Stricter mortgage rules still slowing CMHC lending

Stricter lending rules continue to slow underwriting activity at the CMHC and taxpayers' exposure to a housing crash, the federal housing agency's second-quarter report shows.

Latest report from Canada Mortgage and Housing Corp. shows mortgage market down sharply year-on-year

Finance Minister Jim Flaherty, above, has made several changes to mortgage rules over the past four years in an effort to rein in the housing market. (Fred Chartrand/Canadian Press)

Stricter lending rules continue to slow underwriting activity at the CMHC and taxpayers' exposure to a housing crash, the federal housing agency's second-quarter report shows.

Canada Mortgage and Housing Corp. said Thursday the number of insured mortgages rose slightly in the second quarter compared to the same period last year — largely due to temporary factors — but added that overall, activity has slowed sharply from last year.

On a year-to-year basis, volumes fell by 26 per cent as homeowner purchase volumes declined 19 per cent and refinance volumes plunged 64 per cent.

"The new mortgage insurance parameters that took effect in July 2012 effectively eliminated refinancing at loan-to-value over 80 per cent," said the agency.

Analysts said the numbers point to a slowing housing market but not a major correction or crash.

CMHC income rose 6%

Despite the drop-off in activity, CMHC said its net income rose six per cent to $824 million in the first six months this year over the corresponding period in 2012. It attributed the gain to a $72 million reduction in claim losses.

The second-quarter results suggests that despite fears that the housing sector is due for a sharp correction, the market appeared relatively stable as of June 30, with arrears ratios actually falling from a very low 0.35 per cent in the first quarter to 0.32 per cent in the second.

As well, CMHC's total insurance on loans fell by $4 billion to $562 billion over the past year and remains well within the $600 billion ceiling set by the government.

The agency has been under fire of late for what some perceive as contributing to an overheated housing market by guaranteeing defaults and removing bank risks in issuing mortgages.

Finance Minister Jim Flaherty has intervened four times in as many years to tighten mortgage rules as well as place greater oversight over the agency's activities.

He has suggested that some of the CMHC's functions might best be handled by the private sector, noting that the agency's original mission was for social housing, not as a general guarantor of the market.

Insurance business a money-maker for government

In the report, the CMHC makes the point that the risk to the taxpayer is low and notes that it has been a steady contributor to the government's revenues.

"Over the last decade, CMHC has contributed more than $17 billion towards improving the government of Canada's fiscal position through both its income taxes and net income," it said in a statement. "Of the $17 billion, CMHC's insurance business has contributed more than $15 billion."

CIBC deputy chief economist Benjamin Tal said the risk to taxpayers from CMHC's mortgage insurance activities has been exaggerated.

"You can argue to what extent there is too much insurance and to what extent this led to higher house prices in the last decade, but I think it would be strange to suggest we are putting taxpayer money at risk in any meaningful way," he said.

"Even a correction of 10 to 15 to 20 per cent will not lead to a disaster scenario that some people talk about."

Most analysts believe that the housing market has flattened, but only a few are calling for a major correction in prices. A recent report on affordability by the Royal Bank found the costs on households of maintaining a residence have changed little in the past year and slightly above historic levels.

The agency said it did take $117 million in losses on claims during the second quarter, but that was 30 per cent lower than the corresponding period and 22 per cent lower on a year-to-year basis.

Year-to-date, the agency said it has invested $459 million in social housing on behalf of the government.

During a conference call with media, CMHC officials said they would announce soon how the agency will allocate the unused portion of the $85 billion limit on mortgage-backed securities. Recently, it put a $350-million ceiling per lender on the program for August, a move that was widely seen as likely to boost borrowing costs for Canadians moderately.

But the CMHC said it does not believe the measure will impact consumers.