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CMHC cutting back on what it covers with mortgage default insurance
Canada Mortgage and Housing Corp., the Crown corporation that controls the vast majority of mortgage default insurance in the country, says it plans to get out of the market for second homes and is adding restrictions for self-employed Canadians.
Effective May 30, CMHC said it will discontinue insuring second homes and will require self-employed Canadians to have third party income income validation.
The Crown corporation said the changes are being made as part of its review of its mortgage loan business. The organization has already said it is raising rates across the board May 1, a move that comes after the federal government last year appointed a new chair for CMHC and brought in a new chief executive.
CMHC helps Canadians meet their housing needs and contributes to the stability of the housing market and finance system said Steven Mennill, senior vice-president, insurance, in a release. As part of the review of its mortgage loan insurance business, CMHC is evaluating its products and services to ensure they are aligned with these objectives.
The agency said its the first set of changes resulting from the review of its operation. TheFinancial Postreported this month that Evan Siddall, a former investment banker brought in as CEO, has been asked about the possibility of a risk-based method of assessing mortgage default insurance. Sources say the new CEO has told people he doesnt disagree with the principal of risk-based insurance.
The changes announced Friday affect a small portion of the market. CMHC said its second home and self-employed without third party income validation business account for less than 3% of CMHCs insured business volumes in units.
Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market, the agency said in a release.
CMHC first introduced the program for self employed people in 2007 in response to industry competition which at its peak saw some U.S. players enter the market and encourage changes that created amortization lengths as long as 40 years. The government has since restricted loans to 25-year amortizations.
The second home product was introduced in 2005 and applied when purchasing an owner-occupied second home anywhere in Canada.
CMHC said it will limit the availability of homeowner mortgage loan insurance to only one property (one to four units) per borrower/co-borrower at any given time.
Benjamin Tal, deputy chief economist with CIBC, said the announcement was not a big surprise given the mandate of providing more stability. That might not be the end of it. We might see more coming from CMHC.
Finn Poschmann, vice-president of research at the C.D. Howe Institute, said the requirement for validation seems reasonable.
What is interesting is the question of whether the change will tend to shift risk away from CMHC and toward the private insurers. Whether that is the outcome will be determined by the private insurers responses, he said, in an email.
Bank of Canada maintains overnight rate target at 1 ¾ percent
The Bank of Canada today maintained its target for the overnight rate at 1 percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 percent.
The global economy is showing signs of stabilization, and some recent trade developments have been positive. However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences. The Canadian economy has been resilient but indicators since the October Monetary Policy Report(MPR) have been mixed.
Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October. The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter. Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft. In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.
LISTINGS FALL AGAIN TO END 2019, PUSHING PRICES HIGHER
Canadian Real Estate Association data show that national-level home sales fell 0.9% (sa m/m) in December 2019 after rising in the previous nine months. Limited availability looks to be increasingly weighing on sales activity. The month saw another broad-based decline in new listings18 of the 31 centres for which we have data witnessed fallsthat lifted the national sales-to-new listings ratio to 66.9%. It was the highest ratio since 2004 and a third straight month of supply- demand conditions tilted in favour of sellers (after data revisions). Fourteen cities reported sellers market conditions; the rest were balanced. The aggregate MLS Home Price Index (HPI) rose 3.4% (nsa y/y), its best gain since March 2018.
Montreal remained Canadas tightest local market, with rising sales and falling listings leading to yet another record-high sales-to-new listings ratio and the citys steepest y/y MLS HPI gains since 2005. Ottawas ratio also reached a new high as new listings plunged by more than 20% (sa m/m), driving a record 12.5% (nsa y/y) MLS HPI increase. Toronto also crept into sellers market territory for the first time since March 2017as in Montreal, home purchases rose and new listings felland its 7.3% (nsa y/y) HPI rise was the sharpest since 2017.
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Source: Scotiabank Economics