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CMHC’s underwriting rule reversal helped drive insurance volumes in Q1

Canada’s national housing agency said its mortgage insurance volumes are up on an annual basis thanks in part to its reversal of stricter underwriting guidelines introduced in 2020.

In its first-quarter report, the Canada Mortgage and Housing Corporation reported a year-over-year increase in default-mortgage insurance in-force, which was up over 8,000 units to 56,277, or $12 billion.

The Crown corporation suggested the increase was driven by its decision last year to reverse stricter underwriting guidelines it had introduced in 2020.

In July 2021, CMHC reverted its Gross/Total Debt Servicing (GDS/TDS) ratios to 39/44 (from 35/42), and lowered the minimum credit score (for at least one borrower) back to 600 from 680.

“In response to the COVID-19 pandemic, we tightened our mortgage insurance eligibility rules in July 2020. Those tighter restrictions were lifted July 2021 as we re-established our pre-COVID underwriting guidelines and practices,” reads CMHC’s report. “As a result, this contributed to transactional homeowner volumes increasing by 704 units (6%) and portfolio unit volumes increasing by 1,320 units (181%).”

“Transactional” mortgage insurance refers to insurance paid by individual borrowers, typically on mortgages with down payments under 20%, while portfolio (bulk-pooled) insurance is typically paid for by the lender to insure mortgages with down payments of 20% or more.

On a quarterly basis, however, total insurance-in-force, including for multi-residential properties, was down $27 billion, or 6%.

“New loans insured were $38 billion, while estimated loan amortization and pay-downs were $65 billion,” CMHC noted.

CMHC still the #2 mortgage insurer

When CMHC introduced its stricter underwriting guidelines in 2020, making it harder for borrowers with above-average debt loads to get a mortgage, it did so alone. Canada’s other two insurers, Sagen and Canada Guaranty, left their underwriting policies unchanged.

That move cost CMHC, causing it to fall to under 30% of market share (down from 46% in 2019), and behind Sagen’s 43%.

As of Q1 2022, CMHC is reported to have risen back to about 35% of mortgage insurer market share, just behind Sagen with 36%, while Canada Guaranty is at 29%.

A breakdown of CMHC-insured mortgages

The average purchase price of loans insured by CMHC was up nearly 19% to $356,000 in Q1. Homes priced in the $600,000 to $850,000 range saw the largest percentage increase year-over-year, rising to 12.3% of insured loans during the period, from 7.2%.

CMHC also reported a jump in the percentage of variable-rate mortgages it insured in the quarter, rising to 49.2% vs. 13.3% a year ago. Fixed-rate mortgages fell to 50.8% from 86.7%.

Of the mortgages insured by CMHC in the quarter, the average credit score was 777, down slightly from 780 a year earlier. Though, that’s up from an average score of 757 recorded at the start of the pandemic in Q2 2020.

CMHC says housing market faces uncertainty ahead

CMHC sees further downside risks on the horizon, including “consumer hesitancy, stronger-than-expected inflationary pressures leading to higher interest and mortgage rates, and elevated geopolitical risk.”

The change in economic conditions has already had a “significant impact” on CMHC’s financial results, it noted.

That includes a decrease in investment securities measured at fair value due to higher interest rates, and a 99% increase in insurance claims to $183 million, though CMHC noted claims continue to be low and this is largely due to base effects from last year.

CMHC also made a dividend payment to the Government of Canada of $995 million.

Going forward, and as interest rates continue to increase, CMHC said it will “continue to monitor for signs of increased housing market vulnerability.”

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