Brokers to struggle with high ratio deals in one market

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The CEO of one mortgage default insurer believes Alberta is set to see an uptick in mortgage delinquencies and a drop in housing prices in the near future – and the insurer scrutinizing deals more closely.

“Our expectation is we’ll start to see [mortgage delinquencies] potentially in the second half of this year, so third quarter, fourth quarter it will start to pick up,” Stuart Levings, CEO of Genworth Canada told the Globe and Mail.

In anticipation of this, Genworth has sent a higher number of deals to underwriters to be evaluated, as opposed to relying on a computer algorithm.

As a result, the insurer has rejected around 8.5 per cent of Alberta’s deals, an increase of 1.5 per cent over average underwriting rates.

Levings expects prices to fall 8 to ten per cent in Alberta by the end of the year.

The oil industry – a major contributor to Canada’s economy – has taken a beating, with prices falling 60 per cent at certain points this year. Oil currently sits at $60.40 per barrel.

Genworth’s conservative underwriting has been influenced by the effects the 2008 recession had on the insurer – and the overall housing market – in Alberta.

“Alberta was literally a housing bubble going into 2008,” he told the Globe. “House prices went up 15-20 per cent a year, two to three years in a row. It was unheard of.”

As for unemployment rates, Edmonton reached 5.3 per cent in March; Calgary spiked to 5.2 per cent. Levings believes the overall unemployment rate in Alberta could eventually hit seven per cent.
  • Ross Kay on 2015-05-07 9:40:02 AM

    44% of all home owners in Calgary would lose money in 2015 if they sold with a REALTOR when inflation is taken into consideration.

    Prices in 2015 dollars are now all the way back to March 2007 purchase prices in those 2015 dollars.

    While years of mortgage payments have reduced CMHC and Genworth's risk exposure ( the consumer loses not the insurer) over 45,000 properties in Calgary are currently underwater totally if required to be sold.

    Prices have been falling in Calgary but have been hidden behind the fact that market was in OverSold condition but as of April 30th is back to the more risk free way of selling first and buying after.

    2777 higher priced homes that had to be liquidated in Q1 2015 to complete Q4 2014 purchases that which were set to close in Q1/2 2015 have now been addressed.

    Plummeting prices since January will now be recorded in the CREB monthly average selling price.

  • Tony Piattelli on 2015-05-07 9:44:41 AM

    Here's what really doesn't make sense with this perspective. The insurer's industry has been built around client's meeting specific rules/guidelines to qualify. What we are seeing in Alberta are people with 675 beacon scores, 25% GDS and 38% TDS with 1.5 years full time employment 4 years in the same field getting declined because they work in the oilfield. Reason for decline: Tight ratios, low CB, only 1 year at full time job. If the deal fits your guidelines, then approve the deal. Oh yea, as to the comments from 2008 after all the years of consecutive growth, house values in Alberta only dropped 10% and have since rebounded. No Genworth isn't out money nor did they lose money. My concern has to do with how they adjust their approvals on an ad hoc basis depending on whether someone works in the oil industry. This borders on discrimination.

  • Ross Kay on 2015-05-07 10:00:28 AM

    The best thing for those declined is that Genworth is actually saving them 10's of $1000's of dollars by stopping them from making a foolish financial decision ( buying at peak prices ).

    Maybe Genworth should have listened to the REALTORS association in Calgary in January and expected price increases in 2015 and only a minor slowdown.

    In Calgary people can walk away from their homes something you can't do in other provinces. As such prudent lending policy should have addressed this fact years ago.

    The best solution available which would still allow Calgarians to capitalize of today's low mortgage rates would be to Appraise properties at 2007 Valuation and loan on that assumption.

    In all fairness this is how all mortgage debt that is required to be insured should be loaned but that is not possible if the Canadian housing market is to continue in a manner that allows the housing stock to grow and meet the demands of the population.

  • Tony Piattelli on 2015-05-07 10:19:20 AM

    Hi Ross,
    Not sure I understand your position. The insurers have been using business models that have served them well since inception. What I'm saying is that Genworth is not sticking to their own business model based on assumptions that the market in Alberta is going to collapse by 10%-20%, which isn't going to happen. Basing mortgages on 2007 values is useless and doesn't serve the economy in any way as it doesn't represent true market value. Let me ask you: If your house is worth $650,000 today and in 2007 it was worth $400,000 do you plan on selling your home for $400,000? Not a chance, so I'm not sure how that's going to help, but I'm not talking about this. I'm more concerned with an institution that's been successful due to it's business model and now they are not following their own business model as they are cherry picking and rationalizing declines that fit their business model in order to target a specific industry. The fastest way for a company to commence the failure process is to tinker with the business model on an ad hoc basis. By the way, house prices in Calgary aren't over inflated and we still have net migration. Which is probably why the 10% decline hasn't happened and in certain areas of the city there's been an increase in values.

  • Ross Kay on 2015-05-07 11:54:38 AM


    Calgary prices have already fallen over 8% since the first of the year but that still has not been communicated to the public. If you check the CREB website today you will see that reduction is now showing up in May's sale stats. It's also why using real estate board generated marketing points to make risk based decisions is a laugh.

    Genworth's business model ONLY works when a housing bubble inflates, it does not work when the deflation begins. I assume you are not foolish enough to actually believe REALTORS comments that house price corrections are like dinosaurs, meaning they are now extinct. Or that Demand is so great in Vancouver that bidding wars are common. Remember even in Toronto's 416 52% of the homes offered for sale did not sell. Clearly this was a case of lack of demand if you were talking about any other market.

    Genworth shareholders would demand two options. 1) Raise fees ( which is impossible when competing against CMHC) or 2) Refine Insuring guidelines.

    They have chosen choice 2 which in all fairness was the only choice they had. No private corporation would willingly assume more risk.

    Actually this entire discussion only outlines how much misinformation exists about housing markets.

  • Darr Robbins on 2015-05-08 12:00:44 PM

    Purchasing a high priced asset carries a risk. Lending on those also carries a risk. Innocent Canadians should not be forced to share the burden and be penalized through CMHC for the malinvestment decisions of others. Negative real interest rates is the reason why house prices are high. Interest rates should be allowed to normalize bringing assets prices and credit risk premium back to equilibrium.

  • Tony Piattelli on 2015-05-08 3:46:33 PM

    Not sure if you know this, but CMHC has never lost $$ since it's inception. The only 2 bodies of government who have always made money has been CMHC and the Bank of Canada. Genworth got into the game with the set of rules that they have agreed to play with. Now they're changing the rules on an ad hoc basis. The issue with the interest rates is determined by global markets because we are a global player and really don't have as much say in the interest rate game as you may believe due the other variables in play such as: other countries interest rates, price of commodities (oil, wheat, etc.), foreign policy, and such. I also guarantee you that the price of my home won't go down if interest rates go up. Canada is a small player in a big world. Don't mix up local issues with global issues.

  • Darr Robbins on 2015-05-08 4:15:57 PM

    All in, including labour, benefits, building leases and all other expenses based on GAAP accounting, CMHC is a tax drag for taxpayers. The point that it has not had to pay a claim is not at issue here. Even then, because it has not, credit risk should be borne by lenders.
    As for the Bank of Canada, it should have been closed down yesterday. Its only purpose is to provide liquidity for banks at the taxpayer’s expense. It increases the money supply which creates inflation that is a stealth tax for Canadians. Yes, it makes money through seigniorage which is the difference between the face value of money and the cost to produce it. However, this small revenue stream is far outweighed by the detrimental inflation the Bank of Canada creates. Central banks are the greatest hoodwink ever pulled on citizens to confiscate their purchasing power.

  • Tony Piattelli on 2015-05-08 4:33:27 PM

    I agree that one of the functions of the Bank of Canada is to provide liquidity for the banks, but I disagree with the comment that it's at the taxpayer's expense for many reasons, but to think that providing liquidity of to the banks is it's only function is narrow is scope as the primary role of the B of C is to ensure that the government in power is acting in the best interests of the Canadian public by supporting government policies that are working towards that objective and countering government policies which are not necessarily working in the best interests of the Canadian public. They are a check to government, which is why they aren't controlled by government.

  • Ross Kay on 2015-05-08 4:40:39 PM

    First everyone must remember CMHC and Genworth have the banks(lenders) as clients and not the consumer. The Bank (lender) is deemed to be buying the insurance so the coverage is different than what a consumer would obtain.

    The banks are covered for loses in both Principle and Interest that would have been generated over the course of the loan. This effectively raises the RISK far higher than had the only the priniciple been guaranteed.
    The insurer also shoulders all the liquidation costs for any property foreclosed and CMHC is the one who goes after the consumer to recover any loses, saving face for the banks.

    Let all that sink in.

  • Tony Piattelli on 2015-05-08 4:49:38 PM

    I would agree that the insurers have an obligations to the contract they signed with the banks regarding the level of coverage that they would be providing in order to get the revenue stream by charging the client the insurance premium, and do have to write off several mortgages a year, yet I guarantee you that the insurers don't cover every mortgage that they insurer as like most insurers, they pore through the file to identify areas of deficiencies and then reduce the amount of insurance that they cover and many times don't provide any coverage at all, if they deem the banks didn't provide enough prudence during the adjudication process, so no, they don't cover all loses per your comments and definitely don't always cover the accrued interest as many times the banks stop accruing the interest on these mortgages.

  • Darr Robbins on 2015-05-08 5:03:23 PM

    The Central Bank cartel has only served to rob citizens of the purchasing power since their inception. They work in unison to debase fiat currencies. They answer only to banks who increase the money supply with each loan they make. Through the fractional reserve banking system, banks lend money they never had right out of thin air with each loan they make. This is legalized counterfeiting. It is extremely inflationary which is why the middle class, defined as those in the fifties and sixties era, is all but extinct. Money issuance should return the Ministry of Finance with legislation outlawing deficit spending to prevent abuse. Inflation will cease when money is truly backed by collateral. Special interest and corporate political contributions should also be outlawed thus returning the electoral power back to the individual citizens. Only then will democracy return to Canada. Until then, your votes serve no purpose as all elected official are bought and paid for regardless of their political color.

  • Ross Kay on 2015-05-08 5:15:14 PM

    If a bank charges CMHC FEES to a client and outlines it as such those costs are revealed and notorized in the lawyers office as part of the adjustments. This happens whether the insurance is paid outside or included in the mortgaged amount loaned.

    What you are suggesting would be fraud and I assume another body would look into that.

    That said the policy is the policy and interest is due an payable as part of the policy as are real estate fees, lawyers fees, admin fees, etc etc, CMHC pays all these.

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