by In March 2020, the Trudeau government launched a new version of the Insured Mortgage Purchase Program (IMPP). According to CMHC’s website: “Under this program, the government will purchase up to billion of insured mortgage pools through CMHC.” Here are 10 things to know: 1. Canada Mortgage and Housing Corporation (CMHC) is a federally-owned crown corporation. Many of us know CMHC as the federal agency that works with provincial and territorial governments to assist some low and moderate income households with rental housing. Likewise, some of us know CMHC as the lead federal agency on Canada’s National Housing Strategy (geared mostly to renters). 2. CMHC has been acting as a publicly-owned insurance company for residential mortgages since 1954. Indeed, in addition to
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In March 2020, the Trudeau government launched a new version of the Insured Mortgage Purchase Program (IMPP). According to CMHC’s website: “Under this program, the government will purchase up to $50 billion of insured mortgage pools through CMHC.”
Here are 10 things to know:
1. Canada Mortgage and Housing Corporation (CMHC) is a federally-owned crown corporation. Many of us know CMHC as the federal agency that works with provincial and territorial governments to assist some low and moderate income households with rental housing. Likewise, some of us know CMHC as the lead federal agency on Canada’s National Housing Strategy (geared mostly to renters).
2. CMHC has been acting as a publicly-owned insurance company for residential mortgages since 1954. Indeed, in addition to assisting some renter households, CMHC also offers to insure mortgages with high loan-to-value ratios.[1] In other words, it tells the banks and other financial institutions: “If you are willing to provide a mortgage to this prospective homeowner, we’ll make sure you don’t incur any losses if they ever end up in default.”
3. The Superintendent of Financial Institutions (OSFI) regulates the banks to make sure they don’t engage in overly risky activity. Banks (and other financial institutions) sometimes like to get aggressive in their lending, so OSFI says they can’t make mortgage loans with less than a 20% down payment unless the mortgage is insured. CMHC provides such mortgage insurance, and premiums are paid by qualifying homeowners.
4. Most of Canada’s formal financial institutions are currently eligible to have their mortgages insured by CMHC.[2] Indeed, CMHC’s insurance program is not available to all lenders, but it does apply to all major mortgage issuers.[3] Mortgages that do not have CMHC insurance include mortgages with larger down payments and mortgages issued by some of Canada’s newer mortgage lenders.
5. Without CMHC’s insurance program (or equivalent) prospective homeowners would typically need at least a 20% down payment in order to purchase a home.[4] That would make it more challenging for many Canadians to buy a home for the first time. So without this insurance program in place, rental vacancy rates in Canada would likely be even lower than they are today (and this would be bad news for renters and prospective renters).
6. If an approved lender (namely, a bank, trust company, or credit union) makes a mortgage loan, CMHC will issue an insurance policy on that mortgage. The down payment can be anywhere from 5% to 20% of the value of the home. And if there’s a default, CMHC pays the bank. With this insurance program, a mortgage with a high loan-to-value ratio all of a sudden becomes a very good investment for the bank—that is, what once looked like a high-risk loan is now a low-risk loan. CMHC insurance therefore makes mortgage lending attractive for banks.
7. Homeowners then have to pay the premiums. For a loan-to-value ratio up to 80%, the premium is 2.4%. For a loan-to-value ratio between 80.1% and 90%, the premium is 3.1%. And for a loan-to-value ratio of between 90.1% and 95%, the premium is 4%. That’s the premium paid by qualifying homeowners, as a lump sum, when they take out the mortgage. Premiums go to CMHC’s publicly-owned insurance program. CMHC takes the premiums and invests them in stocks and bonds. When the time comes to cover claims on insurance, they can use the pool they built up to pay the claims.
8. With our looming recession, some homeowners will likely default on their mortgages. Knowing this, banks and other lenders have been looking at the state of all their loans (in fact, they must do so according to federal regulations).[5] And they need to be setting aside reserves against those possible defaults. Some banks are starting to think about calling in (i.e., cancelling) their loans and/or not issuing new loans. To avert such a crisis—known as a liquidity crisis—the Government of Canada is essentially injecting money into the financial system so that banks and other lenders don’t have to call in loans and stop issuing new loans (which would make matters worse for Canada’s economy). The Government of Canada is giving CMHC money to buy existing mortgages (all of which are insured by CMHC, and are therefore safe for the government to buy). When banks sell these mortgages to CMHC, banks get cash in return, which they can use to then make new loans (including new mortgage loans).
9. With the recently-announced IMPP, CMHC is offering to bulk purchase insured loans. CMHC effectively becomes a bulk purchaser of insured loans, bundled as mortgage-backed securities. CMHC has offered to buy back as many as financial institutions want to sell to them, up to the $50 billion threshold (an amount that has since been expanded to $150 billion). Homeowners will see no difference in the day-to-day. Once each mortgage term ends (they’re typically five-year term mortgages) homeowners will have to renew their mortgages with lenders.
10. A buy-back on this scale has only taken place once before. As is noted elsewhere: “Between fall 2008 and the end of 2010, CMHC purchased $69 billion of mortgages” via a previous iteration of this same program, in the immediate aftermath of the 2008-09 world financial crisis.
In sum. With the IMPP, the Government of Canada has likely helped prevent a financial crisis, which would have made our looming recession even worse. (For a concise overview of Canada’s housing finance system, see Chapter 4 of the Canadian Housing Observer 2014.)
I wish to thank the following individuals for assistance with this blog post: George Fallis, Susan Falvo, Marc Lee, David Macdonald, Marc-André Pigeon, David Pringle, Saul Schwartz, John Smithin, Tsur Somerville and two anonymous sources. Any errors are mine.
[1] A few caveats are in order here. First, CMHC also insures mortgages in rural areas that have low loan-to-value ratios (otherwise, the lender might refuse to issue a mortgage). Second, there are two other insurers of residential mortgages in Canada, in addition to CMHC. They are Genworth and AIG.
[2] And also by Genworth and AIG.
[3] Any lender or mortgage broker can apply to be an NHA-Approved Lender, and must then comply with CMHC underwriting standards—and if they don’t, they risk losing the approved lender status.
[4] Alternatively, they might provide another guarantee for the lender.
[5] OSFI sets requirements for reserves, based on risk-weighting criteria.
Nick Falvo is a Calgary-based research consultant with a PhD in Public Policy. He has academic affiliation at both Carleton University and Case Western Reserve University, and is Section Editor of the Canadian Review of Social Policy/Revue canadienne de politique sociale. You can check out his website here: https://nickfalvo.ca/.