CMHC faces some hard decisions
Mortgage insurer losing market share
When the Canada Mortgage and Housing Corporation moved to tighten its underwriting practices last summer, it was the largest provider of mortgage insurance in the country, capturing 49 per cent of new business in the second quarter.
“There is no doubt that we have willingly chosen to forego some profitable business that our competitors would find appealing,” then-chief executive Evan Siddall wrote in August, in a letter to Canada’s biggest lenders, following the implementation of the stricter standards. Siddall used the letter to caution the banks and others mortgage lenders about risky lending, warning that “there is a dark economic underbelly to this business that I want to expose.”
The hope was that competitors would follow the organization’s lead for “the good of our economy.” But it turns out they didn’t.
Instead, the CMHC saw its market share of new insurance originations plummet, dropping the Crown corporation all the way to third place, behind private insurers Sagen and Canada Guaranty. In the first quarter of 2021, the CMHC held just a 23 per cent share of new underwritings, according to figures calculated by RBC Capital Markets. Sagen (formerly known as Genworth Financial) held 44 per cent of the pie followed by Canada Guarantee with 33 per cent.
This week, the CMHC admitted that the tighter standards were a mistake and reversed them, but some in the financial sector wonder if the damage was done. While watching the private sector swallow CMHC’S lost share isn’t expected to move the needle when it comes to housing prices, it is a hit to the agency’s presence in the sector as well as its ability to move the housing market with further adjustments to its underwriting practices. It raises a question that borders on the existential: where does the CMHC go from here?
“You wake up one morning and you’ll realize that CMHC is number three in the market and all of a sudden not dominating the market the way it was,” Benjamin Tal, deputy chief economist at CIBC Capital Markets told the Financial Post. “By regaining market share, they will regain some influence, but I think that the days in which CMHC was the market — those days are over.”
Tal noted that the CMHC will now have to figure out a new identity in the market, something that comes as Romy Bowers, who had formerly served as the CMHC’S senior vice-president of client solutions, takes the reins.
Dan Eisner, chief executive and founder of True North Mortgage, said that Bowers will face an uphill battle in bringing the CMHC back to terms with the other industry players.
“I think you have three factors going against Romy on this: One is that we were burned by CMHC and so we’re reluctant. Two, we made all these IT investments. Now, you’re asking us to (reverse them),” Eisner said, explaining that the mortgage industry was forced to make software changes to accommodate the change in underwriting practices. “Three, you just have the lower-level direct underwriters’ personal relationships that have developed over the last year. So, I think it’s going to be a struggle for Romy to bring that back.”
Eisner anticipates that the CMHC will look into bolstering its other segments to make up for the loss in revenue from its diminishing market share. One area Eisner believes they will aim to make up that revenue is through the fees the organization charges to manage the Canadian mortgage bond and mortgage-backed securities markets.
“We saw the fee increase substantially in January,” Eisner said. “It makes me wonder … that since they lost market share, so they’re not getting their pound of flesh upfront, they’re getting a pound of flesh at the end.”
Higher fees, Eisner suggested, could lead to higher mortgage costs as lenders would have to cover.
Leading up to the change in leadership, the CMHC had already been evolving under then-ceo Evan Siddall’s watch, leaning into its mandate of providing more affordable housing for Canadians. It even announced that it might change its name to something along the lines of “Housing Canada” in the future to reflect a goal of ensuring that “by 2030, everyone in Canada has a home that they can afford and that meets their needs.”
CMHC may also seek to rely on — or leverage — its large store of housing market data.
“The CMHC is a major, major provider of housing market data that is not out there, and the competition doesn’t have this capacity,” Tal said. “So, this is something that they will try to capitalize on when they try to regain market share.”
But the competition is unlikely to yield that turf voluntarily. Sagen has seen its underwriting volumes surge and in April, announced that it had been fully acquired by Brookfield Business Partners LP, which took the company private after purchasing the remaining outstanding shares at $43.50 a piece.
Rob Mclister, mortgage editor at Ratesdotca, told Financial Post earlier this week that borrowers may have a newfound loyalty toward these private sector default insurers, making it that much more difficult for the CMHC.
Mclister added that reframing the organization’s priorities is important to bring the company back to balance in the Canadian mortgage market.
“The CMHC needs to get back to a more industry-friendly stance and kind of separate its overall policy initiatives — or maybe even leave those to the government and get back to doing what it does best, which is to provide default insurance for folks that don’t have 20-percent down and provide industry intelligence in terms of data and research,” Mclister said.
THEY’RE GETTING A POUND OF FLESH AT THE END.