Another Nail in Competition’s Coffin

As previously announced, CMHC is jacking up default insurance premiums on Canadian borrowers.

Effective today, anyone purchasing a home with less than 20% down will fork over up to 1.00%-point more in fees.

If you’re down payment is:

  • Less than 10%:
    You’ll pay 0.40% more, or 4.00%
  • Between 14.99 and 10%:
    You’ll pay 0.70% more, or 3.10%
  • Between 19.99 and 15%:
    You’ll pay 1.00% more, or 2.80%

As an example, if you’re putting down 5% and paying $500,000 for a home (which is below average, believe it or not), CMHC will now siphon you for another 0.40%, or $1,900. It’s just the latest in a long line of fee increases at CMHC, an acronym that should probably stand for “Costing More for Homeowners Continually.”

The Untold Story

Federal policymakers, who are behind these rules, are purposefully downplaying one very important point. CMHC’s new fees do not just affect high-ratio mortgages. They also make mortgages with 20%+ equity more expensive.

That’s because some of Canada’s most competitive lenders must insure their mortgages in order to sell them to investors. The cost of that insurance has now leapt considerably for people with 20-34.99% of skin in the game. Borrowers can thank the banking regulator’s (OSFI’s) new capital requirement increases for that.

Despite pristine underwriting and far better default performance than the big banks, mortgage finance companies have no choice but to raise their best mortgage rates to offset these fees. We’re talking about 10-30 bps being tacked on to their rates if the mortgage is 65.01% to 80% of the home value.

Non-bank lenders have already started announcing these increases and we’ll see more next week.

Another huge win for banks

Big banks don’t need to insure their low-ratio mortgages. So these fee hikes barely faze them.

In fact, Ottawa’s changes only widen the gap between banks and their securitization-dependent competitors. That puts less pressure on banks to keep their rates low.

The takeaway: If you’re pro-competition and like paying less for your mortgage, CMHC’s fee hike today is an unequivocal disaster.


Sidebar: If coughing up more interest to lenders doesn’t sit well, write a short note asking your MP to tell the Department of Finance that mortgage competition matters—that saving hard-working families thousands in interest matters.


3 Comments

  • Nikola says:

    “Big banks don’t need to insure their low-ratio mortgages. So these fee hikes barely faze them”.

    They don’t need to, but do you have data saying that they don’t? I’m sure they do as it helps with their capital requirements (discount on asset value for capital purposes is smaller on insured mortgage v. non insured mortgage). So if they do insure those mortgages, then surely their funding costs have increased and they’re likely not “barely fazed”.

    “In fact, Ottawa’s changes only widen the gap between banks and their securitization-dependent competitors. That puts less pressure on banks to keep their rates low”

    FN and MCAP are two of those largest “securtization-dependent competitors”. Looking at their most recent public filings, looks like 1/3 of their funding comes from NHA MBS (ie: the market that’s being scaled back). The other 2/3 of their funding comes from “institutional investors” (ie: Big Banks). Take those two factors together and I’m not sure how this is an “unequivocal disaster” for competition.

    • The Spy says:

      Hey Nikola,

      To be clear, no one said banks don’t insure low-ratio mortgages. What the story said, as you quoted, is that they don’t need to. There’s a big difference.

      Major banks don’t need to insure to securitize. They have mortgage funding options that their competitors do not, including the lowest deposit costs in Canada and covered bonds, to name two.

      Of course, banks do insure some low-ratio mortgages and issue NHA MBS. But this is a minority of their overall mortgage book. And banks never insure refis, extended amortizations, rentals, super-jumbo loans and non-BoC-tested debt ratios. These are mortgages that used to account for well over half of mortgage finance companies’ businesses. Those competitors now have no practical way to fund most of these mortgages — other than sell them to the very banks they compete with at inferior terms.

      As the Bank of Canada noted in December:

      “Mortgage Finance Companies are relatively more vulnerable than traditional lenders to certain changes in government policy. In particular, a reduction in the availability of these programs or increased fees would have a more profound effect on MFCs than on traditional lenders. This was evident with the policy changes announced by the federal government in early October.”

      By comparison, banks’ cost increases have been minor. But more importantly, they’ve been offset by the massive competitive advantages Ottawa has just handed them. So yes, we repeat: banks are barely fazed by these rules.

      As for the competitive implications, if you think FN and MCAP comprise competition, you’re ignoring about 400+ other lenders across this country.

      Moreover, these two lenders you named are unique in that they are systemically important. They have over $150 billion in mortgages under administration and billions in MBS. They also underwrite and service for other lenders, including a major bank (TD). Unlike smaller competitors, it’s in OSFI interests to ensure these two lenders have sufficient liquidity from their bank funders.

      In any case, even if we limit our discussion to this unrepresentative sample of bank competitors, FN and MCAP have both been forced to jack up their conventional pricing 20-45 bps depending on the term. Their low-ratio rates are now meaningfully less competitive to the Big 6. It would be silly to argue that today’s considerably higher rates at mortgage finance companies (big or small) do not influence the degree of discounting at the major banks.

      Since October 31, 2016, spreads between 5-year fixed refinance rates have risen 16 bps for MFCs and shrunk 14 bps for major banks. Is that an unequivocal disaster for competition? If you don’t mind less lender choice and higher interest costs, maybe not.

  • Mary says:

    I think it’s pretty obvious the deck is stacked against the little guy (i.e. the mortgage finance companies). When you’re going up against the big banks, it’s little wonder who is going to come out the winner, sadly.

Leave a Reply

Your email address will not be published. Required fields are marked *