Canada Guaranty, the mortgage insurer you never heard of, is gaining momentum in the mortgage industry. What’s interesting is that they are actually paying the banks to send them business. According to Royal Bank’s own disclosure document, they receive $140 for every mortgage closed and insured with Canada Guaranty. As long as this fact is disclosed and the mortgage insurance is equal to that offered by CMHC and Genworth then there’s no ethical or legal issue. That said there’s something wrong with a mortgage insurer kicking back revenue to a mortgage lender.
If the mortgage insurers are making enough profit to buy their business then one of the following is going on:
1) Insurance premiums are too high
2) Mortgage defaults / claims are much lower than expected
3) Canada Guaranty is willing to operate at a loss to gain a foothold
I suspect that it’s a combination of 1 and 2. Having been in the mortgage industry for more than 2 decades, I’m personally aware of other kick-back situation with one of the other insurers. Although gaining market share is the obvious reason no firm operated at a loss. In fact, all of the players profited greatly from the arrangement.
With the recent mortgage rule tightening, especially on mortgages that require mortgage insurance, you’d expect insurer risk to go down. Lower risk should mean lower premiums to borrowers not kickbacks to banks.