Risk-based home-loan insurance model costly

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      Mortgage broker Cholo Insua has mixed feelings about the pricing of home-loan insurance.

      Having been in the mortgage business for almost 15 years, Insua sometimes hears talk about changing how premiums are determined. Rates are based on the size of the down payment. The bigger the loan is as a percentage of the value of the house, the higher the premium.

      Not all home buyers are required to get this insurance, which protects banks and other lenders against default. It applies to those with a down payment of less than 20 percent. The premium can be added to the mortgage.

      Canada Mortgage and Housing Corporation, a federal Crown company, is the country’s largest insurer of house loans. Insurance can also be bought from two private companies, Genworth Financial Canada and Canada Guaranty.

      As someone who understands risks, Insua agrees that premiums should be based on creditworthiness. For example, borrowers who didn’t take care of their credit in the past aren’t supposed to have it as easy as those who have been diligent with their financial obligations.

      “You have to pay for your sins,” Insua quipped in a phone interview with the Georgia Straight.

      But Insua also recognizes that things are more complicated for some people, like new immigrants. Many recent arrivals tend to fare poorly on what is known as a Beacon score, which is a credit rating. That could depend on a lot of factors, like a short credit history.

      Unlike those who get good Beacon scores, people with low marks get higher interest rates and fewer choices on loan arrangements. With a risk-based system for assessing mortgage-insurance premiums, Insua said, it will cost more for some to buy a home.

      “I don’t want to see any more increases on the lower bracket of the Beacon scores,” Insua said.

      On January 1 this year, former investment banker Evan Siddall took over as CMHC president and CEO. Siddall is consulting with a broad range of sectors across the country on several topics, including mortgage insurance, according to Karine LeBlanc, an Ottawa-based spokesperson for the housing agency.

      “It’s an ongoing process because we have a new president, and he’s getting to know our stakeholders,” LeBlanc told the Straight in a phone interview.

      LeBlanc stressed that the exercise is meant to gather information. She pointed out that any suggestion that CMHC is embarking on new directions, particularly on mortgage insurance, is “speculative”. Earlier this month, the Financial Post cited unnamed sources claiming that Siddall “does not disagree” with the principle of risk-based insurance.

      Bryan Yu, an economist with the Vancouver-based Central 1 Credit Union, doesn’t foresee the housing agency changing rules on mortgage insurance anytime soon.

      “We’ve had this current system in place for a long time,” Yu told the Straight in a phone interview. “And, so far, it’s been relatively steady.”

      Like mortgage broker Insua, Yu noted that some will end up paying more under a risk-based system. They could be people who are just out of school and haven’t had much opportunity to have paying jobs and build up their credit scores.

      There are also other types of risks to consider, according to Yu. For example, homes in rural areas tend to be more difficult to sell than those in cities. And during economic downturns, buyers don’t typically go shopping for recreational property, the economist noted.

      Yu said aversion to subsidies could underlie some of the interest in how the current home-mortgage-insurance model is built.

      “If everybody is paying the same thing, essentially, somebody is subsidizing another person,” he said. “So I think that’s where it’s coming from.”

      CMHC will increase premiums for new mortgage-insurance requests submitted on or after May 1, 2014.

      The housing agency doesn’t expect the raise to have an impact on the housing market. According to CMHC, it will add about $5 a month to mortgage payments for an average buyer.

      In its latest quarterly financial report, here’s what CMHC says this about its mortgage-insurance business: “CMHC’s Mortgage Loan Insurance Activity is operated at no cost to Canadian taxpayers. Over the past decade, CMHC’s insurance business has contributed more than $15 billion of the $17 billion contributed in total by CMHC to improving the Government’s fiscal position.”