CMHC Cap – “If they do in fact operate within their $600B cap, check out how drastically the growth in their insurance in force would have to slow. That’s a hard stop if ever I’ve seen one.”

– chart via e-mail from Ben Rabidoux, of ‘The Economic Analyst‘, 25 Mar 2012, who adds:
“Attached is a chart of CMHC cap on insurance in force as outlined in their latest Corporate Plan. If they do in fact operate within their $600B cap, check out how drastically the growth in their insurance in force would have to slow…..to only 20% of 2007-2011 levels for the next 5 years, or a slowing to less than 2% annual growth. That’s a hard stop if ever I’ve seen one.”
[Thanks Ben. – vreaa]

61 responses to “CMHC Cap – “If they do in fact operate within their $600B cap, check out how drastically the growth in their insurance in force would have to slow. That’s a hard stop if ever I’ve seen one.”

  1. I had not idea that 2011 had only 26B worth of CMHC insured mortgages. This is less than of each of 2007, 2008, and 2009. I think the trend is already afoot and CMHC cap will not be breached in any event.

    Most mortgages are 5 year term. Thus, we start purging the CMHC obligation on 2007 (53Billion) by the end of the year, next year we purge 62 billion and the year after 64 billion. Total for 3 year is a shedding of 179 Billion insured loans.
    If you’re a taxpayer worried about a government bailout you have to like where the trend is headed.

    • When those mortgages roll over, isn’t the CMHC expected to backstop the next term? Surely that’s the case. If not, wouldn’t the private lenders baulk at the renewals?

      • no Vreaa. After 5 years when remortgaging the loan becomes low ratio due the change in equity – either through appreciation, payments or both

      • Right, change in equity :)))
        Since most of what people pay in the first 5 years is interest, this “change in equity” totally depends on price appreciation. It’s like relying on a Perpetuum mobile.

      • When prices start to fall significantly, many non-CMHC insured loans will become low ratio loans due to erosion in equity. So when they roll over will they then require CMHC backing? If not CMHC, who? And for how much?

    • The insurance stays in force for the entire length of the mortgage. You get to carry it even to another bank.

    • Purge??? I dont think loans gets purged, like AG Sage says I think it stays with the life of the mortgage, which makes sense since it is a lump sum payment made when you pruchase the home, and even with a growth in equity the down payment still stays the same. One of the ideas for having CMHC insurance is that people who put down a smaller down payment have less to lose and more likely to default. The size of the down payment doesnt change with equity growth. Also equity growth isnt related to how much the buy can afford.

      • “I think it stays with the life of the mortgage”

        impossible. We would have topped the 600B long ago if that were true. Do your research

      • formula1 -> “Impossible”… “Do your research.”

        You sound confident, not to mention cocky.
        Perhaps you should do your research.
        From CMHC website (a quick google search):

        FAQs — New Parameters on Mortgage Insurance
        http://www.cmhc.ca/en/corp/faq/faq_008.cfm

        I already have an insured mortgage. How will these changes affect me?

        CMHC mortgage insurance is good for the life of the mortgage. Borrowers renewing an insured mortgage will not be affected by these changes. For example, if a borrower had a 40 year amortization and there are 37 years remaining on the mortgage, the mortgage can be renewed with a 37 year amortization, as long as no new funds are being added to the mortgage. “

    • See F1 it does stay with the life of the mortgage and considering that insure mortgages with only a 5% deposit, that will cut down on the number of mortgages to be issued in the future. Most banks wont touch a new mortgage without 20% down. A $500,000 house will require $100,000 down as opposed to $25,000 down with a CMHC back mortgage.

      Its gonna be a bumby ride in the near future.

      • this gives me a great deal of comfort knowing that some very old CMHC properties are covered as part of their portfolio. What it means is that there is “much ado about nothing” since many of these homes now have a very high equity. I guess the devil of the total CMHC insurance obligations is in the detals.

      • Approximately $300 bn in coverage added in the past 5-6 years. That’s scary…so much exposure to loans with the lowest LTV ratio. No wonder they’re changing the rules – the CMHC is becoming “supersaturated” with risky policies.

        Bumpy ride indeed.

  2. Looking at the chart another way, take note of how dramatic a fall there was from the 2009 high to that of 2010 and then another sharp drop in 2011. This is something of a reflection of the decline in first time buyers as I see it and the trend was going to take us down to the 12 billion dollar range in 2012 anyway.

    Just as a rough guide, 2009 required 62 billion in insurance, 2010 demanded 46 billion and 2011 utilized 25 billion in insurance.

    That is one very steep drop. But wait…. we had heard 9 of 10 mortgages needed CMHC to prop them up. It is also common knowledge that average down payments rarely exceed 7%. Are we kidding ourselves or something?

    So we know that buying itself held up in most markets even as prices rose. Why do we have such a discrepancy? If sales were brisk but needs for insurance were actually declining then we have not accounted for how many deals were done with large downs.

    There is missing information here. Anybody out there getting this who might know why?

    • Echo those questions, what revenues are replacing the new insured buyer? If trends are up, this must be skewed nationally. Could play into he who bought, bought, and inventory remains high.

  3. Basement Suite

    In any event the “cap” simply would increase if we ever come too close. Just like the US debt “ceiling”. There’s no political will to hold that firm, not when so many voters depend on this bubble.

    • No, I don’t think so, Basement. We are being told the cap will not be increased and so CMHC must live within its allowable limit. This chart is telling us that they have more than ample room to carry on. As F1 pointed out already, expiring mortgages free up room for the future usage.

      But this is Bens chart. Maybe he has more details on the data used

      • Basement Suite

        I understand they say that, but if the bubble really took off again and we actually bumped up against it, I am sure it would be increased as needed. They would justify the change as “the landscape has changed and we need to keep up with upwardly revised home valuations” or something similar. But as you said, the cap might be so high now, maybe it is a moot point today.

  4. Let’s agree to call CMHC by a more appropriate moniker,

    CANNIE MAE

    Because that’s where it’s headed…

  5. just talked to a businessman friend in China. He told me that more and more Chinese money is coming to buy land and old houses and apply for rezoning in the GVRD area. It used to be from individuals, but now it’s largely from corporations and businesses. He has ties to couple of these companies and he expects to make lots of money here buy investing in the housing market. I don’t know how this is going to affect the local housing market. I don’t know why the Canadian government is not doing anything…

    • mommy40: Why? Any idea *why* all these purportedly ultra-rich Chinese (really, how many can there be anyway?) are investing here when they can get so much more for so much less elsewhere and not the run the risk/certainty they’ll lose mega-bucks as this fat blimp spirals into the ground?

      Oh, the humanity!!

      But seriously, is it the weather? Two decent days thus far in 2012!! Is it the onerous cost of living? The “East Village” (TM)?

      • Number of time zones between Vancouver and Hong Kong first, length of flight time between YVR and capitals in China is # two and third, much less onerous rules of admission for immigration compared to the US where haywire politics and a resentment of China has become a political football.

        Add it up. Easy access to US markets via free trade if you do business, good quality schools, stable government, excellent services and infrastructure and a clean environment (you know….all that hydorelectric thingy that makes Vancouver seem spotlessly clean when compared to the filthy gas bags that pass for cities in most of China).

        Losing money on real estate is only a small part of the equation. Seems the downside is still worth the price of admission. We need to start brushing up on our Cantonese. They say we will need it if we expect to get tips when serving coffee and doing laundry.

      • Farmer, I mostly agree except for 2 points.
        #1) “Losing money on real estate is only a small part of the equation.” I understand that rationale for individual “investors”, but not for corporate investment. mommy40 claimed “It used to be from individuals, but now it’s largely from corporations and businesses.”
        #2) Mandarin not Cantonese.

      • Jeff,

        Yes, Mandarin, not Cantonese.
        Even the long time Cantonese Vancouverites will be forced out of the city by mainland Chinese money coming here. I don’t think there are too many locals that this does not effect.

    • Your govt is handing out the brochures. Because your govt has a big fat debt and canadians are low wage consumption kings. I deal with Chinese traders and Vancouver doesn’t come up. I think Vancouver’s uptick is no different than anywhere else in the world. Lots of Chinese investment in Africa right now.

      • Agree Debtless. I saw it firsthand. Everything is big there now, off the charts. Got to love Africa. The place is very energetic and youthful and the Chinese are the biggest of investors although they are not alone. I could comfortably say that Africa is that worlds last Wild West. A place to go where the potential is a hundred times more than here if your idea is to build a business. There is talent everywhere, skills and education levels are high in many countries. All that is missing is the element of investment dollars to make it all happen and sadly, most Africans have little wealth. That is where the opportunity lies.

      • “A place to go where the potential is a hundred times more than here if your idea is to build a business.”

        I guess that depends on the type of business. Perhaps for resource extraction or cheap labor?

        “All that is missing is the element of investment dollars to make it all happen”

        Some political stability would be nice too, although I guess this varies a lot from country to country.

    • These pretzels are making me thirsty

      Unless you have a real source, this is just rumour mongering.
      A friend in China, friend of a friend etc. is just silliness

      I have traveled or lived in at least 5 different countries and some of the most gullible people are Canadians (no disrespect intended). There are better places in the world, and also the rest of the world does not revolve around Vancouver. Geez..

    • “He told me that more and more Chinese money is coming to buy land and old houses and apply for rezoning in the GVRD area”

      better keep that to yourself mommy40 before posters here start calling you a liar. They think the Chinese buyer is a myth, or at best overstated.

      • These pretzels are making me thirsty

        I do not usually respond to your comments F1, simply because they are ludicrous (like comparing BC Place to Sydney Opera house or Lions Gate to Golden Gate).

  6. “Made in China, spent in Canada” – just announced on TV – Monday on Global – another objective piece journalism with the slimeball Cam Good.

  7. LandlordRescue.ca

    I wrote some advice for Flaherty and Bank CEO’s. I’m so sick of their ridiculous posturing.

    http://landlordrescue.ca/seriously-flaherty-ceos-banks-grow/

    Enjoy.

  8. There’s a few anomalous trend lines in that chart. Enough to rationalize more theories. If sales haven’t dropped off, what’s filling the gap left by insured mortgages? Foreign investment, fund investment, speculation or hype? This chart would be interesting against various revenue charts, debt burden. Does the govt give figures on cash transactions on RE? or is it hush hush. I think that in the US, cash transactions are recorded, they have money laundering laws.

    • It could be that 2011’s market growth was people climbing the property ladder, rather than FRBs jumping in without equity… People who’ve already had good appreciation on their RE investments probably have enough equity to be able to invest in additional properties with >20% down.

    • stopped backing helocs mid-2011. also, yields dumped allowing more leverage ergo equity crack hit.

    • ” If sales haven’t dropped off, what’s filling the gap left by insured mortgages?”

      You may not like the answer: banks are still lending and eating it in terms of margins. Flaherty is no idiot, and has been getting good Machiavellian advice on how to pass on costs to inelastic enterprises.

      • yes, without CMHC banks will still lend. They’re in the business of making money and will apply their own eligibility requirements to loan applicants. Silly to think there would be no lending.

      • don’t really see a gap. the step down from 2010 to 2011 levels can be explained by policy change on helocs plus the illusory equity boost from cbond yields moving lower. sales are falling off now, just a lag. sort of infer that the buy side was tapping helocs to fund downpayments. way cool.

      • f1. here in the canada south, banks aren’t lending if they can’t push the contract onto the gse. it’s because they’re fully stuffed with non-performing and toxifying contracts. if they are lending with their own cap, the terms are unfavorable.
        straight up question: what would it take to convince you?

      • “it’s because they’re fully stuffed with non-performing and toxifying contracts”
        Flaherty was big on access to the US investment markets re volker rule. Big lobbying flurry. Are banks stick handling to reclassify their underinsured mortgages as a product? Who’s buying it?

      • @debtless. don’t know. i’m not familiar. but it’s so late now, the outcome isn’t a mystery. the only buyers of unbacked junk would be central banks. so, if you are saying they’re looking for a way to offload externally, the only thing that would make sense is a readying a path to the fed.

  9. LandlordRescue.ca

    After 5 years of payments with 5% down and CMHC insurance costs of 2.75% you will have paid off 14% of your 25 year mortgage.

    • Perhaps, but I don’t know anyone here who actually has a 25 year mortgage. Canadian average amortization period for CMHC insured loans is 24 years, and I think it’s safe to assume that the longer amortizations are concentrated in Vancouver.

    • “After 5 years of payments with 5% down and CMHC insurance costs of 2.75% you will have paid off 14% of your 25 year mortgage”.

      then it must be the house appreciation.

  10. LandlordRescue.ca

    Yeah F1 that pendulum swings both ways. Not sure you noticed but it’s been going up for a long time. Wonder what happens now.

  11. From past back of the envelope analysis I think CMHC’s portfolio vintages are relatively flat, meaning as many expire as come up for renewal. So while the growth is shrinking, churn still leaves them a lot of coverage to play with every year. Remember they very recently had a total cap of only $100 billion (before Harper).

  12. I still say banks are going to lend no matter what. They will curtail lending only insofar as they need to retain more reserves because they cannot get a 100% hedge any more.

    And really banks should be lending to non-household lenders anyways, you know, to get the real economy moving and old stodgy stuff like that, assuming there’s one left after the CMHC umbrella is pulled.

  13. Hey, formula1, before you characteristically abandon this thread once you’ve been found to be completely wrong about something, how about an apology to AGSage and Arshes for the following exchange, and an acknowledgment that you were mistaken? (from above):

    AG Sage | 26 March 2012 at 5:56 am | Reply | Edit
    The insurance stays in force for the entire length of the mortgage. You get to carry it even to another bank.

    Arshes | 26 March 2012 at 8:08 am | Reply | Edit
    Purge??? I dont think loans gets purged, like AG Sage says I think it stays with the life of the mortgage, which makes sense since it is a lump sum payment made when you pruchase the home, and even with a growth in equity the down payment still stays the same. One of the ideas for having CMHC insurance is that people who put down a smaller down payment have less to lose and more likely to default. The size of the down payment doesnt change with equity growth. Also equity growth isnt related to how much the buy can afford.

    formula1 | 26 March 2012 at 8:31 am | | Edit
    “I think it stays with the life of the mortgage”

    impossible. We would have topped the 600B long ago if that were true. Do your research

    vreaa | 26 March 2012 at 9:06 am | | Edit
    formula1 -> “Impossible”… “Do your research.”

    You sound confident, not to mention cocky.
    Perhaps you should do your research.
    From CMHC website (a quick google search):

    FAQs — New Parameters on Mortgage Insurance
    http://www.cmhc.ca/en/corp/faq/faq_008.cfm

    “I already have an insured mortgage. How will these changes affect me?

    CMHC mortgage insurance is good for the life of the mortgage. Borrowers renewing an insured mortgage will not be affected by these changes. For example, if a borrower had a 40 year amortization and there are 37 years remaining on the mortgage, the mortgage can be renewed with a 37 year amortization, as long as no new funds are being added to the mortgage. “

    • “Confidence comes not from always being right but from not fearing to be wrong.”

      • Either that, or being the other side of the intelligence curve.

        “I think the problem with people like this is that they are so stupid that they have no idea how stupid they are. You see if you are very very stupid, how can you possibly realise that you’re very very stupid? You’d have to be relatively intelligent to realise how stupid you are. There’s a wonderful bit of research by David Dunning… who has pointed out that in order to know how good you are at something requires exactly the same skills as it does to be good at that thing in the first place. Which means… that if you’re absolutely no good at something, at all, then you lack exactly the skills that you need to know that you’re absolutely no good at it. And this explains not just Hollywood but also the entirety of Fox News”
        – John Cleese

  14. Let’s not forget mini-cmhc: genworth. Flaherty has given them plenty of room to pick up the slack for a while. It will take a bit of getting your used to, and more costs.

  15. Told-you-so-in-2007

    @jesse,

    Ahh, the Dunning-Kruger effect is fairly well researched (stupid can’t see that it’s stupid). Sadly, having competence in an area leads one to be able to ascertain a multitude of possibilities that the denser among us just can’t see coming. Sadly, these factors combined explain why the more intelligent among us don’t tend to do well in politics.

    “One of the painful things about our time is that those who feel certainty are stupid, and those with any imagination and understanding are filled with doubt and indecision.” – Bertrand Russell

    @zerodown

    “Let’s not forget mini-cmhc: genworth. Flaherty has given them plenty of room to pick up the slack for a while.”

    Can you verify this? Do you have any information about what Genworth’s portfolio is like or what their cap is set at?

  16. @debtless. just occurred to me. i had forgotten, things haven’t actually blown yet and you don’t have something like tarp yet. do you know what sort of assets the boc is permitted to hold? this is my paranoid side taking over. could it be setting up an escape route in case a campaign to monetize the toxified uninsureds fails or fall short? i mean the eurocrats weren’t able to push through a solution for greece on the front end, right? if true, that would mean somebody is considering possibility of truly epic bust.

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