Mortgage insurance model ripe for major changes
Australia no longer has mandatory government mortgage insurance
Buy a house with less than a 20% down payment and you have to get mortgage default insurance. There’s no choice. The rules are dictated by Ottawa and protect the banks in the event you default.
The rate you’ ll be charged bears very little relation to your individual risk. You have a fantastic job, a great credit history and live in a part of the country where the housing market is on solid footing? Forget it, you’re paying the same premium as anyone else.
“The mortgage insura-nce produc t, irrespective of who sells it, is the same product. There is l-ess product differentiation than there is among c-hoices of 89 octane un leaded gasoline,” says Finn Poschmann, vice-president of research of the C.D. Howe Institute.
“In gasoline, at least you can choose among ethanol c-ontent levels and deter gents. Not so with mortgage insurance.”
S-tarting on May 1 con sumers will pay even more for this insurance, which provides a backstop to the entire Canadian economy given Ottawa is on the hook for close to the $1 trillion in mortgages it guarantees.
But this type of pricing c-ould all change in the fu ture.
Evan Siddall, a former investment banker who was installed as president a-nd chief executive of Can a-da Mortgage and Hous ing Corp. in December, has been asked about the possibility of a risk-based m-ethod of assessing mort gage default insurance.
Sources say the new CEO has said he does not disagree with the principal of risk-based insurance.
CMHC wouldn’ t offer any specific comment.
“CMHC’s President has been consulting with a broad range of housing s-takeholders across Can ada over the past three months in order to gather i-nformation and perspec tives on several different topics, including mortgage l-oan insurance,” a spokes person said in an email.
I-t would be a monumen tal change for the Crown corporation and might fit with the more businessl-ike approach the depart ment of finance seems to be demanding from CMH-C. Former finance min ister Jim Flaherty openly talked about privatizing the organization last year.
T-he new minister of fi nance, Joe Oliver, doesn’t s-eem to be ruling out any thing when it comes to the mortgage market these days. “The government is gradually reducing its i-nvolvement in the mort gage market,” he said, in response to the latest rate battle raging among the banks.
Last year, Mr. Flaherty p-ut CMHC under the con trol of the Office of the S-uperintendent of Finan cial Institutions, to keep it more tightly under the thumb of finance.
CMHC has already begun overhauling its board with a more Bay Street flavour with the new chairman Robert Kelly, a former Wall Street CEO. One of the first major acts of new management was t-o increase the fees, some thing it said it needed to d-o to improve capital tar gets and reduce taxpayer exposure to the market.
With 5% down, the current cost of insurance is 2.75% of the value of your mortgage. That premium rises to 3.15% next month. CMHC controls a majority of the market and its only two private competitors followed almost immediately with the exact same spike in rates.
“It’s a one-size fits all model,” said Winsor Macdonell, general counsel with Genworth Canada, t-he largest private com petitor in the marketplace.
Changing the model w-ould be a potentially con troversial measure that w-ould leave mortgage in surance closer to the more t-raditional approach to in surance when it comes to assessing risk.
N-o one in the life insur ance industry would ever give the same rate to a nonsmoker as a smoker. Car i-nsurers will charge some one in small town Ontario a much lower rate than, say, someone in Toronto.
And such a change is not without precedent. Australia no longer has mandatory government mortgage insurance but a market has developed for t-he product privately any way, Mr. Poschmann says. In the United States, there are rates based on your state and within that state pricing you pay a premium based on your credit score.
“I think the Canadian model is partly (the way it is) because it’s historic,” Mr. Macdonell says. “We looked at this 10 years ago b-ecause finance was con sidering getting rid of the mandatory requirement for mortgage insurance.”
One of the biggest political problems for riskadjusted based pricing in Canada would be the difference in pricing for p-eople in rural areas ver sus urban areas.
“It’s harder to sell a home in a rural area and that by itself would drive your price up,” he says, adding the current model m-akes Genworth’s port folio stronger because it spreads risk more evenly.
The government has an interest in keeping that portfolio strong, given that in the event Genworth fails Ottawa is on the hook for 90% of the dollar value of t-he loans the private insur er guarantees for banks. The government backs 100% of loans insured by CMHC.
One of the reasons the banks are said to like the current system is they don’t want an increase in market share by private players because of that 10 percentage point gap. During the financial crisis in 2008, the banks started driving more business to CMHC because of that gap and concerns over credit. The banks want private i-nsurers there for competi tion but only to a point.
The current system does mean some consumers are s-ubsidizing others by pay ing a higher rate than they would in a free market. “In a reconfigured marketplace you would likely would have more variation. Credit scores would be one axis, so would the strength o-f the market and the abil i-ty to turn over proper ties. And the product itself could be different,” says Mr. Poschmann.
Vince Gaetano, a mortg-age broker with monster mortgage.ca, says nothing illustrates the absurdity of the market more today than the fact that people with mortgage insurance and low down payments actually get cheaper rates than people with large down payments without insurance.
He can get a consumer with 5% down a mortgage rate of 2.84%, if they lock in that rate on a closed mortgage for five years. Put more than 20% down and the best he can do is 2-.99% for the same mort g-age because it has no gov ernment backing.
Still, he questions what the incentive will be to change the system — not because the banks like the current system but also due to the lack of data to access individual risk.
“Sure (changing the system) make sense. I just don’t think they’ ll be able to trust the data,” says Mr. Gaetano, about assessing risk.
“T here are having a hard time trying to come up with a matrix to assess risk. It’s very difficult.”
For that reason, while many people think a change is coming from CMHC, it could take years to implement.