In order to have an understanding of what’s going on the in the Canadian residential real estate market, you need to have a fundamental understanding of the role of the Canada Mortgage and Housing Corporation (“CMHC”).
CMHC explains its role with respect to mortgage insurance as follows:
Mortgage Loan Insurance
Supporting Canada’s Housing Finance System
CMHC’s mortgage loan insurance products facilitate access to a range of housing options for Canadians and promote and contribute to the stability of the financial system. Our mortgage insurance business operates on a commercial basis, at no cost to taxpayers. CMHC’s commercial operations contribute to improving the Government of Canada’s fiscal position through its net income and income taxes paid.
Mortgage Loan Insurance
Mortgage loan insurance is mandatory for federally regulated lenders in Canada when the buyer of a home has less than a 20 per cent down payment. This insurance protects the mortgage lender against loss if a borrower defaults, and allows qualified borrowers to access homeownership at interest rates comparable to those offered to buyers with larger down payments.
In the end, the Government of Canada through the CMHC provides mortgage insurance to facilitate the financing of residential real estate that might not otherwise be available based on the purchaser’s income on a standalone basis.
On January 1, 1946, the Central Mortgage and Housing Corporation was created (changed to “Canada” Mortgage and Housing Corporation in 1979) to house returning war veterans and to lead the nation’s housing programs.
CMHC’s basic functions were to administer the National Housing Act and the Home Improvement Loans Guarantee Act and provide discounting facilities for loan and mortgage companies. The capital of the Corporation was set at $25 million (a substantial amount for the times), and a reserve fund of $5 million authorized to be accumulated from profits. This requirement and capital structure are still in effect today.
Toward the end of the 1940s, the federal government embarked on a program of much-needed social and rental housing, creating a federal-provincial public housing program for low-income families, with costs and subsidies shared 75% by the federal government and 25% by the province.
In 1954, the federal government expanded the National Housing Act to allow chartered banks to enter the NHA lending field. CMHC introduced Mortgage Loan Insurance, taking on mortgage risks with a 25% down payment, making home ownership more accessible to Canadians.
You’ll note that the CMHC was granted its original mandate to provide mortgage insurance by taking on mortgage risks where the purchaser of residential real estate was unable to meet the 25% down payment requirement of the Canadian chartered banks at the time. Over the years the mandated down payment requirement has been tinkered with to reduce it over time. The rationale behind this reduction in the down payment requirement was clothed in the politics of making housing more affordable. At the same time, it added risk to the financing of mortgages as the borrower had progressively less “skin in the game” when the mortgage becomes problematic and created a greater need for mortgage insurance coverage by the mortgage lending institutions in Canada.
The role of CMHC has not been without controversy. The Macdonald-Laurier Institute for Public Policy released a study entitled Mortgage Insurance in Canada Basically sound but room for improvement in 2010. The study pointed out an unfair advantage provided to the CMHC by the Government of Canada.
As a public entity, CHMC mortgage insurance policies are 100 percent guaranteed by the federal government. But the government has chosen to give private mortgage insurance firm policies only a 90 percent guarantee.
The study concluded with a recommendation that a level playing field should be created in Canada, thus giving consumers more choice. The recommendations in the report do not appear to have been implemented.
This Is A Complicated Topic
The purpose of this post is simply to provide a brief introduction to the CMHC and mortgage insurance. More to come on how the industry is structured and it’s effect on the availability and cost of residential mortgages in Canada.
Other than CMHC there are the following mortgage insurers in Canada: