On July 1, Canada Mortgage and Housing Corporation (CMHC) tightened its underwriting policies for high ratio borrowers, including increasing credit score requirements and lowering debt servicing limits.
CMHC is, of course, a Crown Corporation, but there are private mortgage insurers, Canada Guaranty and Genworth Canada, that did not follow CMHC’s lead.
The result is CMHC has lost market share to the private companies as lenders send more business their way.
Last week, Evan Siddall, outgoing CEO of CMHC (he leaves at the end of the year) called on lenders to tighten their underwriting policies, for “the sake of the economy.”
Siddall sent a letter to CMHC-approved lenders and the country’s other two mortgage insurers, which reads, in part, “There is no doubt that we have willingly chosen to forego some profitable business that our competitors would find appealing.
“Please put our country’s long-term outlook ahead of short-term profitability.”
Industry executives were quick to respond, particularly to Siddall referring to a “dark economic underbelly to this business that I do not want to expose.”
“I think the type of language that is used in this letter is really only serving to drive fear in some instances,” Paul Taylor, president and CEO of Mortgage Professionals Canada, told BNN Bloomberg. “We should be thinking about the long-term economic prospects of Canadians here.”
Rob McLister, founder of RateSpy.com , also told BNN insurers and lenders are “extremely conservative” in their underwriting practices.
“Nobody wants to take a house back,” said McLister. “No lender or insurer wants to lend such that their arrears rate is noticeably above average, because then they stick out and bad things happen. The cost of capital goes up (and) regulators clamp down. There are so many incentives that people don’t understand in this business to keep lenders doing the right thing.”
Phil Soper, president and CEO of Royal LePage, has his own take.
“It was one of the more bizarre things I’ve heard a senior executive or the head of a Crown Corporation ever say,” says Soper. “Metaphors pop into my head. First of all I thought of the CBC. Say the CBC decides it’s going to cut programs, which essentially is what CMHC did — they cut service levels to a significant part of the market, that being young people, first-time home buyers without a credit history. So when CBC cuts programming, CTV bumps up its programming and advertisers move their business over to CTV. Then, CBC writes a letter to advertisers and says ‘you know, there is a dark underbelly in Canadian broadcasting and really, for the good of the nation, you need to move your advertising business back to us.
“That’s basically what Siddall wrote, but, he didn’t (mention) CMHC’s drop in service levels, the fact they abandoned bank customers, that they’re going to make things better in the future.
“No, they use some bizarre language to try to convince banks randomly that they need to move this business back from the private sector to the public sector after they materially dropped them. I know there’s a collective raising of eyebrows of bank executives saying ‘thanks for your bizarre letter but sorry, we’re busy, and we’re moving on with our lives.’ ”
Prudence guides the private insurers, who have no back-up to failure.
“If CMHC gets into financial trouble, the Canadian taxpayer bails them out. Not that that has happened, because Canadian housing has been strong for decades, but if CMHC has problems, that’s what happens,” says Soper. “If a private company gets into trouble, they go out of business or their shareholders abandon them. There is no bailout for private companies, so the underwriting rigour in the private sector is very, very good, because they don’t want to write bad policies.”
Another Soper metaphor.
“Take Canada Post, which delivers mail to Coronach, Saskatchewan, or Balzac, Alberta, for the same price as they do between Calgary and Edmonton and it’s a public service,” he says. “CMHC, in this bizarre approach to the market, said ‘we want to write the low-risk, high-margin business and get out of the service-to-Canadian-homeowners business,’ which is why the agency was created in the first place, and they got surprised, because the private sector said, ‘no that can be done safely and profitably’ and the banks, in return, gave the private insurers the higher-risk business that CMHC walked away from and more of the regular lower-risk, higher-margin business as well.”
CMHC wants the lower-risk, higher-margin business back because, without it, it is in a tenuous situation.
“What they did backfired completely and they are in the process of losing material market share and they’ve got a bunch of staff and they’ve got all these premises and all this management,” says Soper. “Suddenly their budgets, their forecasts, their commitments to their owners, the federal government, they’re all thrown out the window because they’re losing market share. So, it’s a very, very bizarre situation and my guess is the new head of CMHC will turn things around and it will become more client-centric and more focused on high-service levels, rather than preaching these bizarre, anti-housing sentiments from Canada’s housing agency.”
One last thought from Soper.
“Siddall’s a strange guy and CMHC is suffering as a result of it.”