Tougher rules and a ‘dark economic underbelly’: How CMHC’s market share collapsed in one year

It started with a tersely worded letter and ended with a falling-out between Canada's financial institutions and state-owned mortgage insurer.

By July, the Canada Mortgage and Housing Corp. had lost half its standing in the mortgage insurance business, a result of self-acknowledged mistakes and an unusual broadside to private lenders that, according to industry insiders, really pissed them off."

On Monday, CMHC reversed restrictions it had introduced in July 2020 that made it harder for prospective buyers with above-average debt loads to be approved for a mortgage. The rationale for the stricter rules, the Crown corporation said at the time, was that it needed to limit heavily indebted borrowers from taking on mortgages they might not be able to repay. Evan Siddall, then-CEO of CMHC, had long sought to curb risky lending habits in an effort to prevent a crisis in the housing market, and, in August 2020, he was warning of economic systemic concerns" that justified a crackdown on mortgage lending.

But the move impacted CMHC's business model adversely. Over the course of the pandemic, the corporation lost substantial market share to the two dominant private companies in the mortgage insurance industry, both of which stepped in to offer mortgage insurance to all the lenders that could no longer get it from CMHC.

Private insurers Sagen MI Canada Inc. and Canada Guaranty Mortgage Insurance Co. declined to adopt CMHC's tougher rules, despite repeated requests from the corporation itself. And the lenders that typically received mortgage insurance from CMHC - banks, credit unions and alternative lenders - simply diverted their business to the private sector, rendering the federal corporation's new rules borderline inconsequential for consumers.

CMHC, which for decades has been the dominant actor in the mortgage insurance industry, lost roughly half its market share while private insurers gobbled up business. According to an RBC research note, CMHC has slipped from 50 per cent of the market before the pandemic to 23 per cent earlier this year. Sagen, meanwhile, has grown its market share to 44 per cent, while Canada Guaranty rose to 33 per cent.

With this week's rule reversal making it easier to access CMHC mortgage insurance, the corporation will regain some of its market share in the coming months, says mortgage broker Rob McLister. But there's some degree of market share that it will never get back, or at least not for a long time."

McLister says a letter from Siddall to Canada's foremost financial institutions in August 2020 left mortgage lenders with a sour taste in their mouth," potentially influencing where they send their business in the future.

The confidential three-page memo chastised mortgage lenders for helping indebted borrowers buy homes, telling them to put our country's long-term outlook ahead of short-term profitability." There's a dark economic underbelly to this business," which produces competitors that employ economically counterproductive activity," Siddall wrote.

In a dramatic finish, he told the lenders: If you want us in wartime, please support us in peacetime."

The letter was released publicly last year after it was leaked to the press.

It doesn't account for such a loss in market share, obviously, but it definitely bothered a lot of people in the industry," McLister said of the letter. Lenders, to a large degree, have latitude on where they send insured business. And that was an unfortunate move for CMHC."

CMHC's rule changes demonstrate that the corporation has had little impact on borrowers when the lenders can just turn to the private sector, says Ron Butler, mortgage broker at Butler Mortgage.

There's nobody who didn't get the full amount of insurance they wanted after CMHC tightened its rules, because instantaneously the other two companies picked up the slack," Butler said.

And though the changes were in part aimed at curbing unsustainable growth in the housing market, real estate prices have skyrocketed, with the average home price rising by 38 per cent from a year ago, according to the Canadian Real Estate Association.

CMHC acknowledged its mistake in Monday's announcement, writing that the changes were not as effective as we had anticipated and we incurred the cost of a decline in our market share."

In an email to the Star, it said it remains in a position to respond" to a crisis in the housing market, despite its lowered status in the mortgage insurance world.

Butler says he expects the banks to return to CMHC mortgage insurance now that the corporation has reversed its stricter rules; grievances between the government and lenders are likely in the past.

Sure, they were irritated for a day. But once they realized that nothing changed in their lending scenario, thanks to private insurers, they instantly forgot about it. Why hold a grudge? They'll go back to the CMHC when it's advantageous."

Jacob Lorinc is a Toronto-based reporter covering business for the Star. Reach him via email: jlorinc@thestar.ca