Economists are standing up to address concerns about the soundness of Canada Mortgage and Housing Corp’s portfolio, answering speculation that the insurer would need a bailout should the housing market go south.
Stéfane Marion, chief economist and strategist for National Bank
Financial, says those fears are overblown considering Canadian borrowers, whose mortgages are insured by the CMHC, have had much stronger credit scores than their U.S. counterparts.
“There seems to be growing concern about the Canadian housing sector and the risks it poses to the CMHC and our banking system,” Marion said in a research note. “As some of the stories go, lending standards in Canada have been eased to the point where mortgages with high loan-to-value ratios (more than 80%) make up the same proportion of the market as in the U.S. in 2007. Even if this were the case, we would still argue that current underwriting standards in Canada are much more conservative than those applied in the U.S. before its housing bust.”
Prior to that implosion, more than a quarter of newly approved mortgages were for people with a FICO credit score below 620. FICO scores range between 300 and 850, with a score above 650 generally indicating a good credit history. Since the crisis, lending standards have tightened and only about 8% of mortgages are held by borrowers with scores of 620 or less, Marion writes.
“In Canada the proportion of newly approved CMHC homeowner loans with low credit scores was 7 per cent at the end of 2012, down from 13 per cent in 2009,” he said. “This very low ratio coupled with the norm of recourse mortgages on this side of the border makes the comparison between Canada and the US circa 2007 seem dubious.”