The Canada Mortgage and Housing Corporation is making it easier to get federal mortgage insurance, overturning tougher rules imposed a year ago.
The federal housing agency has admitted making a costly mistake by unilaterally toughening its demands last year, admitting that it lost market share to its competitors.
“We are taking this step because our July 2020 underwriting changes were not as effective as we expected and we incurred the cost of declining market share,” CMHC said in a statement. .
Starting Monday, the mortgage insurer is lowering the required credit rating and relaxing other measures that ensure homeowners have enough income to pay off their mortgages and other debts.
Major lenders require mortgage insurance from CMHC or a private sector insurer if a borrower makes a down payment of less than 20% of the purchase price of a home.
Under the new rules, borrowers need a minimum credit score of 600 instead of 680 to qualify for CMHC mortgage insurance and may have a higher expense-to-income ratio.
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A borrower’s gross debt service ratio – the share of monthly household income used to pay off the mortgage and other housing costs – can be as high as 39% instead of 35%. Additionally, a borrower’s total debt service ratio – the portion of monthly income used to cover all housing costs, credit cards, lines of credit, and other loans – can reach 44% instead of 42%. .
The rule reversal comes at a time when mortgage demand has skyrocketed and after the Bank of Canada warned of the risks of heavily indebted households taking on more debt. But this may not have an impact on house prices.
When CMHC imposed tougher rules last July, the agency believed it would protect homebuyers, reduce risk to taxpayers and curb the excess demand from homebuyers that was fueling the price spikes. But as the quality of CMHC’s portfolio improved, the agency lost market share to other private sector insurers, and its actions did not dampen demand. The average price of homes in Canada is now 38% higher than a year ago, according to the Canadian Real Estate Association.
Bank of Montreal chief economist Douglas Porter said it was not clear that the CMHC overthrow alone “will significantly stir up the market or make the financial system weaker because the company was probably taken over by private insurers ”.
Benjamin Tal, deputy chief economist at CIBC World Markets, said the overthrow of CMHC “does not change the imagination” for Canada’s overheated housing sector.
“It’s just a game of market share with no impact on the size of the insured pie, since the competition has not changed the rules,” he said.
The rule reversal is CMHC’s first major move under the leadership of new CEO Romy Bowers, who took over in April, and brings CMHC closer to Canada’s two private mortgage insurers – Canada Guaranty Mortgage Insurance Co . met the stricter CMHC rules last year.
The real estate agency came under heavy criticism from lenders and the mortgage industry when it imposed its new standards in 2020.
CMHC expected private insurers to follow suit, but they did not. Instead, lenders started sending business to private insurers, prompting then CMHC President Evan Siddall to berate banks and other lenders for not supporting CMHC.
Since last July, CMHC’s share of the mortgage insurance market has fallen sharply, according to a research note from the Royal Bank of Canada. The bank said CMHC’s market share was between 45 percent and 50 percent before the pandemic, but slipped to 23 percent earlier this year. In contrast, Sagen’s market share climbed to 44 percent and that of Canada Guaranty to 33 percent, according to the RBC memo.
“I think most of the market share gains made by the two private insurers over the past year will be retained,” said Dan Eisner, CEO of Calgary mortgage brokerage True North Mortgage. “Borrowers very rarely choose the insurer they use. Lenders are making this call.
Mortgage broker Robert McLister agreed that the decision of private insurers to reject CMHC’s policy won them the loyalty of lenders. “There is a certain market share that CMHC may not recover for years, if ever,” said McLister, editor of Rates.ca.
In the first quarter of this year, CMHC insured 1.04 million homeowners and insured $ 209 billion in mortgages. That compares to providing insurance to 1.12 million homeowners with mortgages worth $ 225 billion over the same period in 2020, according to the agency’s latest quarterly report.
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