CMHC limits and their affect on you

The Department of Finance and CMHC recently announced that they were enforcing their CMHC limits on Canadian Lenders.

First, a little bit of the back story on CMHC limits:

Every January, the government of Canada and CMHC set a maximum amount of mortgage volume that CMHC is allowed to insure.  For 2013, that number was $85 billion, however, by the end of July lenders had already used $66 billion or 78% the insurance allowed for this year.   To ensure that the insurance limit is not reached before the end of the year, and that all lenders and in turn Canadians have fair access to CMHC insurance, it has recently been announced that each lender has been limited to $350 million of insurance for this month.  This is a stop gap procedure until a more formalized allocation and process can be created by CMHC.

Rylan, what do you think could have caused this run on CMHC limits?

Well, I am glad you asked.  My personal thought is that the blame for this “emergency” lies with the banks and more specifically with their pocket protector wearing risk managers.  Until a couple of years ago, the underwriting philosophy of most lenders was the client’s best interests were paramount and they would work with not only CMHC but also Genworth and Canada Guaranty to ensure that the best fit for the client was achieved.  Essentially, once an underwriter approved a client’s mortgage and they believed in the merits of the borrower’s application, they would do their best to ensure the client was approved by the insurers.  For most Canadian banks and many trust companies this has changed.  Now most of the banks have adopted a “one insurer policy” where by every mortgage that they receive that has less than 20% down payment, with only a couple of minor exceptions, is sent to CMHC only for approval.  If CMHC declines the mortgage then, although the underwriter believed in our client enough to approve them, the mortgage is declined – no second look through Genworth or Canada Guaranty.  This is the current internal policy for most of the Canadian banks.  The short sightedness of this policy leads to:

1. An overloading of CMHC limits – the banks receive a slightly higher rate of return for their CMHC insured mortgages than Genworth and as such with a one submission policy – they all send to CMHC first.
2. Harm to our clients, the borrowers – this one submission policy arrogantly assumes that CMHC always makes the right choice, this is simply not true.  We have had many clients over the years that CMHC simply did not want to do their mortgage and put up so many roadblocks to do the mortgage that we simply proceeded with Genworth or Canada Guaranty.  CMHC will always make up a risk based reason for their decline or stalling tactics but sometimes that answer is simply the wrong underwriter looked at the mortgage on the wrong day and gave the wrong answer.

Given all of the above information, what do I think?  I think that the Canadian banks and more specifically their short sighted risk managers have caused this problem and that the solution is for them to move back to more Genworth and Canada Guaranty insured lending to curb this CMHC limits problem.

So, given these CMHC limits what is the potential affect on you?

Once a lender uses up their CMHC insured mortgage allotment, they will then begin to use Genworth and Canada Guaranty insurance instead.  From a borrower perspective you don’t care who insures your mortgage.  That being said, some of the Banks and Lenders have been a little bit arrogant or lazy in sourcing institutional investors for non- CMHC insured funds and as such these banks will receive a lesser return for their mortgages.  This unfortunately means they will charge you a higher rate, with most estimates indicating the rate increase being between 0.25% to 0.65%.  As a broker, we have lenders who regularly lend with Genworth and Canada Guaranty with best rates and terms so it will be interesting to see if we will see an overall rate increase or if we will only see the banks and lenders who have not sourced adequate funding increase their rates.

Mortgage questions?

Please feel free to give me a call, Rylan Hahn 403-802-7201 direct