MORTGAGE INSURANCE: CMHC EXPERIENCE IN CANADA

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

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OBJECTIVES OF THE PRESENTATION

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

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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
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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

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HOUSING FINANCE IN CANADA
Not a stand-alone system, integrated into the
wider capital market
OUTSTANDING CREDIT OUTSTANDING CREDIT
Residential mortgages C 448.2 B (30)
Consumer (excluding mortgage) C 201.9 B (14)
Business and Commercial C 828.3 B (56)
Total Year 2001 C 1,478.4 B
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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)

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HOMEOWNERSHIP

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

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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
Enabling Environment System Foundations Housing Mortgage Market
Macro-economy stable Mortgage Real estate laws title foreclosure Supply of affordable housing
Priority for Housing Regulation of financial inst. capital credit Long term funds Lenders with risk mgmt. experience
Consumer demand confidence Regulation of urban development construction Information prof. services for transactions
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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