CMHC at a crossroads: agency faces tough decisions after losing market share in mortgage insurance

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The introduction of tougher standards has lowered him to third place – and at least one observer does not think he will be able to regain his position.

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When the Canadian Mortgage and Housing Corporation tightened its underwriting practices last summer, it was the largest mortgage insurance provider in the country, capturing 49% of new business in the second quarter.

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“There is no doubt that we have voluntarily ditched some lucrative business that our competitors would find attractive,” then-CEO Evan Siddall wrote in an August letter to Canada’s largest lenders following the introduction of stricter standards. Siddall used the letter to warn banks and other mortgage lenders about risky lending, warning that “this business has a dark economic underbelly that I want to expose.”

It was hoped that competitors would follow the example of the organization for the good of our economy. But it turned out not.

Instead, CMHC saw its market share of new insurance companies plummet, dropping Crown Corporation to third place behind private insurers Sagen and Canada Guaranty. According to data calculated by RBC Capital Markets, in the first quarter of 2021, CMHC owned only 23% of the shares of new underwriters. Sagen (formerly Genworth Financial) owned 44 percent of the pie, followed by Canada Guarantee with 33 percent.

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Earlier this week, the CMHC acknowledged that tightening the standards was a mistake and canceled them, but some in the financial sector are wondering if the damage has already been done. While the observation that the private sector is absorbing a lost CMHC stake cannot get off the ground when it comes to home prices, it is a blow to the agency’s presence in the sector, as well as its ability to move the housing market further adjustments. underwriting practice. And this raises a question bordering on the existential: where will CMHC go next?

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“One morning you wake up and realize that CMHC is number three in the market and is suddenly no longer dominating the market like it used to be,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, told the Financial Post. in this week’s interview. “By regaining market share, they will regain some influence, but I think the days when CMHC was a market are over.”

Tal noted that CMHC will now have to come up with a new identity in the marketplace, which comes after Romy Bowers, who previously served as CMHC’s senior vice president of customer solutions, takes over the reins.

Dan Eisner, CEO and Founder of True North Mortgage, said Bowers will have a tough battle to get CMHC back into agreement with other industry players.

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“I think you have three factors opposing Romy about this. The first is that we were burned by the CMHC and therefore we resist. Secondly, we made all this investment in IT. Now you’re asking us to (cancel them), ”Eisner said, explaining that the mortgage industry was forced to make software changes to accommodate changes in underwriting practices. “Thirdly, you just have a personal relationship with the direct lower-level underwriters that have developed over the past year. So I think it won’t be easy for Romy to get it back. “

CMHC will likely be looking to fill its deficit by looking at other divisions to increase revenue.
CMHC will likely be looking to fill its deficit by looking at its other divisions to increase revenue. Photo by Ernest Doroshchuk / Toronto Sun / Postmedia Network

Eisner expects CMHC to consider strengthening its other segments to offset the loss of revenue from declining market share. One area in which he believes they will be looking to make up for that income is the fees the organization charges to operate the Canadian mortgage bond and mortgage-backed securities markets.

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“In January, we saw that the size of the commission increased significantly,” Eisner said. “It makes me think … that because they lost market share, so they don’t get their pound of meat up front, they get a pound of meat in the end.”

Higher fees, Eisner suggested, could lead to higher mortgage costs as lenders would have to cover them.

Prior to the change of leadership, CMHC developed under Siddallah’s leadership, building on its mandate to provide more affordable housing for Canadians. He even announced that in the future he could change his name to something like Housing Canada to reflect the goal of ensuring that “by 2030, everyone in Canada has a home that they can afford and that meets their needs.” …

Higher fees to cover losses can impact mortgage costs

The CMHC may also seek to rely – or leverage – its large body of housing market data.

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“CMHC is a major provider of housing market data that is not on the market and competitors do not have this opportunity,” Tal said. “So this is what they will try to make money on when they try to regain market share.”

But the competition is unlikely to voluntarily cede this territory. Sagen’s underwriting volumes skyrocketed, and in April the company announced that it had been fully acquired by Brookfield Business Partners LP, which took over the company after purchasing the remaining outstanding shares at $ 43.50 a share.

Rob McLister, mortgage editor at Ratesdotca, told the Financial Post earlier this week that borrowers can show new-found loyalty to these private-sector default insurers, making the CMHC’s job much more difficult.

McLister added that changing the organization’s priorities is important to rebalance the Canadian mortgage market.

“CMHC needs to go back to a more industry-friendly stance and sort of decouple its shared policy initiatives – or perhaps even leave them to the government and go back to what it does best, which is providing default insurance for people who avoid a 20 percent recession and provide industry intelligence in terms of data and research, ”McLeister said.

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Detailed reports on the innovative economy from The Logic, provided to you in partnership with the Financial Post.

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