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CMHC mortgage insurance reforms positive for banks: Moody’s

Industry News

Quality of mortgage portfolios to improve

By James Langton |

 

Late last month, CMHC said that it will discontinue certain mortgage insurance products, effective May 30. In a new report, Moody’s says that the decision to eliminate these products is credit positive for CMHC “because it will reduce potential claim costs as the existing liabilities run off”.

 

It also sees the move as credit positive for the Canadian banks “because they will likely reduce lending or increase pricing to these two groups, improving the quality of their mortgage portfolios.”

 

The rating agency says that the elimination of these products — which provide insurance for second homes, such as vacation properties; and for self-employed workers without third-party income validation (such as tax returns) — will act as a brake on the housing market and mortgage growth, “reducing the prospect of a sharp housing price correction that would increase credit losses at Canadian banks.”

 

It notes that elevated housing prices, and the resulting increase in household indebtedness, represents a key threat to the stability of the Canadian banking system. This has prompted the government, banking regulators, and CMHC, to make various changes designed to curb that risk over the past couple of years.

 

Moody’s notes that the CMHC has indicated that these discontinued products, combined, comprise less than 3% of its insured business volumes in units. And, it estimates that the number of units to run off starting May 30 totals around 119,000 units.

 

Source: Investment Executive.com

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