OTTAWA Feb 28 Canada's national housing agency announced on Friday it will increase its mortgage loan insurance premiums from May 1 to shore up its capital and reduce taxpayers' exposure to the housing market, which has been a big worry for the government.
The government-owned Canada Mortgage and Housing Corporation (CMHC), which plays a similar role to that of Fannie Mae and Freddie Mac in the United States, said the change would have no material impact on the housing market.
The premiums are typically paid by lenders but they may pass on the extra cost to borrowers. CMHC estimated consumers would see monthly mortgage payments rise by about C$5.
"The higher premiums reflect CMHC's higher capital targets," said Steven Mennill, CMHC's vice-president of insurance operations.
"This is not designed to affect housing market activity. This is simply an exercise in the annual review of our mortgage insurance premiums," he said.
Existing mortgages are not affected by the change.
CMHC has raised its capital reserves substantially since 2010. It has been under pressure to raise its premiums as well amid worries that its rapidly growing mortgage insurance business increases the risk to taxpayers in the case of a shock. CMHC issued insurance to 192,000 homeowners in 2013.
Last November, CMHC announced that as of Jan. 1 it would be required to pay the government a "risk fee" of an additional 3.25 percent of its insurance premiums, plus 10 basis points extra on the low-ratio portfolio insurance that it sells to banks.
Home buyers in Canada who make a down payment of less than 20 percent are obliged to have mortgage default insurance. CMHC controls about three-quarters of the mortgage insurance market and the federal government guarantees 100 percent of CMHC's insured loans. The agency profits from the premiums paid, but it is at risk if defaults rise dramatically because it has to reimburse lenders - typically big banks.
Finance Minister Jim Flaherty has said he would like to shrink the CMHC, whose traditional role was to provide affordable housing, and has taken steps to curb its insurance business, increase oversight and bolster the agency's financial expertise by appointing a chief executive and chair with banking backgrounds.
But some analysts say the system provided confidence and stability during the 2008-09 financial crisis, helping prevent a U.S.-style crash.
Canada's housing market caught fire in the years following the crisis and the government intervened four times to tighten mortgage lending rules. Recent data show the real estate market is gradually cooling, easing fears of a bubble.
HEADWIND FOR HOUSING MARKET
The latest changes at CMHC will boost premiums on homes and 1-4 unit rental properties by about 15 percent on average, depending on the size of the down payment, CMHC said.
For instance, on a mortgage covering 65 percent of the value of a home, the premium will move to 0.60 percent from 0.50 percent. On higher-risk loans worth 90-95 percent of the cost of the home, the premium will move to 3.15 percent from 2.75 percent, according to a chart provided by CMHC.
John Aiken, an analyst at Barclays Capital, said the incremental cost increase was unlikely to slow down prospective home buyers.
"This is just one more additive headwind to the housing market that the Canadian government has put in place. But our initial reaction is this is not going to be overly material," he said.
CMHC's two competitors are Genworth MI Canada Inc and Canada Guaranty Mortgage Insurance Company. The two companies were not immediately available to comment on whether they would follow the CMHC's lead and raise premiums as well.