It’s time for CMHC to reduce it’s insurance premiums. These premiums, charged to purchasers with less than 20% downpayment, insure lenders against default. The 3 mortgage insurers in Canada have been reaping substantial profits on the backs of Canadian homeowners for a decade. Canada Mortgage and Housing Corporation (CMHC) has held the lions-share of the market (typically 70%) and has reported an average annual net income in excess of $1.1 billion over the past 6 years. Projecting these numbers to the other insurers, Genworth and Canada Guaranty, that net income figure balloons to over $1.6 billion annually. These massive profits are in addition to any claims paid and reserves held back to account for potential future claims.
A premium reduction would be nothing new for the crown corporation. CMHC has reduced premiums before and has also eliminated the need for insurance with down-payments between 20% and 25%. The rationale for these decreases was to recognize the over insured market and to pass some of the excess profits back to consumers.
With only 3 players in the mortgage insurance business there’s a risk that the oligopoly will take advantage of consumers and collude to keep prices high. Thankfully for the consumer, the major player is a crown corporation (CMHC) and is focused on housing Canadians and not on maximizing profits. It was CMHC and the Department of Finance initiatives that reduced premiums in years gone bye. The commoditized nature of the business then forced the competition to immediately match pricing. Any future pricing reductions will need to again be led by CMHC as the lack of industry participants discourages competition.
The Time is Now
Previous premium reductions happened simply to correct the price of mortgage insurance relative to its cost. Although the same argument applies today, we have the further argument that mortgage rules have been tightened 4 times in the past 4 years. Tighter mortgage rules mean fewer defaults and a substantial reduction in mortgage insurance costs. It’s time to pass on these savings back to consumers.
A reduction in insurance premiums also falls right in line with government objectives. Jim Flaherty has been on a tear to reduce consumer debt levels, and mortgage debt has been his top priority. CMHC insurance premiums are capitalized to your mortgage and are amortized over the life of your mortgage. They are not a trivial debt obligation imposed on Canadian homeowners. A $400,000 mortgage on a purchase with less than 10% downpayment would attract an insurance premium of $11,000. A 15% reduction in premiums would reduce 1 household’s debt load by nearly $1,700.
An emerging government objective led by Stephen Harper is to advocate on behalf of consumers. This noble initiative shouldn’t be limited to the wireless and cable tv industries. The oligopoly of the mortgage insurance industry also needs to be kept in line, and profits kept in check.
An initiative led by Brian Bell at TownHouses.ca is petitioning the Federal Government to lower CMHC default insurance premiums by 15%. To make your voice heard click on the following link and sign the petition >> Sign Petition Lets make our voices heard!