Mii Mortgage Group

While the re-emergence of certain private mortgage default insurers might not make it onto the radar of most homeowners, the increased competition could pose to change the types of mortgage products available to them.

Mortgage default insurance – provided, currently, by Canada Mortgage and Housing Corporation, Genworth Financial Canada and Canada Guaranty – is the insurance you are legally required to purchase if you put down less than 20% when purchasing a home. This insurance protects the bank or lender in case you default against your loan – even though the buyer is required to pay the premium.

While this type of insurance has more to do with the lender than the homebuyer, it did affect the types of mortgage products – and the number of approvals – that took place in Canada before the recession hit. For years, Genworth and CMHC were the only two players in the market. When AIG United Guaranty came along (now Canada Guaranty), we saw premiums drop, 40-year mortgages enter the marketplace and the introduction of zero-down loans.

Other U.S.-based mortgage default insurers were waiting in the wings – poised to enter the Canadian market – until the recession hit, and they all fled. AIG suffered its share of troubles too – and it had to deal with the negative connotation associated with its U.S. arm that developed during the banking crisis.

Six months ago, the Ontario Teacher’s Pension Plan announced that it would be partnering up with AIG United Guaranty, which promptly changed its name to Canada Guaranty. Since then, the company has been building up strength to become a contender in the tight mortgage default insurance market.

While tightened government restrictions won’t allow a 40-year amortization back into the market anytime soon, you have to assume Canada Guaranty has some tricks up its sleeve if it wants to play with the big dogs. In most cases, lenders choose which default insurer they go with and 75% of the time, they opt for CMHC because its insurance is completely backed by the government. The private insurers still have a government guarantee, but it’s only 90% of their portfolio.

At the very least, we may see some decreased premiums, which is never a bad thing!

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies. In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.

Economic activity in Canada was slightly softer in the second quarter than the Bank had expected, although consumption and investment have evolved largely as anticipated.  Going forward, consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.

The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank’s expectations and its dynamics are essentially unchanged.

Against this backdrop, the Bank decided to increase its target for the overnight rate to 1 per cent. As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.

Information note:
The next scheduled date for announcing the overnight rate target is 19 October 2010. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 20 October 2010.