CMHC’s decision to tweak its underwriting policies pushes lenders to private market for default insuranceAuthor of the article.
The country’s biggest private-sector insurer of residential mortgages says it has gained market share following the Canada Mortgage and Housing Corp.’s decision to tweak its underwriting policies, a trend that has set off alarm bells at the Crown corporation.
Genworth MI Canada Inc., which has begun operating as Sagen MI Canada, now has a percentage of the default-insurance market for mortgage lenders that is “probably in the high 30s,” said Stuart Levings, Sagen’s president and CEO, on Tuesday.
“Our market share increased during the quarter, as lenders allocated more business to the private sector in response to the underwriting changes implemented by CMHC,” Levings said during a conference call regarding the insurer’s results for the period ended Sept. 30.
A report from National Bank Financial estimated Sagen’s market share at around 33 per cent in 2019, while CMHC accounted for around 46 per cent of premiums written in an industry that really only has three main players in Canada.
That, however, was before CMHC announced in June it was changing its underwriting policies for the mortgages it insures against borrower default. Those changes, the agency said, would help protect would-be homebuyers and reduce risk.
As of July, CMHC said new insurance applications would be subject to stricter criteria around credit scores and the amount of income being spent on housing costs. The Crown corporation also said that “non-traditional” down payments that increased indebtedness would no longer be counted as equity for insurance purposes.
The changes meant up to 30 per cent of future applicants might not meet CMHC’s guidelines, a report from credit-rating agency DBRS Morningstar estimated. Furthermore, CMHC’s private-sector competitors, Sagen and Canada Guaranty Mortgage Insurance Co. (which recently announced it is seeking underwriters to fill “a number of positions”), did not follow suit.
CMHC president and CEO Evan Siddall then wrote a letterto lenders in August warning that the Crown corporation’s market share had taken a hit, and that it was approaching the minimum level at which it would be able to protect the mortgage market in a crisis situation. Siddall asked lenders to reconsider highly leveraged household lending and to avoid making things worse by “unnecessarily” undermining CMHC’s market presence.
CMHC said in a statement to the Post that it doesn’t publicly report its market share, but that its “target homeowner market share” is currently between 40 and 50 per cent.
“To be able to act upon our financial stability mandate, CMHC aims to maintain enough presence to be able to: a) step in to enable financial stability and b) absorb market share if private insurers exit market,” the agency said. “We will continue to monitor the environment to ensure that we remain in a position to maintain our financial stability mandate.”
While it may seem like an obscure part of the financial industry, federally regulated lenders such as banks need to buy borrower-default insurance when a loan is worth more than 80 per cent of the value of the house. Given that not every buyer can make a down payment of more than 20 per cent, obtaining that insurance (with the cost of premiums usually passed on to borrowers) can be crucial to purchasing a property.
The coronavirus pandemic also stoked concerns about a rise in mortgage defaults, prompting lenders to allow borrowers to defer their loan payments — with the blessing of mortgage insurers.
Although Sagen expects most payment deferrals will end with borrowers resuming their regularly scheduled payments, it does anticipate “a subset” will go into default, which has prompted it and its lenders to plan to increase loss-mitigation activities.
In announcing its latest financial results, Sagen said the outstanding principal balance of its insured mortgages on which payments were being deferred by COVID-19-affected borrowers fell to $12.2 billion, or around six per cent of its outstanding insured mortgage balances as of Sept. 30. As of the end of June, those deferrals were happening on around 14 per cent of its loans.
Sagen also said the proportion of new insurance written in the third quarter that had gross or total debt-service ratios above 35 per cent and 42 per cent, respectively — which are CMHC’s limits — was around 41 per cent.
Levings said Sagen is still limiting its exposure to loans with high debt-service ratios and credit scores below 720, and that its proportion of those kinds of mortgages is just over three per cent. He added that Sagen did not see a “material” increase in the volume of non-traditional sources of down payments and loans with credit scores below 680, CMHC’s minimum score for at least one borrower on new applications.
Those loans “continue to represent a very small proportion of our in-force portfolio, and within our risk appetite limits,” Levings said.
Sagen booked net income of $124 million for the three months ended Sept. 30, a jump in profit of about 12 per cent from a year earlier, as its premiums earned increased and its losses on claims fell.
The insurer’s latest results also come as its majority shareholder, Brookfield Business Partners LP, is aiming to buy the remaining 43 per cent or so of Sagen that it doesn’t already own for approximately $1.6 billion. If it receives all the necessary approvals, the deal is expected to close in the first half of 2021.