MORTGAGE INSURANCE: CMHC EXPERIENCE IN CANADA &

SELECTED COUNTRIES

The World Bank

Washington, March 12, 2003

OBJECTIVES OF THE PRESENTATION

• Present the Canadian Experience with Mortgage Insurance

• Share a few lessons learned through our involvement internationally

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 ministerA 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 modernizationImprovements to overall living conditions

D irec t L en d in g & S u b s id iesC M H C B on d s

+ R esearch

A ss is ted (S oc ia l) H ou s in g

M ortg ag e In su ran ce

F ac ilita t ion o fP rim ary M ortg ag e M arke t

M ortg ag e B acked S ecu rit iesC an ad a M ortg ag e B on d s

F ac ilita t ion o fS econ d ary M ortg ag e M arke t

C anada Mortgage & H ousing C orporation

COMMERCIAL AND PUBLIC MANDATE

PUBLIC POLICY COMMERCIALMANDATE MANDATE

Parliamentary Appropriation: Revenues: US $1.24 billion US $1.44 Billion

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 >45%

• Secondary market– Guarantees in force (2002) US $13.4 billion

HOUSING FINANCE IN CANADA

Not a stand-alone system, integrated into the wider

capital marketOUTSTANDING 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 Residential Mortgage Credit

Banks

Trusts

Caisses & Co-op

Pension Funds Others

Life Ins. Cos.

OUTSTANDING MORTGAGES TO GDPSELECTED OECD COUNTRIES

(Source: Centre for studies in Economics and Finance – Financial Market Imperfections

and Home Ownership: A Cooperative study – July 2000)

41%

22%

29%

43%

56%52%

44%

CanadaFrance

GermanyNetherlands

SwedenUnited Kingdom

United States

0%

10%

20%

30%

40%

50%

60%

HOMEOWNERSHIPSELECTED OECD COUTRIES

(Source: Centre for studies in Economics and Finance – Financial Market Imperfections

and Home Ownership: A Cooperative study – July 2000)

70%66%

57%

43%48%

54%

69% 68%

Australia Canada France Germany Netherlands Sweden United Kingdom United States0%

10%

20%

30%

40%

50%

60%

70%

80%

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%

TYPICAL MORTGAGE PRODUCT IN CANADA

• Regulatory requirement for all loans above 75% LTV

• Between 15% and 20% of units insured have an LTV<75%

• 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

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

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

MORTGAGE SYSTEM COMPARISONCANADA US

1. National & Regional Lenders 1. Regional lending

2. 200 Lenders 2. 20,000 lenders – Banks, S&Ls,

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

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?

CMHC INTERNATIONAL INVOLVEMENT SO FAR

Mali 1998–on going Support Housing Finance

development-Creation of FGHM

Palestine 1998–on going Preparation of a business plan &

implementation of PMHC

India 2001-on going Introduction of Mortgage

Insurance Business plan

for IMGC

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

Possible Objectives for Mortgage Insurance in Emerging Economies

1. Increase access to housing finance• Reduce down payment required• Reach out the underserved borrower

2. Encourage lenders to lend

3. Increase level of home ownership

4. Standardize legal and lending practices

5. Deepen financial system – different types of lenders; broader access to capital market

6. Impacts growth in : job creation; building materials; taxes; personal wealth; financial & professional services

7. Develop new and resale housing markets

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

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.

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

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

LESSONS LEARNED – Institutional Model

• Need to be pragmatic, not ideological.

What is possible?

What is feasible?

• Why not a Private-Public partnership?

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…)

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

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

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