Inflexible insurance model for mortgages may change
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 insurance product, irrespective of who sells it, is the same product. There is less product differentiation than there is among choices of 89 octane unleaded gasoline,” says Finn Poschmann, vice-president of research of the C.D. Howe Institute.
“In gasoline, at least you can choose among ethanol content levels and detergents. Not so with mortgage insurance.”
Starting on May 1 consumers 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 could all change in the future.
Evan Siddall, a former investment banker who was installed as president and chief executive of Canada Mortgage and Housing Corp. in December, has been asked about the possibility of a risk-based method of assessing mortgage default insurance.
Sources say the new CEO has said he does not disagree with the principal of riskbased insurance.
CMHC wouldn’t offer any specific comment.
It would be a monumental change for the Crown corporation and might fit with the more business-like approach the department of finance seems to be demanding from CMHC. Former finance minister Jim Flaherty openly talked about privatizing the organization last year.
The new minister of finance, Joe Oliver, doesn’t seem to be ruling out anything when it comes to the mortgage market. “The government is gradually reducing its involvement in the mortgage market,” he said, in response to the latest rate battle raging among the banks.
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 to increase the fees, something it said it needed to do improve capital targets 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
In gasoline, at least you can choose among ethanol levels.
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, the largest private competitor in the marketplace.
Changing the model would be a potentially controversial measure that would leave mortgage insurance closer to the more traditional ap- proach to insurance when it comes to assessing risk.
No one in the life insurance industry would ever give the same rate to a nonsmoker as a smoker. Car insurers will charge someone 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 the product privately anyway, Mr. Poschmann says..
“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 because finance was considering getting rid of the mandatory requirement for mortgage insurance.”
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 insurers there for competition but only to a point.
The current system does mean some consumers are subsidizing others by paying 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 of the market and the ability to turn over properties. And the product itself could be different,” says Mr. Poschmann.
Vince Gaetano, a mortgage broker with monstermortgage.ca, says nothing illustrates the absurdity of the market more today that 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 mortgage because it has no government backing.
“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. “There are having a hard time trying to come up with a matrix to assess risk. It’s very difficult.”