Mr. Flaherty: Thanks For The Crappy Market!

CMHC’s Insurance Volume Dives 37%. 
The Repercussions

Canadian Mortgage Trends
The new mortgage insurance rules were intended to affect “less than 5% of new home purchasers.” That was Finance Minister Jim Flaherty's estimate from last June.

So far, he’s been pretty close to the mark. In the three months ending September 30, CMHC’s insured-purchase volumes are down 6%. (That drop isn’t due entirely to the rule changes, however.)

What Flaherty did not publicly predict was the extent to which high-ratio refinances, conventional securitized mortgages and smaller lenders would be impacted by Ottawa’s changes.

To start with, CMHC-insured high-ratio refinances (those with less than 20% equity) have plunged 22% Y/Y. CMHC attributes this to government policies that “effectively eliminated the high-ratio refinance market.”

On top of that, CMHC says its “portfolio (insurance…a.k.a. bulk insurance) volumes were approximately 98% lower” in Q3. That’s a direct result of it limiting “access to its portfolio product.”

That’s had noticeable effects on small lenders. According to one executive we spoke with, lenders like his can buy only 20-30% of the CMHC bulk insurance it could purchase just one year ago. And the big banks are also restricted, having been capped at $1 billion annually. Compare that to the $17 billion worth that Scotiabank bought last December alone. (More on why this matters) ...

CMHC: Mortgage Insurance is Nearing $600 Billion Limit

CMHC Insurance at $576 Billion
 Canadian Morgage Trends

Canada’s largest mortgage default insurer has $24 billion to go until it hits its $600 billion government-imposed insurance limit.

As of June 30, 2012, CMHC had $576 billion of insurance-in-force, one per cent higher than the prior quarter and two per cent higher year-over-year. That figure is the headline data point in CMHC’s just-released Q2 financials.

The interest in CMHC’s outstanding insurance stems from the fact that policymakers seem unwilling to increase its $600 billion limit. That means CMHC must live within defined parameters, forcing it to meter out less essential “bulk” insurance (which lenders use to help  securitize mortgages, reduce capital requirements, manage risk, reduce funding costs and offer more competitive rates).

Here’s more from today’s report and conference call:

CMHC says the new mortgage rules, which took effect July 9, will “reduce the high-ratio homeowner purchase market” and “effectively eliminate the high-ratio refinance market.”
First-time buyers account for the “vast majority” of CMHC’s high-ratio home purchases. (In our view, the new mortgage rules will disproportionately impact these buyers [our words not CMHC's]).
Second-quarter insured unit volumes plummeted 23.5% year-over-year.
Q2 net income from mortgage insurance fell 25%, resulting partly from a $28 million (25%) increase in net claims expense.
Bulk (portfolio) insurance is down 40% in the first six months of this year, after CMHC started rationing it at the beginning of the year.
The increase in CMHC’s insurance in force is partly due to “certain lenders taking advantage of their full yearly allocated portfolio amounts in the first half of the year.”
CMHC expects $60-65 billion of mortgages to fall off its books each year, as those mortgages are paid down.

Read More Here.