CMHC curbs mortgage insurance offerings to banks

The federal housing agency is serving notice to banks and other lenders that it is nearing the limit on mortgage insurance it can offer them.

The Canada Mortgage and Housing Corp. said Tuesday it "has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance."

"To ensure equitable access to portfolio insurance within CMHC's annual limits, an allocation process is being established, which has caused some delays."

CMHC said in a release that its notice affects only lenders and will not decrease the availability of its mortgage loan insurance for qualified homebuyers and will not affect the cost of buying a house.

The CMHC reported at the end of 2011 that it was backing $541 billion in mortgages.

The federal government, which ultimately must cover the Crown corporation’s mortgage guarantees, has imposed a $600-billion cap on how much liability the CMHC can take on.

Ottawa raised cap in 2008

Ottawa increased that from $450 billion in 2008, as the global financial crisis led banks to increase focus on their cash reserves.

Lenders are required to insure against default when a borrower has less than 20 per cent ownership of the property.

As the demand for CMHC mortgage insurance increases, so does the collective exposure of Canadian taxpayers in the event of a widespread drop in house values.

Not raising the limit could lead to stricter lending conditions and a cooling of the housing market, TD Bank economist Sonya Gulati said.

"It may serve to tighten the housing market," Gulati said.

Although Ottawa could increase the limit as it has in the past, it may not want to if it thinks too many people are borrowing more than they should, Gulati said.

Rates near record lows

Canadian mortgage rates have been near record lows in recent months.

Earlier this month, some of Canada's biggest banks began advertising promotional ultra-low fixed rate mortgages at 2.99 per cent for five years.

"If there are intentions from the government perspective that there is overheating, one of the mechanisms can be to change mortgage eligibility rules," Gulati said.

"Another way is to restrict or to indirectly make getting a mortgage tougher."

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have been warning for months that Canadians have been racking up more debt than they can sustain as a result of a long period of ultra-low interest rates.

Ottawa has been tightening mortgage lending rules in recent years in the effort to limit the dangers of a crisis in the real estate market in Canada.

Last year, the federal government reduced the maximum amortization period for new government-backed insured high-ratio mortgages to 30 years from 35 years and cut the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent.

The government has also withdrawn insurance backing on non-amortizing home equity lines of credit.