Why are mortgage insurance premiums about to rise in Canada for the first time since the 1990s? The new guidelines that the country's financial watchdog issued Monday offer some insight.
Banks are required to obtain insurance when they sell a mortgage to a customer who has a down-payment of less than 20 per cent. The mortgage insurance pays the bank back if the customer defaults on the loan. The insurance is there to protect the banks, but the banks almost always pass the cost of the insurance on to the customer.
So much time passed without any change in mortgage insurance premiums that the industry began to take the price of insurance for granted. Premiums had not risen since the late 1990s, and they actually fell between 2003 and 2005. But six weeks ago, in a rare move, Canada Mortgage and Housing Corp. (the Crown corporation that dominates the mortgage insurance business in this country), said that it will be raising premiums by about 15 per cent on average effective May 1. Of note, after nearly a decade of silence on premiums, CMHC also said that it will start announcing its premiums during the first quarter of each year. Its two competitors quickly adopted its price changes.
CMHC effectively sets mortgage insurance premiums in Canada. Since it's the biggest mortgage insurer, its two rivals (Genworth MI Canada and Canada Guaranty) have generally always copied its pricing. But they weren't happy about it. They had been telling officials in Ottawa that they would like to raise premiums, but they were worried that they'd lose business to CMHC if they did. A main reason why they wanted to raise premiums was that new regulations that were brought in after the financial crisis were forcing them to put aside bigger capital cushions to protect themselves from any future crises. Profit margins were being squeezed.
Based on the new guidelines that the financial regulator (the Office of the Superintendent of Financial Institutions, or OSFI) released Monday, it looks like Genworth and Canada Guaranty had a sympathetic ear in Ottawa.
The regulator's job is to help ensure that the country's banks and insurers remain healthy. That means, in part, ensuring that they're charging enough for the risks that they're taking on.
Check out this paragraph in the new guidelines, especially the last sentence: "For each mortgage insurance product, a [mortgage insurer] should establish actuarially-sound premium rates for the risks it incurs, taking into consideration the overall risk of insuring the mortgage loan and the potential that economic and market conditions and/or borrower characteristics can unexpectedly change. A [mortgage insurer] should review its mortgage insurance premiums periodically, but at least annually."
It sounds like the regulator, OSFI, is pushing for more risk- and market-based pricing. Sources say that officials within the mortgage insurance industry saw a draft of the new guidelines shortly before CMHC announced its price increase six weeks ago.