For decades, more Canadians with down payments under 20% turned to CMHC than any other mortgage default insurer.
Then July 1, 2020 happened.
That's when Canada's formerly #1 default insurer unilaterally tightened its underwriting rules. Among other things, CMHC made it much harder for people with above-average debt loads to get approved for a mortgage.
Its market share got absolutely pummeled as a result.
"A healthy market share is an important consideration as it helps us fulfill the financial stability aspect of our mandate," CMHC said today in a statement. "We aim to maintain enough presence to be able to: a) step in to support financial stability and b) absorb additional market share as required."
Lenders stopped sending CMHC as much business after the rule change because: (A) it couldn't serve their borrowers' needs, and (B) because CMHC's former CEO made a grave error in judgement by rebuking lenders for not sending it more business. Lenders we spoke with said they've never forgotten that.
After losing about half of its market position and falling to third place with a 23% share of new insurance, according to estimates from RBC Capital Markets, CMHC has decided that enough is enough. New CEO Romy Bowers made the right call today, announcing that CMHC is going back to its pre-July 2020 debt ratio maximums of 39% gross debt service (GDS) and 44% total debt service (TDS).
What that means is that borrowers with temporarily larger debt loads (think professionals just out of school, for example) will have more options for getting default insurance. Although, in practice the consumer impact will be minimal since the private insurers, Sagen and Canada Guaranty, already picked up the slack after CMHC pulled back from this business.
CMHC says it constricted its policies last year because, "We felt these changes would protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable price growth." We won't get into the validity of those arguments but clearly the agency's decision today puts some of its justifications in question.
Indeed, CMHC admits that it's taking this action "because our July 2020 underwriting changes were not as effective as we had anticipated..." A spokesperson added, "Demand for housing and pricing did not decline as we had anticipated, and we incurred the cost of a reduction in our market share as applications that did not meet our previous criteria migrated to our competitors."
With respect to risk, loan performance of high-debt-ratio mortgages has been strong, according to Sagen, and the economy has rebounded surprisingly well. Then again, we'll have to wait (hopefully a long time) to see how contained that risk truly is, if/when there is a major housing downturn.
