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Ottawa’s retreat from mortgage market sends CMHC insurance sales tumbling

The Canada Mortgage and Housing Corporation ( CMHC ) complex in Ottawa on Thursday Oct. 9, 2008.

Sean Kilpatrick/Globe and Mail

The amount of insurance that Canada Mortgage and Housing Corp. is selling has fallen dramatically, a sign that the federal government is succeeding in its efforts to reduce taxpayer exposure to the residential real estate market.

CMHC, which is one of the country's largest financial institutions and plays a pivotal role in the housing market, wrote $8.2-billion worth of insurance during the first quarter, compared with nearly $19-billion in the same period a year ago. The number of housing units that it insured fell 54 per cent to 52,078, from 114,045 in the first three months of last year.

The dwindling sales come after Ottawa has taken a number of steps to curb the growth in mortgage insurance, and by extension, to curb rising consumer debt loads and house prices. Those steps have affected sales of CMHC's two main products: traditional mortgage insurance on loans for which the consumer has a down payment of less than 20 per cent, and bulk or portfolio insurance which banks buy to cover portfolios of mortgages that have higher levels of equity.

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The new numbers from CMHC suggest that Ottawa is succeeding in its goals, though questions remain about whether those goals are the right ones.

In a research note Thursday, Bank of Nova Scotia economist Derek Holt weighed in on the success of outgoing Bank of Canada Governor Mark Carney's tenure, and suggested that the jury is still out when it comes to the actions that policy makers have used to steer the mortgage market.

Mr. Holt pointed out that "easing mortgage terms until 2008 as the Feds did and then slashing rates brought us to all-time highs across everything in the household sector." Mr. Carney counselled a very aggressive tightening of the market at what was a relatively late stage of the game, Mr. Holt wrote. In his opinion, the rules were "tightened too much and too quickly at the precise all-time peak in the housing and consumer markets. Those markets likely would have cooled on their own through an exhaustion factor."

Now, "the consequences are only just emerging by way of the magnified risks of a hard landing," Mr. Holt said. That's precisely what policy makers, namely Finance Minister Jim Flaherty, have been seeking to avoid. The Finance Minister has been taking steps that he hopes will gradually cool the market – a soft landing – without letting it continue to heat up too fast, or to crash.

Insurance is mandatory in Canada for high loan-to-value mortgages (those with a down payment of less than 20 per cent). The insurance reimburses the bank if the consumer defaults on their mortgage, with the insurer recouping funds from the foreclosure sale of the home. Sales of this core product have fallen since Mr. Flaherty tightened the basic mortgage insurance requirements in July; he reduced the maximum length of an insured mortgage to 25 years from 30 and effectively limited the ability of consumers to refinance high loan-to-value mortgages.

CMHC said Thursday that insurance volumes to cover new mortgages fell by about 23 per cent in this latest quarter, while refinance volumes were down by 69 per cent.

Ottawa has also taken steps to reduce CMHC's sales of bulk insurance. In the federal budget in March, Mr. Flaherty announced new rules that restrict the ability of banks to buy bulk insurance to reduce their capital requirements, and that curtail the use of government-backed insurance in securities sold by the private sector. CMHC's sales of bulk insurance were down by 98 per cent in the first quarter.

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The government has been keeping close tabs on the mortgage insurance sector because it guarantees it, meaning taxpayers are on the hook if things turn sour. Because the banks know that mortgage insurers will reimburse them if consumers default on insured mortgages, the system also encourages mortgage lending and, by extension, consumer debt, which Mr. Flaherty has been concerned about.

One area that did see higher sales in this latest quarter was the insurance that CMHC sells to cover multi-unit residential buildings, including nursing homes and retirement homes. The volume of multi-unit insurance that CMHC sold rose more than 5 per cent compared to a year ago.

"The numbers here are highly variable quarter over quarter, and as a result there's no significant trend you could see, whether it's in condos or rural or multi-units or nursing homes," CMHC chief financial officer Brian Naish told reporters on a conference call. The Crown corporation was unable to provide information on what proportion of its multi-unit insurance sales relate to the condominium market, which has been another source of concern for policy makers in Ottawa.

All told, the amount of insurance that CMHC had in force ticked down by $3.5-billion, to $562.6-billion, during the first three months of the year. That figure falls as consumers pay down insured mortgages and rises when CMHC sells new insurance.

Ottawa has capped the amount of outstanding insurance that CMHC can have at $600-billion.

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