BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

Your friends at the Canadian Housing and Mortgage Corporation (CMHC) make things possible that, without their help and dedication, would be so much more difficult to achieve.

Canadian mortgage financing is much easier these days, thanks to the regimentation provided by CMHC. Now, the banks operate mostly risk-free.

What I’m referring to is “Mortgage Default Insurance”, the kind that many purchasers of real estate require or else the banks won’t give them the money to make the purchase possible. This default insurance is mandatory for those who purchase a home that’s worth 125% or less of the amount required for mortgage funding. Usually, however, the math is expressed in reverse: you must have default insurance is you’re financing more than 80% of the property’s market value.

As we know, there are three ways you can pay for your real estate purchase. You can pay all-cash (no borrowed money) or you can mortgage the property either with a conventional mortgage or with an insured mortgage. A lot of people find it hard to imagine that there are all-cash buyers out there. But there are quite a few people who own their home out-right.

This blog article is specifically about insured mortgages – a market that’s dominated by CMHC, the Canadian Mortgage and Housing Corporation, a Crown corporation that’s been around for about 60 years now. CMHC manages residential mortgage loan insurance against defaults for those that have down payments of less than 20%.

CMHC is the backbone of the Canadian mortgage financing system. Not only is the service very profitable, it also enables many Canadians the dream of home ownership.

CMHC THE MORTGAGE INSURER

Most people think of CMHC as a mortgage insurer for those that have insufficient money to put down to qualify for a conventional mortgage. CMHC also actively participates in so-called bulk insurance.

Bulk Insurance takes up 43% of existing CMHC insurance. This is the low-ratio portfolio of insurance that lenders buy on mortgages having at least 20% equity. It helps them lower risk, reduce funding costs and acceptably securitize closed mortgages (so they have money to re-lend). Money works on the basic principle that it goes ’round and ’round and ’round. It’s the same at CMHC: they can do new deals when the older ones come to fruition.

At the banks, our money gets pumped around many times. Along with many other financial products, the mortgage industry relies heavily on the reuse of money.

RUNOFF, ANOTHER CMHC TERM

Bankers use interesting expressions. Mortgage runoff is when mortgages are being paid off – which is another way of saying that the bank will be getting new money to relend to others. CMHC expects about $60 billion of runoff annually, which will free up room for new business. In fact, this is about 10% of total CMHC insurance in force (every year).

This relatively high percentage does not come entirely from borrowers making regular monthly or bi-weekly instalments. It may be brought on mostly by cancellations of mortgages.

When everybody pays their premiums and hardly anybody needs to claim against CMHC’s insurance products, the corporation will amass tremendous wealth. At present, CMHC is indeed extremely profitable and has been so for a long period of time. Their profit in 2011 amounted to $1.53 Billion. Since 2002, CHMC has contributed a total of $16 Billion to the public coffers.

Naturally, when one institution like CMHC pumps around large amounts of money for so many people, there are some really serious Dollar amounts involved.

SOME STAGGERING CMHC NUMBERS

The total number of insured units in 2011 was 630,957. CHMC indicates that this was 11% below plan due to a weaker than anticipated homeownership market, the impact of changes to the Government’s guarantee parameters, and a slight drop in CMHC’s market share. Almost half of CMHC insurance is aimed at under-served markets. This includes large multi-unit residential properties, nursing and retirement homes, and homes in rural areas and smaller communities.

CMHC has calculated its arrears rate at 0.41%. The average outstanding mortgage amounts to $162,000 across Canada. Only 8% of CHMC-insured borrowers have less than 10% equity. The percentage of insured borrowers with homes worth more than $400,000 across Canada is 13%.

The average credit score of CMHC borrowers is 724. Borrowers with a credit score of 700 or higher fill 76% of CMHC’s portfolio. Currently, only 50% of CMHC’s insurance portion pertains to high-ratio borrowing.

Three out of four high-ratio mortgages have fixed rates. With fixed mortgages of three years of more, this percentage goes all the way up to 88. Interestingly, one in three high-ratio borrowers are ahead of their scheduled amortization by at least one payment.

Governments may not be known for general fiscal responsibility, but if all agencies would be as profitable as the CMHC, we'd be in excellent shape.

CMHC, A SOLID MONEY-MAKER

CMHC is a very profitable corporation, at the moment. The corporation has contributed greatly to society and built up financial reserves for less fortunate times.

CMHC states its own probability of insolvency at less than 1 in 200. This would be the “tail risk” of events including ongoing negative GDP growth, unusually high unemployment and “significant house price depreciation lasting for a number of years.”

CMHC said it is monitoring condo markets across Canada. It states that it sees no clear evidence of problematic condo prices. In individual mortgage applications, CMHC said its underwriters consider the property type and market where the individual is buying.

CMHC concluded in its annual report that clear evidence of a (housing) bubble is lacking.

CMHC being so profitable, smart buyers will be lined up around the block, if this institution ever goes on the market. Is it time yet, to "give" it away?

WOULD YOU LIKE TO BUY CMHC?

It was reported that CMHC considered selling itself last year. This news follows comments suggesting the government may eventually privatise CMHC. What would be the effects on the general public, if that were to occur?

Since Australia did something similar (fifteen years ago), an analysis of their experience concluded that Australian homeowners pay higher margins on their mortgages than Canadians. Also, the (Australian) lending industry has become more concentrated and less competitive.

Regarding when CMHC might be sold (if at all), analysts say that if it were to occur, they believe it would be unlikely to happen for a while. CMHC did not touch on this topic at all in its annual report.

CMHC, among other achievements, have streamlined the system of valuating properties for mortgage purposes. Hundreds of Dollars are saved, on each application.

WHAT IS: EMILI?

Since 1996, CMHC has used EMILI — an on-line mortgage loan insurance decision-making system. The automation of the underwriting process brought many benefits for mortgage professionals and borrowers including faster CMHC decisions as turnaround times were reduced from days to seconds with lower costs per transaction.

To date, the “emili system” provides a consistent, comprehensive and objective risk-based analysis that considers the borrower, property, market and overall risk of each application. The emili system can be used to process all applications for mortgage loan insurance covering 1 to 4 unit residential properties.

Recently, CMHC’s emili automated underwriting system has been tweaked. It now uses additional borrower, market, property, and fraud analysis to size up an applicant’s risk. CMHC insists that they are not changing the overall risk appetite. Their policies have not changed in the last year, except where it relates to the Department of Finance parameters.

May I recommend that you bite into some more blog-sized articles on mortgage financing and related topics? Below are some links for immediate consumption.

MORE general information on mortgages and home finance issues can be found in the following blog articles:

Rreal estate and finance blog: http://www.mennorealty.ca/Blog.php/blog-format

Most recent local market stats: http://www.mennorealty.ca/Blog.php/november-2012

Easier selling made even easier: http://www.menno.ca/?p=18847

Bringing together buyers and sellers: http://www.menno.ca/?p=19200

Interest rates and home sales: http://www.mennorealty.ca/Blog.php/easy-way

Mortgage rates fixed or variable: http://www.menno.ca/?p=19081

Mortgage costs and more: http://www.mennorealty.ca/Blog.php/carrying-costs