Ottawa to Charge CMHC a Risk Fee
Ottawa to Charge CMHC a Risk Fee : CMHC’s quarterly financials revealed today that the government will start charging the nation’s largest default insurer a “risk fee.”
Effective January 1, 2014, CMHC will pay the federal government an additional 3.25% of its insurance premiums, plus 10 basis points extra on the low-ratio bulk insurance (a.k.a. Portfolio insurance) that it sells.
Private mortgage insurers (Genworth Canada and Canada Guaranty) have been required to pay a fee of 2.25% of premiums since January 1, 2013. CMHC’s fee is higher, because it “takes into account the 100% Government backing of CMHC’s liabilities as compared to the 90% guarantee of the private mortgage insurers' obligations to lenders.
CMHC projects the fees will amount to $50 million in 2014. Where will that money go? The receipt of all fees from mortgage insurers are treated as part of the Government of Canada's general revenues.
CMHC said that its insurance in force is $560 billion. That’s 6.7% below its legal limit, and $7 billion below its year-end 2011 level. As you may recall, CMHC announced in early 2012 that it would be rationing bulk insurance.
Since then, the Finance Department has taken numerous steps to cut its exposure to mortgage insurance, tighten underwriting, and slow housing momentum.
Mortgage insurance is mandatory in Canada when the borrower has a down payment of less than 20 per cent. It reimburses the bank if the borrower defaults on their mortgage. Portfolio or bulk insurance is something that banks can buy to cover large portfolios of previously uninsured mortgages.
CMHC said it earned $452-million in the third quarter, up 20 per cent from a year ago, thanks largely to a reduction in net claims. The total amount of insurance in force fell to $559.8-billion, compared with $566.1-billion at the end of 2012.
Royal Bank of Canada analyst Geoffrey Kwan said that CMHC’s two private-sector rivals, Genworth MI Canada Inc. and Canada Guaranty, already have to pay a risk fee to the government of 2.25 per cent of premiums written.
The fact that CMHC’s new risk fee is higher than that likely reflects the fact that Ottawa provides more backstop to the Crown corporation. The government guarantees 100 per cent of CMHC’s business, but only 90 per cent of its private-sector competitors.
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