CMHC’s Market Share Waterfall

The nation’s former leader in residential mortgage default insurance is now a distant second. Who cares? Two types of people:

a) People with strong income potential and student debt

• Think professionals out of school or skilled trades with less than 20% down payments.
• These are folks who can still buy in expensive big cities thanks to private insurers like Sagen and Canada Guaranty, which allow them more buying power than CMHC (due to CMHC’s rule tightening last July).
• Sources tell us that about 45% of the applications Sagen now gets are deals that don’t meet CMHC’s revised guidelines. Sagen can be selective with these deals because it sees so many of them.

b) People who care about taxpayer risk

• Canadians now have a private default insurer putting more of its own capital before taxpayer capital in the highly unlikely event it fails. And in that one-in-a-1,000 case of insolvency (or whatever it is), taxpayers cover only 90% of the private insurer’s loss, not 100%, in the case of CMHC.
• Private insurers also have a larger percentage of properties in major cities with liquid housing markets. If borrowers default en masse, that could reduce risk of loss compared to CMHC. The reason: CMHC has been forced to insure more suburban or rural properties after it reduced borrower buying power.

Many wonder whether the government will step in and force privates to match CMHC’s restrictive policies. We’ll bet that won’t happen for two reasons: (A) it would be short-sighted because of the portfolio risk mentioned above, and (B) it would strand deserving borrowers, leaving them no reasonable financing options given their favourable risk profiles.

The next year is going to be interesting because CMHC has a new CEO who may be unhappy that its market share chart looks like Niagara Falls. We expect the housing agency to fight and scrap for share through year-end.

That said, CMHC seems more focused on its social housing mandate than market share. So, it probably won’t overtake Sagen for a long, long time — unless it rolls out new products or backtracks on last year’s rule tightening.

That may not be out of the question after the housing balloon deflates. After all, there’s little actuarial justification for CMHC’s restrictive lending practices, according to critics, its competitors, CMHC’s own government-monitored stress tests, arrears data and so on.