Canada Mortgage and Housing Corp. says it needs to raise prices for mortgage insurance to reflect higher capital targets – even though its stockpile of capital is already growing quickly under the old prices. That suggests there is more at play with this move.
The public line for the price increases announced Friday is that they "reflect higher capital targets." That's a good thing because it reduces the exposure of taxpayers, who own CMHC, to any losses at the insurer.
So just what are those capital targets? They must be pretty stiff, because frankly, CMHC has been racking up capital at a fast pace with prices as they are.
As of the end of September, the last results that are public, CMHC was holding 243 per cent of its minimum capital level. That was up from 233 per cent in the second quarter, and just 222 per cent at the end of September, 2012.
That's already well above CMHC's stated capital holding target of 200 per cent, or two times the capital that it is required.
The capital has been accruing because CMHC has been turning steady profits and the government has not taken any money out of the business.
"The capital targets take into consideration good and bad economic conditions that would be expected to occur through normal economic cycles over an extended period of time; if economic conditions are better than expected, the actual capital level may be higher than the target level," CMHC spokesman Charles Sauriol said.
A 15-per-cent increase in prices for mortgage insurance is only going to accelerate that pace of accumulation.
That raises a few possibilities about what CMHC is thinking. One is that the new capital targets internally at CMHC are significantly higher than where the capital levels are now and the government wants to make sure that they are reached quickly. A second possibility is that there are heightened fears of higher losses on mortgage insurance, so pre-emptive price increases will keep the insurer profitable and capital moving higher even if that happens. A third is that Finance Minister Jim Flaherty has decided he simply wants to build a stronger safety net. And a fourth is that a long push by privately-owned insurers for higher prices. Now that CMHC is raising prices, they can too.
Most likely, it's some combination of those factors.
The result will be that an already extra-capitalized CMHC will have an even larger buffer for any losses - and as CMHC stated, that is a good thing for taxpayers.