MORTGAGE INSURANCE: CMHC EXPERIENCE IN CANADA

1

• MORTGAGE INSURANCE CMHC EXPERIENCE IN CANADA
• SELECTED COUNTRIES
• The World Bank
• Washington, March 12, 2003

2
OBJECTIVES OF THE PRESENTATION

• Present the Canadian Experience with Mortgage
  Insurance
• Share a few lessons learned through our
  involvement internationally

3
WHAT IS CMHC

• Canada Mortgage and Housing Corporation
• A federally owned Corporation public agency with
  a private sector culture/structure
• CMHC reports to parliament through its minister
• A board of directors (10 members, majority from
  private sector)
• manages the affairs of the Corporation.
• A National Housing agencies with a broad mandate
  
• THE PROMOTION OF
• Housing affordability and choice
• Housing construction, repair and modernization
• Improvements to overall living conditions

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COMMERCIAL AND PUBLIC MANDATEPUBLIC POLICY
COMMERCIALMANDATE MANDATE
5
CMHC IN NUMBERS

• Income after taxes (2002) US 355 million
• Income tax US 200 million
• Units insured (2002) 529,000 units
• 36 serving Canadian in areas
• where competition is not active
• Insurance in force (2002) US 143 billion
• of outstanding mortgages insured gt45
• Secondary market
• Guarantees in force (2002) US 13.4 billion

6
HOUSING FINANCE IN CANADA
Not a stand-alone system, integrated into the
wider capital market
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OUTSTANDING MORTGAGES TO GDP

• SELECTED OECD COUNTRIES
• (Source Centre for studies in Economics and
  Finance Financial Market Imperfections
• and Home Ownership A Cooperative
  study July 2000)

8
HOMEOWNERSHIP

• SELECTED OECD COUTRIES
• (Source Centre for studies in Economics and
  Finance Financial Market Imperfections
• and Home Ownership A Cooperative
  study July 2000)

9
TYPICAL MORTGAGE PRODUCT IN CANADA

• Roll over mortgage
• Equal payment
• Loan amortized up to 25 years
• Interest rate fixed for term ranging from 6
  months to 5 years
• Mortgage insurance key pillar of system
• Maximum loan without MI 75 LTV
• Maximum loan with MI 95

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TYPICAL MORTGAGE PRODUCT IN CANADA

• Regulatory requirement for all loans above 75
  LTV
• Between 15 and 20 of units insured have an
  LTVlt75
• Introduced in 1954 to encourage banks to lend and
  reduce initial down payment
• Protects lenders against all losses incurred as a
  result of borrower default
• 100 coverage of losses (whole mortgage
• outstanding balance eligible expenses) for
  life
• of mortgage

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MORTGAGE INSURANCE IN CANADA - Product

• Single up-front premium (between 0.5 and 3.75
  according to LTV). Typically added to the loan.
• Universal access everywhere in Canada for same
  kind of terms and conditions, for any kind of
  housing. Different for private competitor.
• More than 95 underwritten by EMILI
• Mortgage Insurance Fund operated on commercial
  and actuarial basis, no cost to government. In
  line with risk exposure and General Insurance
  Regulations
• 200 approved lenders 6 dominant lenders

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MORTGAGE INSURANCE IN CANADA - Impact

• Increased supply of funds by making mortgage
  lending attractive
• Increased mortgage market competition and reduced
  rates
• Allowed government to withdraw from direct
  lending, interest rate subsidies and Federal
  loan-loss guarantee
• Zero capital required by lenders instead of 4
  for non insured loans
• Standardized mortgage terms and conditions

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MORTGAGE SYSTEM COMPARISON

• CANADA US
• 1. National Regional Lenders 1. Regional
  lending
• 2. 200 Lenders 2. 20,000 lenders Banks,
  SLs,
• mortgage banks
• 3. Womb to tomb lending process 3. Segmented
  lending process
• 4. Variable Amortization 5, 10, 15, 4.
  Amortization typically 15 30 years
• 20, 25 years
• 5. Fixed interest rate term 6 months to 5.
  Interest rate fixed for life of mortgage
• 5 years or variable
• 6. No interest rate deductibility 6.
  Interest deductibility
• 7. Capital Gains not taxable 7. Capital
  gains taxable
• 8. Funds primarily from deposit base, 8. MBS
  major source of funds
• 9. CMHC competes with private 9. FHA
  targets low income and avoids
• insurance competition
• 10. CMHC has a significant market share 10. FHA
  covers 10 of new
• residential mortgage loan

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CONCLUSION

• The Canadian Housing finance system is performing
  well.
• An effective balance between private and public
  involvement. Lending is done by private sector.
  Competition on a level playing field between
  private and public sector for mortgage insurance.
• Mortgage Insurance played a key role in the
  development of Housing Finance.
• Mortgage insurance an instrument of public
  policy.
• IS THE CANADIAN MODEL EXPORTABLE
• WITH ADAPTATION?

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CMHC INTERNATIONAL INVOLVEMENT SO FAR

• Mali 1998on going Support Housing Finance
• development-Creation of FGHM
• Palestine 1998on going Preparation of a
  business plan
• implementation of PMHC
• India 2001-on going Introduction of Mortgage
• Insurance Business plan
• for IMGC

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CMHC INTERNATIONAL INVOLVEMENT SO FAR

• Lithuania 2001-2002 Training program on
  Mortgage Insurance Market Analysis
• Latvia 2002 Training program on Ml. Market
  research on mortgage products
• China 2001-on going Feasibility study on the
  introduction Ml
• Serbia 2002-on going Business plan for a
  National Housing Agency

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Possible Objectives for Mortgage Insurance in
Emerging Economies

• Increase access to housing finance
• Reduce down payment required
• Reach out the underserved borrower
• Encourage lenders to lend
• Increase level of home ownership
• Standardize legal and lending practices
• Deepen financial system different types of
  lenders broader access to capital market
• Impacts growth in job creation building
  materials taxes
• personal wealth financial professional
  services
• 7. Develop new and resale housing markets

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Pre-requisites for Mortgage Insurance
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CHALLENGES

• Legal/Regulatory framework sub-optimal
• Foreclosure an issue everywhere. Cultural
  sensitivity to the concept.
• Title registration complex, lengthy, costly or
  ineffective.
• Lenders No experienced lenders or just a few,
  limited appetite.
• Long term resources unavailable or very limited
• Historic data very limited or unavailable
• Professional services for transaction Credit
  Bureau,
• Real Estate professionals, market analysis
• very limited everywhere.

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OPPORTUNITIES

• A clear priority in all countries where we are
  working.
• Clear recognition that the housing sector could
  be an engine of economic growth a factor of
  social stability (India)
• Huge housing needs (India, China, countries in
  transition)
• Macro-economic conditions improving (Inflation
  under control, rate of interest declining)
• Strong lenders (India, Baltic States)
• Better understanding of the need for a strong
  primary market to develop a secondary market
• Transition to market economy (Baltic States,
  Serbia)
• Reduce need for government direct support
• Need for standardization is well understood

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LESSONS LEARNED - Impact

• To early to measure the impact
• New companies are viable in the very short term
• Investors could be mobilized for MI companies in
  the most difficult environment (Mali, Palestine)
• Need a full economic cycle to draw more
  definitive conclusions

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LESSONS LEARNED Institutional Model

• Need to be pragmatic, not ideological.
• What is possible?
• What is feasible?
• Why not a Private-Public partnership?

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LESSONS LEARNED - Product

• Need to be specifically design to meet each
  specific circumstances
• Crucial to share the risk (partial coverage)
  initially
• Creativity is required (gradual risk sharing,
  capon portfolio, etc)

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LESSONS LEARNED - Regulation

• An absolute prerequisite
• A difficult and lengthy process
• What comes first the regulator or the operator
• Is it possible to implement a new set of
  regulation over time? By regions?
• Need to regulate who can provide mortgage
  insurance/guarantee
• Need to regulate the reduced risk for the lender
• of an insured loan

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LESSONS LEARNED - Markets

• Need for a push strategy
• Lenders need to be convinced proactively
• Providing information/training is key
• Potential borrowers (looking to get access to a
  mortgage loan or looking for a larger loan) are
  willing to pay
• more than what lenders perceive

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LESSONS LEARNED - Process

• The creation of a mortgage insurance institution
  can accelerate the implementation of
  prerequisites
• The new institution can become an effective agent
  of change
• An incremental approach is required