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Tougher stress-testing hits CMHC home insurance

Total volume declines 44% year over year in third quarter following new rules making it harder for buyers to qualify for mortgages

Canada Mortgage and Housing Corp. saw its mortgage insurance business continue to shrink in recent months as a result of tougher new qualification rules and declining home sales in the Toronto area.

CMHC, which insures mortgages for buyers who do not have down payments of at least 20 per cent, reported on Wednesday that its total insurance volumes slid to $12.5-billion in the third quarter of 2017, a decline of 44 per cent from $22.5-billion in the same period last year.

Homeowner insurance fell to $8.89-billion in the third quarter from $12-billion a year earlier, while the volume of portfolio insurance fell dramatically to $987-million in the quarter compared with $8.4billion a year earlier. Portfolio insurance is purchased by financial institutions to protect their portfolios of uninsured mortgages.

Most of the decline in volumes was because of tougher stress-testing rules introduced last year for insured mortgages, which made it harder for buyers to qualify for mortgages when they did not have a 20-per-cent down payment. The rules also introduced strict limits on the types of mortgages eligible for portfolio insurance.

Steven Mennill, CMHC's senior vice-president of insurance, said the corporation has also seen insurance volumes decline because of a sales downturn in the Toronto area since April. In October, for example, the Toronto Real Estate Board reported the number of homes sold was down almost 27 per cent compared with the same month last year after falling 35 per cent in September on a year-over-year basis.

"We have seen a decrease in our mortgage insurance volumes in places like the Greater Toronto Area in the last few months," Mr. Mennill said on Wednesday.

CMHC does not break out its business volumes by region, but said Ontario accounted for 33.6 per cent of national home buyer loans insured in the third quarter this year, down from 36.4 per cent in the same quarter last year.

Mr. Mennill said the sharp drop in CMHC's insurance volumes appears to be a permanent shift in the business, and staff levels in the homeowner insurance group have been reduced as a result. However, he said more jobs will shift into the multiunit residential group, which provides mortgage insurance for the apartment-building sector. That division saw total insurance volumes grow to $2.7-billion in the third quarter from $2.1-billion last year.

CMHC is also responsible for administering funding for the federal government's social housing programs, which have expanded rapidly as a result of new funding commitments to reduce homelessness and help low-income earners.

Staff levels will increase in those areas, so total CMHC staff levels will not shrink and may grow over time, CMHC chief financial officer Wojo Zielonka said.

CMHC approved an additional $290-million dividend in the third quarter, which will be paid to the federal government, bringing total dividends approved this year to $4.7-billion.

CMHC only began paying dividends to the federal government this year, and the 2017 total includes a $4-billion special dividend declared in June to return excess capital to the government.

While critics have argued that CMHC should lower premiums for home buyers instead of paying bigger dividends to the government, Mr. Zielonka said the dividends come from past profit and excess accumulated capital, while premiums charged today for new policies are appropriate for the level of anticipated underwriting risk they represent.

He said CMHC does not want to cut premiums and subsidize future risks with past profit.

Associated Graphic

A downturn in Toronto's residential real estate market also contributed to the drop in CMHC's insurance volumes.

FRED LUM/THE GLOBE AND MAIL

© The Globe and Mail

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