- No changes pending regarding CMHC client premiums
- Headlines easily mislead us
The headline below in last weeks Globe & Mail caught more than a few of my clients attention, prompting needless stress.
Despite the way this headline reads there is no change to actual mortgage insurance premiums charged to CDN homebuyers now or currently pending.
Recent steps taken by Finance Minister Jim Flaherty with regard to charging CMHC a new ‘risk-fee’ premium equivalent to 3.25% of the mortgage premiums CMHC charges should NOT result in increased fees being charged to consumers.
The mathematics of this suggest, if this new 3.25% of the actual premium were charged, then the net increase to current client premiums would translate into approximately a 0.03% increase in premiums. Or in real money, less than $160.00 for the typical CDN home buyer (with less than 20% down payment).
Both rival insurers, Genworth and Canada Guaranty, currently pay a 2.25% ‘risk-fee’ to the Government. Thus market competition, such as it is in this sector, should keep premiums exactly where they are. The only potential twist being this news is one more argument against the calls to reduce current mortgage insurance premiums.
The real math;
The current premium earned on a typical 95% LTV purchase transaction in Canada is $4895.00. (using the average CMCH mortgage amount of ~$179,000.00)
The current ‘risk-fee’ remittance by CMHC is $0.00
Current ‘risk-fee’ remittance by Genworth and CG in the above example $110.14
The new Premium charged to CMHC moving forward of 3.25% adds a new cost for them to the transaction of $159.09
However market competition dictates that only 1% (or $48.95 in the above example) of this new fee is a burden for CMHC to bear. Arguably CMHC has enjoyed the advantage of not remitting a 2.25% fee as their competition has had to do. All three insurers price their products identically.
If CMHC wanted to pass on to homebuyers the premium it now faces, something very unlikely to occur, then the premium in the above example would rise from 2.75% (on a 95% LTV mortgage) to 2.78%
A .03% rise in mortgage insurance is unlikely to have effect whatsoever on market conditions. Would an additional $159.09 fee which is buried within the mortgage amount, and not an up-front cash expense, slow the market in any way whatsoever? No more than a gnat hitting a windshield slows a vehicle down.
CMHC’s formal announcement;
Re: Government Guarantee Fee Payable by CMHC
Effective January 1, 2014, CMHC’s mortgage loan insurance activity will be subject to a risk fee payable to the Government of Canada of 3.25% of premiums written. An additional fee of 10 basis points will be payable on new portfolio insurance written.
Since January 1, 2013, private mortgage insurers have been required to pay a fee of 2.25% of premiums as compensation for the protection provided by the Government of Canada. The fees compensate the Government for risks stemming from its guarantee of mortgage insurance.
The guarantee fee of 3.25% that has been developed for CMHC takes into account the 100% Government backing of CMHC’s liabilities as compared to the 90% guarantee of the private mortgage insurers obligations to lenders.
These new fees are not anticipated to have an impact on the availability or cost of mortgage funding, nor the cost of buying a house. We are reviewing the impact on our low-ratio portfolio insurance product provided to lenders.
The good news should be highlighted here, it is buried deep within the body of a story with a headline which leans more towards fear-inducing for prospective home buyers;
‘CMHC said it earned $452-million in the third quarter, up 20 per cent from a year ago, thanks largely to a reduction in net claims. The total amount of insurance in force fell to $559.8-billion, compared with $566.1-billion at the end of 2012.’
This leaves one wondering why the headline would not better match the content, perhaps a separate story along the lines of;
‘Taxpayer risk to mortgage portfolio decreases by $6.3Billion’
‘CMHC profits rise as defaults drop, stability seen in portfolio’
Perhaps next time. In the meantime keep digging for the good news buried within what often appear to be bad news stories.
Thank you for your time.