The Canada Mortgage and Housing Corporation marked its 65th anniversary last week with the release of their 2011 annual report. As the nation’s top mortgage insurer (the organization backs $567 billion in default mortgage insurance), the CMHC controls roughly three-quarters of the nation’s mortgage default insurance. Despite inching ever closer to the $600 billion dollar government-imposed limit, the CMHC’s reported that there’s still plenty of room to meet the nation’s core demand for mortgage insurance.
While CMHC is confident that they can operate within it’s $600 billion window, it won’t be possible without certain changes. According to the annual report, CMHC believes they can better mange insurance demand based on two important factors:
- Runoff: CMHC anticipates about $60 billion of mortgage runoff (i.e. mortgages being paid off) annually. This helps to free up more room for new business. According to figures in the annual report, CMHC anticipates that runoff will help drop their current insurance load by roughly $10 billion to $557 billion by the end of 2012.
- Bulk Insurance Crackdown: Roughly 43% of CMHC’s insurance is low-ratio portfolio insurance. CMHC saw an unexpected rise in these bulk insurance projects in 2011. New rations will help reduce this load and free up space for high-ratio products.
Outlooks for 2012
While CMHC’s first quarter report (due by month-end) will provide a better understanding of what’s happening now, the outlook published in the 2011 report hinted at a number of risks on the horizon. Downsides include a slower than anticipated U.S. market recovery and increased economic unrest in Europe. Housing prices were also flagged as a concern, especially in areas where “house prices exceed levels that would be suggested by underlying demographic, economic and financial factors (migration, income, interest rates, wealth etc.) and where the growth rate of prices is accelerating.” CMHC recognized that these conditions can increase speculative activity in the housing market, a common factor in an housing bubble. With that being said, CMHC insists that “clear evidence of a bubble is lacking,” but that steps have been taken to better monitor underlying factors.
Understanding the Average CMHC-insured Borrower
The Canadian Mortgage Trends blog published a great overview of what the average CMHC-insured borrower looks like. Here’s a quick rundown:
According to the annual report, the average outstanding mortgage amount is $162,157. The average equity is roughly 44 percent; borrowers with 20 percent or more equity is 75 percent. The average credit score of a CMHC-insured borrower is 724; however, roughly 76% of borrowers have a credit score greater than 700. Finally, the average amortization that a borrower selects at the time of approval is 25 years.
What Wasn’t in the Report
Not surprisingly, CMHC avoided the topic of privatization in their report, even amongst rumours from Bloomberg that the CMHC considered selling itself earlier last year. Finance Minister Jim Flaherty has also made the following comment concerning the privatization of CMHC:
Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.
– Source: Financial Post
Privatizing the CMHC would have mixed results. While it would take tax payers off the docket, it could lead to higher margins for Canadian homeowners. Experts have looked to the Australian system as a reference, as their housing market completed a similar shift in 1997. According to Bloomberg, Australian’s pay relatively higher margins than Canadians and their lending industry has become more concentrated and less competitive due to the new setup. Either way, a sale of the CMHC likely wouldn’t happen quickly. House hunters can still secure the best mortgage rate online now in order to take advantage of the current low rates.