CMHC – Profits fall; Claim losses “jump”.

“Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims. The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.
In its second-quarter results, released Wednesday, CMHC said that its losses on mortgage insurance claims rose to $168-million for the three months ended in June, up from $144-million in the same period of 2011 and $154-million in the first quarter of this year.
That’s part of the reason why profits from CMHC’s core mortgage insurance business fell to $255-million, down from $341-million. The earnings were also hurt by paper losses on a mutual fund investment that suffered when international stock markets fell.
Part of the reason for the growing claims losses of late has been the dramatic increase in the amount of insurance that the Crown corporation has in force.”

– from ‘Jump in claims pinches CMHC’s insurance business’, The Globe and Mail, 29 Aug 2012 [hat-tip allen]

20 responses to “CMHC – Profits fall; Claim losses “jump”.

  1. As the Knight in the Holy Grail says:

    “Just a flesh wound!”

    BTW, what is the CMHC doing investing in mutual funds?

    • I would humbly suggest that there is not info to gauge CMHC’s risk. An increase in claims is also alongside an increase in policy originations and premiums. For CMHC to be in trouble will take magnitudes more stress than this.

      • Agreed.
        But if stress starts, what would it look like?

      • Yes but, generally speaking profit should also increase with increased originations (aka sales activity) – especially since at the margin, fixed costs are generally covered. I take the decline in profit as a harbinger of what’s to come, especially since everyone talks[in error IMHO] about how defaults don’t happen in Canada at scale. Seems it happened enough already to affect CMHC and prices have barely started dropping.

      • I second vreaa’s comment. What constitutes real stress on the financial structure of the CMHC then?

      • Risk begins to increase when the banks’ can’t liquidate REO inventory. At that point, after a certain period of time, they can request a full claim for the property value—then CMHC takes possession of the asset. When markets are normal, banks can sell the property at a fair market value and then make a claim for the difference.

        CMHC’s Karen Kinsley recently stated that rural forecloses are the biggest risk to CMHC’s portfolio, which makes sense because these properties are hard to sell.

        Today’s Q2 report shows CMHC’s equity is a measly $12.8 billion. Vancouver alone could wipe out their balance if things get really bad.

        Too much leverage is what CMHC can’t handle.

      • “But if stress starts, what would it look like?”

        CMHC has had to significantly curtail its policy issuance since the beginning of the year. They have experienced a transition where they cannot get new business but have to service the existing policies in force. That is a step-change in revenue (fewer policies) with ongoing expenses (normal flow of claims).

        This is like any other insurance company would face in a similar situation. If prices start dropping CMHC will once again start taking on new policies as dropping loan values require borrowers to purchase mortgage insurance. From what I’ve read CMHC will not deny any of these borrowers MI. This will almost certainly come with increased claims as defaults start increasing. Further when that happens they will be under significant pressure to raise premiums as their capital reserves deplete. They will present this fact to the government and the government will balk that the Canadian public cannot absorb such horrible usury and subsidize premiums instead. CMHC is, after all, a profit-making entity and, like any insurer, does some horrible things to its customers when correlated claims take off.

        As I’ve stated many times before I think CMHC will be made whole by government loans if they bleed through their capital reserves. CPC policy may be trying to starve the beast and justify curtailing its operations and transitioning to a more free-market model, however CMHC has been a mainstay in Canadian housing policy for 60 years now, and I expect the government will be unwilling/unable to give that up any more than the Americans have been able to give up the GSEs.

        So yes falling profits will kill CMHC’s balance sheet but what we saw in this last report is more due to a short-term revenue hit. The real pain will be geometrically increasing expenses from claim payouts. That will be the time to grab the popcorn.

    • They should be investing in mutual funds (or other investments) for diversification purposes. Unless, of course, the mutual funds are heavily invested in Canadian Real Estate assets!

      • …or highly correlated with RE-driven economic activity.

      • Like any insurer they should try to save their capital. I don’t know how sophistimicated they are but with that size of reserve they should be hiring some professional advice.

      • They should be hedging with assets that are inversely correlated with Canadian RE, but there is a fair chance that their portfolio managers are underestimating RE downside risk, and are not doing that. This always seems to be the temptation in these situations.
        Are the CMHCs investment positions publicized anywhere?

  2. “The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. ”

    Not really, because…

    “An increase in expenses related to work-outs on loans in arrears was also a contributing factor to the increase in Losses on Claims.”—CMHC

    Well, we can now throw CBA’s mortgage in arrears stats out the window, as it indicates nothing but an overflow of delinquent loans or distressed mortgage payments that were not settled by a consumer proposals, or ” work-outs” as CMHC calls it.

    It doesn’t get more socialist then programs like this; using taxpayer’s money (including renters and those waiting to buy) to bailout reckless borrowers, and like every socialist program the government tries, it will fail and make matters worse.

    • >using taxpayer’s money (including renters and those waiting to buy)

      Although I don’t totally agree with you Watchdog, I think this is an excellent point. As a renter, I’m staying the fuck out of the housing market for a while yet, especially while I’m in Vancouver. Buyers and speckers are on their own, I want no part in that bullshit.

      Should I land a Post-Doc position in Southern California, I might contemplate buying since that market looks like it’s bottoming out (although I still don’t like the idea of throwing so much money in to a single asset.) My degree in biology tells me that diversification is a key to stability.

      • As a renter, how do you feel about your tax dollars going towards your own interest to buy a home? Or how do you feel about the health sector getting student loan debt forgiveness and not your field? What right does the government have to pick and choose who they feel are worthy of a bailout with taxpayers money?

        Without winners and losers in society, there is no capitalism.

      • Capitalism/Socialism are such loaded words, does “free market” cover what you mean?

        My own naive thoughts on the matter: it makes sense for some areas to be “free market”, but some areas don’t, for example State services. It’s a political decision exactly what services the State should provide, but some candidates are education, health, major infrastructure, etc. that promote a just, prosperous, stable society (assuming people care about such things), and wouldn’t work very well as free markets (e.g. emergency services). I don’t think that’s particularly “socialist”. For some reason there has been a political desire for the State to support Home Ownership. I can see the point in supporting a minimal level of “adequate housing” for health/stability reasons, but that doesn’t imply getting everyone on the housing ladder. Why not subsidize cars? Transportation/mobility is also beneficial, but the State support focuses on infrastructure including some basic public transportation to ensure there are ways to get around for everyone (aside from walking).

      • UBCghettodweller

        @Canadian Watchdog

        I can’t be too self-righteous about the health sector workers getting debt forgiveness because I’ve been living off of an NSERC CGS-D scholarship for the last few years. But then again, I didn’t just get that because I got in to grad school and completed a degree. I was in the top 1% of my undergrad classes with excellent reference letters and peer reviewed scientific _publications_ before my 21st birthday.

        The irony is that the Doctor shortage is generated primarily by the professional associations in combination with provincial funding limiting the number of Medical School positions. There is a line up 15 people deep for every Med School position in this country, at least two or three of them are qualified and have the financial resources to pay their way through without government subsidized tuition. This guarantees that MDs have a high demand, high paying job once they leave Medical School. Us PhD scientists however are chronically underemployed or leave for other fields. We operate more as intellectual mercenaries than professionalized civil servants… which is why I’ll be heading down to the US after my degree and happily kicking the dirt of Vancouver off my shoes because there are no real opportunities here. Whoever pays gets my expertise.

    • CMHC bails out reckless lenders, not the borrowers. The borrower loses the house and any money invested in it; the lender is made whole for any difference between the mortgage and the value of the house.

      Of course, for the same cost, we could bail out the borrower, who would then replay the lender, and both the borrower and lender would be saved from their actions. But that wouldn’t be fair; only lenders deserve to be bailed out from the consequences of their actions.

  3. CMHC changed its name back on July 1, 1979. What does this tell you grasshoppers? http://www.ontario.ca/ontprodconsume/groups/content/@tsso/documents/document/stel01_078527.pdf

  4. CMHC is almost a scam. The borrower pays them, through fees rolled into the mortgage and higher rates, to insure the bank’s loan. Even if you have 25-40 percent equity in your house when the bank forecloses, you will not see a dime. Instead the bank will report a loss to CMHC, which CMHC will pay. Then, years later, CMHC collections will come after you for the full amount of the bank’s inflated claim + interest (at > 10% interest). Bankruptcy may be your only option. The scam is a combination of insurance fraud by the bank and usury by CMHC. Do not use CMHC if at all possible, and even if not.

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