Banks may be forced to carry some CMHC burden

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The CMHC is looking at a formula that would force banks to pay a deductible on mortgages insured by the crown corporation before claims are settled. The idea was briefly mentioned in the International Monetary Fund’s assessment of the Canadian housing market earlier this year and would enable the CMHC to move some of its financial burden on to the private sector; the banks are of course against the idea. The suggestion is that banks could take on risk of between 5 and 10 per cent of the value of the mortgage. Read the full story.
  • Ron Butler on 2014-09-10 11:28:21 AM

    Couple of things, there is no "burden", CMHC is very profitable.

    It would change risk pricing and would automatically be a rate differentiator favoring balance sheet versus non-balance sheet lenders.

    It seems like backwards approach to increasing net revenue. Just increase premiums to raise more money. It is not as if the people who pay the premium pay the deductible so there is zero motivational economics here.

  • Daniel McKay on 2014-09-10 5:25:45 PM

    Fully agree that there is no "burden" associated with CMHC as their mortgage insurance component is very profitable. I'm not sure if this is the best way to do it, but I really like the idea of forcing the banks to have some skin in the game. This should hopefully force them to scrutinize and properly underwrite their deals submitted by their employees a bit more closely. I'd love for them to have to pay deductibles on insured mortgages and then lose that money and receive no compensation on the defaulted mortgages when CMHC discovers that they granted approval based on misrepresentation or fraud on the part of that bank or their employee(s). We've all had deals where we had to tell the client's they don't meet insurer guidelines or that they were declined by the insurer only to find out down the road that they somehow got an insured mortgage through a bank branch. I'm hoping that if implemented, this policy will help curb or at the very least cost the banks on those deals.

  • Ron Butler on 2014-09-10 6:00:38 PM

    Please be aware that lenders relentlessly mitigate their risks and they know how to price so they would simply build the future cost of projected deductible losses into their rates.

    In the end the entire borrowing public would end up funding the deductibles for those that defaulted through higher rate. Like every other government idea it seems to make sense and it appeals to the public: let the big banks suck up some deductible costs to teach them to be better underwriters but in the end that will never happen. The banks will build the cost into the rates and the good borrowers will end up paying for the defaulters.

  • Ron Butler on 2014-09-10 6:00:38 PM

    Please be aware that lenders relentlessly mitigate their risks and they know how to price so they would simply build the future cost of projected deductible losses into their rates.

    In the end the entire borrowing public would end up funding the deductibles for those that defaulted through higher rate. Like every other government idea it seems to make sense and it appeals to the public: let the big banks suck up some deductible costs to teach them to be better underwriters but in the end that will never happen. The banks will build the cost into the rates and the good borrowers will end up paying for the defaulters.

  • Daniel McKay on 2014-09-10 6:57:32 PM

    @ Ron: With rates being so competitive in the industry I don't think that the cost of deductibles would be fully passed on to mortgagors, the banks will be forced to eat at least some of that cost. If they built the full cost of the deductibles into rates, than they will likely be rate undercut by other lenders offering better rates because they have a cleaner book. The big banks have demonstrated that they are willing to sacrifice mortgage profitability for market share, with the BMO "specials" being a prime example. I highly doubt they would be willing to sacrifice market share to have the deductible cost fully passed to mortgagors in the form of higher rates. The good borrowers won't pay for the bad ones, they will go to a lender with a lower rate.

  • Ron Butler on 2014-09-10 7:07:09 PM

    @ Daniel, you may be right but mortgage delinquency is basically the same for all lenders within a couple of basis points so how could one bank have an upper hand over the other banks and in the end I believe the consumer will pay that's just the way banks work. The lenders who will HAVE to pass on the cost increase to fund deductibles are the monolines because their funding sources insist on the static returns they require to offer the funds so the costs get baked into the cost of the money being offered.

  • Paul Therien - CENTUM on 2014-09-11 1:18:03 PM

    I think we need to consider several things when looking at this proposal. Firstly is of course that today there is no deductible paid, and the beneficiary of the insurance is the banks.

    Is CMHC profitable? Yes it is, but so were the big U.S. insurers until 2008. Although we are in a different economic circumstance, and our credit adjudication processes are tighter than what they had in the U.S. it is not outside of the realm of possibility that we too could experience a “crash”. It may not appear likely, but to quote U . Gary Charlwood: “A smart man never builds his business for the good times, only for the bad times. When times are bad you profit, when times are good you profit.” CMHC, albeit a government entity is a company, and how much tolerance do we think the public would have if it was losing money? It is, or would be, a political minefield.

    When CMHC started out their mandate was to house Canadians, and to assist with making home ownership affordable. They were not there to subsidize large, private, for profit institutions. Prior to the 2000’s most banks carried a balance sheet of lending, and they accepted the risk on that lending. Today, most lenders bulk insure their entire portfolio to mitigate any risk or loss. The statistics show that the vast majority of mortgages in this country are either front end insured, or bulk insured. The challenge with bulk insurance is that no insurer fully audits/adjudicates every single file that is a part of that “batch” of mortgages. They do spot checks and allow for certain risk factors. That being said, it is likely that some files being bulk insured are perhaps not up to snuff. That means that the exposure to risk is magnified significantly for the tax payer. (We must not forget that Genworth and Canada Guarantee are 90% guaranteed by the government).

    In the event of a collapse of our housing market CMHC would bear the biggest burden as the largest insurer in the country. The political fallout would be nasty, a crown corporation gone bad. Genworth and Canada Guarantee however… it would be seen as a bailout of a private company by government and good for the economy, etc. You only have to look at what happened in the U.S. to know that is true.

  • Ron Butler on 2014-09-11 1:24:51 PM

    @ Paul, so you are favor of deductibles or not I favor, or .............???

  • Paul Therien - CENTUM on 2014-09-11 1:40:41 PM

    At this point with the limited information I have at hand (and I probably have more than most), I would respond that I cannot say definitively either way. There are still questions that need to be answered and the economics of the proposal that need to be considered. Without that information it is impossible to make an informed decision.

    I can tell you that I do not believe that they would have a significant impact on the consumer or on rates. It would encourage lenders to have more judicious practices with their bulk insured portfolio's perhaps, but that is assuming that they are not today which I doubt is the case for most. From a strictly CMHC perspective it makes sense.

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