In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on…
In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on News 95.7, the guys talk about CMHC updating underwriting policies, its role as a crown corporation, and how mortgage insurance is good for first-time home buyers.
Mortgage 101 with Clinton Wilkins & Todd Veinotte – July 2021 – Part 1
Don’t feel like watching the video? Check out the transcript below.
“A little lesson on what CMHC is”
Todd Veinotte: [00:00:00:04] Alright, so some news this week pretty impactful and involving CMHC. First of all, a lot of people hear that acronym CMHC, it’s a pain in their butts because they got to pay extra money when they’re getting their mortgage.
Clinton Wilkins: [00:00:10:27] Oh yeah.
Todd Veinotte: [00:00:11:18] And they hear that. Right. A lot of people don’t even know what it is.
Clinton Wilkins: [00:00:14:02] Sometimes people use CMHC as a bad word. I don’t even know, even though it’s an acronym.
Todd Veinotte: [00:00:19:20] So before we get into the news about CMHC and it’s pretty impactful, give everybody a little lesson on what CMHC is. And then and then we’ll talk about what happened.
Clinton Wilkins: [00:00:29:02] CMHC is actually an acronym for the Canadian Mortgage and Housing Corporation. They are a crown corporation that does a bunch of different functions.
But for what I talk about, their primary function is around giving lenders high ratio mortgage insurance for borrowers. So it’s required to have this high ratio mortgage insurance for any purchase that a client does in Canada with less than 20 per cent down, you’re required to have high ratio mortgage insurance.
There are three insurance companies in Canada, CMHC, which is a crown corp. There’s also Sagen and Canada Guarantee. Last year when the pandemic struck, CMHC, in their great wisdom, basically changed their underwriting policies to require a higher credit score and for borrowers to have a lower level of indebtedness in terms of what their debt service ratios were, in terms of what their payments to their income look like.
You know, it was tough and I think it negatively impacted borrowers in more rural areas of Canada, which really, this is their mandate to provide, you know, an avenue for people to get into homeownership. And early this week,
Cooling the housing market and too much risk
Todd Veinotte: [00:01:50:07] before you get into that, why did they do that? What was it to cool the housing market?
Clinton Wilkins: [00:01:54:20] They were trying to cool it because they felt it was overheated and there was no room for it to go. And they were also concerned around what the implications would be to the economy from the pandemic.
Todd Veinotte: [00:02:07:08] So too much risk perhaps? They were concerned about risk and exposure.
Clinton Wilkins: [00:02:11:20] Exactly. And because really, at the end of the day, this is the government backing essentially mortgage loans to banks. And they were concerned that there was going to be mass losses. You know, a lot of people losing their jobs, not being able to pay their mortgages, they thought maybe home values were going to go down.
Todd Veinotte: [00:02:32:29] So they’d be on the hook for a lot of this?
Clinton Wilkins: [00:02:35:05] For any insured mortgage. When a borrower defaults, if they have insurance from the Canadian Housing Corporation, they will pay the lender for any losses.
Todd Veinotte: [00:02:45:10] Will they recoup that if and when the property is repossessed?
Clinton Wilkins: [00:02:48:17] Yeah, they’ll recoup it. But if it’s sold for a loss, then they will make a payment to the lender.
“CMHC is actually so profitable that they do transfer payments back to the federal government”
Todd Veinotte: [00:02:54:23] They have deep, deep pockets. They’ve only got so much capacity as well to pay this if it were to,
Clinton Wilkins: [00:03:00:00] Well, here’s the thing. Technically, they’re an insurance company. So they actually have a lot of funds on deposit. And CMHC is actually so profitable that they do transfer payments back to the federal government.
They actually have paid the federal government back millions and billions of dollars over the years because they’re so profitable, you know, at the end of the day, you know, CMHC is in place to help borrowers become home owners. But really, it’s a business and it’s an insurance company. And, you know, that’s one function of their business. And, you know, they were concerned.
They made their underwriting policies more challenging. But guess what? The other two private insurers did not change their policies. So if anything, the private corporations were more in business with Canadians than the federal government agency.
Todd Veinotte: [00:03:54:13] Aare the less expensive?
Clinton Wilkins: [00:03:56:10] The same price.
Todd Veinotte: [00:03:57:21] Same rates?
Clinton Wilkins: [00:03:58:11] Same premiums. Same rates.
Todd Veinotte: [00:04:00:07] Wow. To me, it seems strange that you would have a crown corporation, which was once, I think, a standalone. The only option, was it?
Clinton Wilkins: [00:04:07:00] It was the only option. And even when there were other players in the market, they still had the bulk lion’s share. But now the tables have turned.
Is it an unfair playing field with a crown corporation?
Todd Veinotte: [00:04:16:08] So to me, it seems strange that you would have a crown corp. in this sphere and then private insurers as well. That’s odd. Anybody ever thought that CMHC has, because it’s a crown corp, it’s an unfair playing field? How do you compete with the crown corp?
Clinton Wilkins: [00:04:33:02] I think at one time, probably the private corporations did think that and they found it challenging to compete with the crown corporation because at the end of the day, the crown corporation can dig as deep as they need to dig, really. They have an infinite pool of resources that they can really dip into where the private corporations obviously have a finite amount of maybe money and resources that they can dip into. So I think they did find it challenging maybe in the early days.
And I think the private corporations really focused on maybe more niche business or maybe they may have dug up maybe a little bit deeper for borrowers that maybe the credit wasn’t as great or maybe for maybe the properties that you don’t need an appraisal. And if CMHC wasn’t willing to do it, then they would be kind of a second choice, even though they were all still a prime option.
The interesting thing is the Canadian Mortgage and Housing Corporation actually provides 100 per cent coverage to the lenders where the private corporations only provide actually 90 per cent coverage.
Mortgage insurance is important for first-time home buyers.
Todd Veinotte: [00:05:33:22] Why the same rate though?
Clinton Wilkins: [00:05:35:12] Just the way that it goes. CMHC actually stops, you know, backstops the private insurers as well. It’s a very complex system that we run in Canada. But believe it or not, in the U.S., they have a very similar system of high ratio insured mortgages.
And they are really important, specifically for first-time home buyers. You know, they are the ones that are really enabling these first-time home buyers to get into the market and really helping any borrowers that don’t have a 20 per cent down payment, as you can imagine, as the property values increase, it’s more and more challenging for borrowers even to come up with a five per cent down payment, which is the minimum down payment in Canada.
The two privately owned corporations or private corporations, I should say, do some programs the Canadian Mortgage and Housing Corporation, don’t run or maybe don’t run anymore. So, for example, let’s say you’re self-employed and we need to do a product called stated income. The federal government agency doesn’t offer that program anymore. The reason that they don’t is because they don’t want borrowers not claiming the income on their income tax and really CRA collecting that income tax from them, but then also qualifying for a mortgage. I kind of get it.
But there isn’t parity between all three insurers. They’re all slightly different. And the two private ones are, I would say, the most different from the Canadian Mortgage and Housing Corporation. But it’s really great news that CMHC now has made the announcement to change their underwriting policies and it’s going to bring it back more into alignment with the other two corporations.
Next up: Real Estate Investments and Cottages!
Todd Veinotte: [00:07:22:03] Excellent. So we’ve got a lot to talk about in the show. And I want to talk to you about investing in real estate, investment properties. I think that’s greatly important. Is that something you’re up for?
Clinton Wilkins: [00:07:31:29] It’s certainly something I’m up for. And maybe that’s investing in buying a cottage we know with summer season. So, I’m sure lots of borrowers are interested about it.
Todd Veinotte: [00:07:39:23] Okay, Mortgage, 101 with Clinton Wilkins and myself Todd Veinotte, returns right after this.
If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.