Canada's private mortgage insurers are pressing the federal government to get Canada Mortgage and Housing Corp. to raise its premiums, sources say, a move that could add to the cost of a home for some buyers.
The two private sector players, Genworth MI Canada and Canada Guaranty, compete with CMHC in the business of insuring mortgages when the buyer does not have a down payment of 20 per cent. The insurance covers the lender in case the homeowner defaults.
But because the federal Crown corporation dominates the business, private competitors tend to copy its prices, and would be extremely reluctant to raise prices on their own, industry sources say. CMHC has not raised its prices since the late 1990s, and actually lowered them between 2003 and 2005.
The amount of capital that mortgage insurers must set aside has risen over the years, as regulators have demanded a greater cushion against losses. That has squeezed profit margins, and Genworth and Canada Guaranty have raised the matter with Finance Department officials and the country's financial regulator – looking for CMHC to raise prices so they can follow suit.
Finance Minister Jim Flaherty has taken numerous steps to tighten up Canada's mortgage insurance market and cool the housing market in recent years. Those included four sets of changes to the rules that govern which loans are eligible for mortgage insurance, such as deeming mortgages with amortizations of longer than 25 years ineligible. In the past five weeks he has said that, while he would intervene again to ensure a housing bubble doesn't form, he has no plans to do so now. It isn't clear how he would regard the private insurers' request and he declined to comment on conversations with stakeholders.
CMHC's premiums are technically paid by the lenders, but the cost is almost always passed along to the borrowers. The premiums vary depending on the size of the down payment and are calculated as a percentage of the mortgage. The smaller the down payment, the greater the cost to the buyer.
For example, the standard premium is 1 per cent for a mortgage with a loan-to-value ratio of 80 per cent, and 2.75 per cent for a mortgage with a loan-to-value of 95 per cent. A borrower with a 17-per-cent down payment on a $500,000 house might pay more than $7,000 in premiums, while a borrower putting 6 per cent down on a $300,000 house might pay more than $8,000.
A hike in mortgage insurance premiums could have a cooling impact on the housing market, by making mortgages somewhat more expensive for many borrowers. It is estimated that about 60 per cent of mortgages underwritten by banks have some form of mortgage insurance on them.
Mortgage insurance is designed to make it easier for borrowers to obtain a mortgage, by reducing the bank's lending risk. Since the bank knows it will recoup its money if the borrower defaults, it's more likely to approve the loan. Consumers pay the premiums in order to obtain mortgages that they might not otherwise receive.
"Pricing has not changed in the mortgage insurance since 2005 and that time [it] was actually a price reduction," Genworth MI Canada chief financial officer Philip Mayers told analysts during an investor day earlier this month. "But if you look at the level of capital that's being deployed in the mortgage insurance market, it's approximately 30 per cent higher today than it was in 2009.
"If you stand back and look at, you know, what are the things that insurers price for? We price obviously risk, we price for expenses, we price for the return [on] capital. To the extent that capital is increased in the long run, one would expect that that should translate into a price increase."
Last week, CMHC disclosed that Mr. Flaherty was imposing a new "risk fee" on the Crown corporation's insurance sales. As of Jan. 1 it will have to pay the government a fee equivalent to 3.25 per cent of the mortgage insurance premiums it writes and 10 basis points on portfolio insurance it writes. Royal Bank of Canada analyst Geoffrey Kwan noted that Genworth and Canada Guaranty already have to pay a risk fee to the government of 2.25 per cent of premiums written.
"While we do not comment on our competitors' pricing structure, CMHC constantly reviews its products, pricing and models, taking into account its overall risk appetite and regulatory requirements, including current market practices," CMHC spokesman Charles Sauriol said in a statement.
The Office of the Superintendent of Financial Institutions, which regulates mortgage insurers, is going to be releasing a set of guidelines governing how the insurers operate by the end of March.
"Our best assumption is that capital requirements will be going even higher, suggesting that the return on regulatory capital will be going even lower," Canadian Imperial Bank of Commerce analyst Paul Holden said in a recent research report, adding that he thinks Genworth's argument is valid that it needs higher prices to earn an adequate return on capital.