Housing Recovery? We May Have To Wait…
Effects of CMHC Reducing Mortgage Default Insurance Coverage
Mortgage default insurance, also known as “mortgage insurance” helps Canadian buy a home sooner and with a lower down payment. It protects lenders against any loss caused by unpaid payments, or a property sale that does not generate enough money to pay the outstanding balance. According to The Financial Post, starting May 30th, 2014, Canada Mortgage and Housing Corp. (CMHC), will stop insuring second homes and will require self-employed Canadians to have third party income validation. Canadians with less than a 20% down payment on a house and borrowing from a federally regulated bank must get the insurance to cover their loan.
CMHC said the changes will affect less than 3% of CMHC’s insured business and that “their discontinuation is not expected to have a material impact on the housing market.” But Genworth Canada’s parent company said those lines “perform quite well” for them.
It was announced on May 1st that CMHC is raising rates all around. The new decision was made after reviewing their mortgage loan business. According to Steven Mennill, senior vice-president, the changes were necessary as CMHC tried to help “Canadians meet their housing needs and contributes to the stability of the housing market and finance system.”
Vice-president of research at the C.D. Howe Institute, Finn Poschmann, believed that the changes are reasonable and “the aim is to shift the balance towards private investors taking on more of the housing finance risk and the federal government taking on less on behalf of federal taxpayers.”
Rob McLister, editor of Canadian Mortgage Trends, agreed that the changes were the government’s way of slowly privatize the mortgage default insurance business.
And how did the government responded to this statement? It was said in an email from the Department of Finance that: “The CMHC changes are aligned with the government’s continued efforts to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance.”
For those insurances that are no longer covered by CMHC, they will see a rise in rates. And surely, on May 1st, the private companies did choose to adopt a premium hike on insurance that CMHC changed.
Now the question is will others follow in the leads of CMHC?The mortgage insurance industry consists of just three companies: the CMHC, which controls the bulk of the market, Genworth MI Canada and Canada Guaranty.
Brian Hurley, chief executive of Genworth MI Canada, said that there is no immediate actions to follow the CMHC’s decision, but they still planned a review. A few days after, it was announced that Genworth MI Canada will reduce the maximum number of units allowable under the vacation/secondary home program from two units to one unit. However, the company will not be making changes to its criteria for loans to self-employed people and there will be no change to the maximum number of Genworth-insured properties per borrower.
Contact Irina Marshall today if you want to discuss more on this matter or if you have further questions regarding the recent changes.
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