower this year than previously expected.

While there have been considerable swings in monthly estimates of housing starts activity, the trend has been rising and "some reduction of the current robust pace of housing starts is expected later this year and next year," CMHC said

In total, including its securitization business and other activities, CMHC reported second-quarter profits of $335-million, down from $383-million a year ago.

Total residential sales through the Multiple Listings Service will remain relatively stable for the remainder of this year and next, maintaining balanced market conditions in most Canadian housing markets, CMHC predicts.

"House prices are expected to grow at a rate close [to] or slightly below inflation," Mathieu Laberge, CMHC's deputy chief economist, told reporters. Growth in employment, net migration flows and incomes are among the factors supporting the market, he added.

Higher home prices are helping to keep the revenue that CMHC takes in from mortgage insurance premiums up even though the growth of its mortgage insurance portfolio is slowing.

The Crown corporation said that the volume of portfolio insurance it is offering has been about 40-per-cent lower so far this year than last year. Portfolio insurance is a product that banks buy from CMHC which covers entire portfolios of lower-risk mortgages with higher down payments. Banks like it because once those mortgages are insured, they can be securitized or sold into bonds. Portfolio insurance accounts for about 43 per cent of CMHC's total insurance-in-force, and the Crown corporation is now making only a small amount available to banks as it seeks to stay within its $600-billion limit.

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