Short Version;
The boring CDN housing market, by the numbers it is clearly stable being primarily composed of borrowers with excellent credit, solid incomes, and reasonable down payments who met stringent qualifying standards in order to enter the market.
Long Version;
Much of the information you’re about to read is available within the public domain. Although rarely seen in mainstream media, let alone making headlines.
Perhaps it is simply too boring a story. Personally I prefer ‘boring’ when it comes to my Real Estate. Roller coaster rides belong in the amusement parks.
The following data is primarily in relation to mortgages held on CMHC (the Canadian Mortgage & Housing Corporation) books. Approximately 50% of mortgages in Canada are insured by one of three Mortgage insurers; Crown Corp CMHC, or one of the two privately owned competitors Genworth, or Canada Guaranty.
A profitable Crown Corp?
CMHC (the Canadian Mortgage & Housing Corporation) is a Crown Corporation, as such should they fail would ultimately be backstopped by taxpayer dollars. This ‘risk to the taxpayer’ is often a lament of several ‘bubbly bubble type bloggers’. There are perhaps riskier business’ for the CDN Government to be involved in, say investing 10B+ in the car business. Review of the recent CMHC quarterly report indicates a Corporation with $13.799 Billion in retained earnings whose activities steadily keep money in taxpayers pockets ‘
‘Over the last decade, CMHC has contributed over $17 billion towards improving the Government‘s fiscal position through both its income taxes and net income’
In other words CMHC profits have been shifted to other areas of the Federal Budget, reducing the tax burden on all CDN’s at the expense of the CDN’s purchasing homes with CMHC insured mortgages.
Increasing Exposure? Actually no…
CMHC total insurance in force has actually dropped from 566.1B to 562.1B between Dec 2012 and June 2013.
‘CMHC expects mortgage repayments to continue in the range of approximately $60 to $65 billion per year. These repayments off-set future increases to CMHC‘s insurance-in-force resulting from new business being written.’
These repayments occur when properties are paid off, sold to buyers with 20% or more down, or as refinanced once there is greater than 20% equity in place.
The level of mortgages leaving the books of CMHC is reasonably close to the level of new mortgages coming onto the books. Due to this balance it is unlikely that the current 600B cap will be a concern anytime soon. Although as new homes are added to the market growth seems inevitable.
Do CDN’s miss mortgage payments?
One might argue that these CMHC backed mortgages represent the highest risk group of homeowners within the Canadian market. Being that initial down payments were less than 20%, and going back a few years were as low as 0% in some cases. This would be a reasonable assessment, so let’s look at the actual numbers and determine for ourselves how high the risk may be.
Current mortgage arrears in Canada;
Aside from being extremely low, they have been steadily falling each year.
2011 0.41%
2010 0.44%
2009 0.47%
The arrears rate for uninsured mortgages (mortgages not insured by CMHC, ones which buyers had 20% ore more as a down payment for), interestingly enough, only vary by approximately 0.02%. This would suggest that the Canadian households whose mortgages fall into arrears represent scenarios that cannot easily be filtered via conventional underwriting standards. For instance disability, death, assorted health or addiction issues, employment issues, or often a combination of some or all of these factors are almost always present in an arrears situation.
A side effect of our aging population is that a growing number of foreclosures are against properties held by estates where they are either no heirs, or arguments between the existing heirs are delaying settlement of the estate and nobody is making the payments due in the deceased individuals name in the meantime. This a key reason that several smaller lenders actively practice age-discrimination with regards to mortgage lending.
It would seem odd that insured mortgages have such a marginally higher (0.02%) rate of arrears over conventional mortgages, that is, until one realizes just how stringent mortgage qualification criteria in Canada actually is.
40% of CDN households are mortgage free, of the remaining 60% with a mortgage of some kind the portion on CMHC’s books (those ‘high risk’ ones) have an average equity stake of 45%. This is a story of stability.
‘based on updated property values the majority (76%) of CMHC-insured
mortgages currently have loan-to-value ratios of 80% or less. The average equity in CMHC‘s insured High and Low Ratio Homeowner loan portfolio remained stable at 45% as at 30 June 2013′
How likely is a sudden decrease in nationwide property values by 45%, combined with Canadians deciding to cease making payments on their homes, along with nobody wanting to purchase property at 45% off current prices? It would be fair to state that this is an extremely unlikely confluence of events.
76% of all CMHC mortgages are, strictly speaking, not really ‘high ratio’ at all, 76% of homeowners have 20% equity (or greater) in the property, in fact 22% owe less than 50% of the value of their property.
18% have a loan-to-value of 80%-90%.
10% have a loan-to-value greater than 90% (10% or less equity in their properties)
>1% of all CMHC mortgages have a loan-to-value greater than 95% – you read that correctly, less than 1% of CDN homeowners have 5% or less equity in their homes.
This data is very important, as there is a direct correlation between ‘loan-to-value’ and foreclosure or arrears rates. The greater the equity you have in your home, the less likely you are to walk away from it. This is easily explained by the old adage ‘skin in the game‘.
It is also worth noting that ~4% of mortgages in Canada are held on investment properties, and ultimately investment properties represent ~75% of foreclosure claims. This in part explains significant restrictions placed on rental property financing over the past 4 years.
Massive Mortgage debt?
The average high ratio mortgage balance on CMHC’s books is $178,212 In fact 88% of the mortgages CMHC holds are under $400,000
17% less than 100K
44% 100K – 250K
27% 250K – 400K
8% 400K – 550K
4% 550K and above
CMHC’s average mortgage balance is very close to the National average. Understanding that of the 60% of CDN homeowners that have a mortgage are carrying an average balance of ~165K brings into perspective the somewhat limited impact that rising interest rates will in fact have on arrears rate. Significant exposure is just not the Canadian style.
Amortization – What about all those 40yr mortgages?
The current average amortization of all CMHC residential insured mortgage is 25 years.
‘CMHC analysis shows that more than a third of CMHC-insured high ratio borrowers with fixed-rate mortgages are consistently ahead of their scheduled amortization by at least one mortgage payment per year. The figure rises to about three quarters for those who are ahead of their payment schedule by any amount. Accelerated payments shorten the overall amortization period, reduce interest costs, and increase equity in the home at a faster rate and lower risk over time.’
Credit Quality
Another a key metric of CMHC mortgages would be the credit score of the typical borrower – if you are aware of your own current credit score the following data may be very interesting to you. If you are unaware of your current credit score you should be checking it on an annual basis at www.Equifax.ca
Clients Credit Score
75% 700<
15% 660-700
8% 600-660
1% below 600
1% no score
The average credit score for high-ratio homeowner approved loans in the first six months of 2013 was 741 – up from 736 during the same period in 2012.
The bottom 2% with a score under 600, based upon my own experience, typically demonstrate supporting criteria that indicate an extremely low credit risk moving forward, i.e. down payment of 50%+, several hundred thousand dollars in liquid assets, alternative credit confirmation via lease agreements etc.
89% of the portfolio consists of client with a credit score above 660. These are people who never miss a minimum payment and rarely carry a balance from month to month.
Stability.
Summary
These numbers tell a story of a market poised to withstand significant price depreciation, as unlikely as such depreciation is to arrive on Canada’s doorstep. This sampling of the highest risk mortgage holders has excellent credit histories, documented incomes, and significant equity in the properties.
Those of you who read this far might find the CMHC 2012 Annual Report of interest also.
Also, we must all live somewhere. If values were to fall it would go against logic (and character) for CDN’s to cease making payments. Payments are made through good times and bad times. The majority of Canadians believe to their core that there is a strong likelihood their home will in fact be the best investment they will make in their lifetime. Both in financial terms, as well as sociologically.
This strength of belief alone will power us through many gradients of up and down over the long term.
The long term being the key focus for the majority of CDN homeowners.
Thank you.
Dustan