CMHC’s subprime mortgage advocacy angers lenders

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CMHC President Evan Siddall in Toronto on June 1, 2017. His letter, dated August 10, berates a long list of leading mortgage lenders for helping heavily indebted borrowers buy homes, which it says it could harm economic growth.

Nathan Denette / The Canadian Press

A very specific letter sent by the head of the National Housing Agency of Canada has upset many senior mortgage lenders whose business he is trying to win back.

Canada Mortgage and Housing Corporation CEO Evan Siddall set the door on fire this week after his decision to tighten mortgage insurance standards this summer caused a sharp drop in the agency market share.

His letter, dated Aug. 10, condemns a long list of leading mortgage lenders for helping heavily indebted borrowers buy homes, which he says could hurt economic growth. But it is also a call to banks, credit unions and alternative mortgage lenders to retrocede to CMHC some business that they have diverted to private mortgage insurers who have chosen not to meet the stricter standards. of the Crown corporation.

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The sharp arguments and blunt tone of the letter, which asks mortgage lenders to “put our country’s long-term prospects ahead of short-term profitability” and cites a “dark economic belly to this business”, came without Warning. Far from having the desired effect, it has left some senior bankers perplexed and others bristling, according to multiple sources close to the response within the financial sector.

The Globe and Mail does not identify the sources because their companies do not respond publicly to the letter. Many of these companies have no intention of responding at all, the sources said. The letter was first reported by Bloomberg News, prompting Mr Siddall to publish it publicly.

CMHC announced in early June that it would tighten its mortgage insurance eligibility standards on July 1, requiring higher credit scores, prohibiting the use of borrowed funds for down payments, and creating a hard cap on A borrower’s debt service ratio – which measures the percentage of a borrower’s income required to service their debts. Days earlier, the agency released first-quarter financial results that included an above-normal loss ratio of 36.5% – which measures loss on claims against premiums received.

Siddall said in his letter that CMHC chose to tighten its standards because of “systemic economic concerns” that excessive debt levels reduce consumer spending and slow economic growth. He has been a strong advocate for a mortgage stress test designed to curb subprime lending and has made grim predictions of falling house prices in Canada since the onset of the coronavirus pandemic.

“These changes were not made because of our current mortgage insurance business portfolio, but rather to maintain its integrity,” said Len Catling, a CMHC spokesperson. “High household debt continues to be a concern and the COVID-19 pandemic has further exposed long-standing vulnerabilities in our financial markets.”

The new rules have made it more difficult for some borrowers to obtain mortgage loan insurance from CMHC and have excluded up to 30% of the agency’s usual pool of applicants, according to three sources. Its two competitors, private mortgage insurers Genworth MI Canada and Canada Guaranty Mortgage Insurance Co., did not change their underwriting standards, which were virtually identical.

While CMHC seemed happy to give up certain activities it considered to be higher risk – borrowers with a credit score below 680 or high debt service ratios, for example – the agency has also lost a significant portion of the business of homebuyers that it deems more secure. Private insurers taking on more borrowers who don’t meet CMHC’s new standard have also asked lenders to do more of their other business in order to balance the risks.

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To varying degrees, lenders have accepted the demands of insurers. Some have transferred a significant portion of their insured mortgages to private insurers, according to several sources. Mr. Siddall said in his letter that CMHC was “concerned” about this trend. “I said go ahead and redirect the business that we avoided, but don’t give up [the private insurers] more than that, ”he wrote on Twitter.

Its letter also warned lenders that CMHC “is approaching the minimum level of market share we need to be able to protect the mortgage market in times of crisis.” We need your support to prevent further erosion of our market presence. “

Mortgage insurers do not disclose their market share, which makes it difficult to assess how far CMHC has lost to its competitors.

Before announcing tougher standards, CMHC held a conference call to brief mortgage lenders and federal finance officials. The plan was hailed as unorthodox, as it restricted access to mortgages at a time when governments were pumping tens of billions of dollars into stimulus packages designed to keep credit in circulation amid a global crisis public health.

CMHC “has consulted with the Department of Finance as we normally would for housing finance,” Catling said, but advice to the ministry remains confidential.

“CMHC, as a Crown corporation, has the legislative authority to make strategic decisions as it sees fit to prevent the erosion of the mortgage market. This specific business decision was taken independently of the Ministry of Finance, “said Maéva Proteau, press secretary to Minister of Finance Bill Morneau, adding that officials” will continue to monitor the situation and react if necessary.

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Dan Eisner, CEO of Calgary-based mortgage brokerage firm True North Mortgage, said Genworth MI and Canada Guaranty contacted him “promptly” after CMHC announced its new criteria and asked him “to send us a full set of transactions ”, not just these. that CMHC would no longer approve.

He compared the logic to other types of insurers that accept clients who are both riskier and more stable. “They don’t want all drunk drivers for auto insurance,” he says.

Canada Guaranty “takes a measured approach to growing our market share” and has “a dynamic underwriting and risk management framework,” CEO Andy Charles said in an email. A Genworth MI spokesperson did not respond to a request for comment.

Mr. Eisner said it was quite predictable that CMHC would lose market share as the agency gave private insurers a competitive advantage. Now Mr Siddall is “trying to use moral suasion” to pressure lenders and private insurers to follow his lead, Mr Eisner said. “Evan went out on a branch with this thing and no one followed.

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