the canadian mortgage insurance market
DESCRIPTION
Snap shot of the Canadian Mortgage and Mortgage Insurance Market circa 2007.TRANSCRIPT
The Canadian Mortgage Insurance Market
Scott WilkinsonIdea Associates Ltd
July 2007
2Idea Associates LtdClient Confidential
Idea Associates is a Toronto based consultancy focused on financial services products and markets
Leading Financial Services companies
through the process of implementing new
product and market opportunities.
New Product StrategiesNew Product StrategiesCrossCross--Border OpportunitiesBorder Opportunities
Process RedesignProcess RedesignMergers & AlliancesMergers & Alliances
Disruption PlaysDisruption Plays
ePaymentsePaymentsCredit CardsCredit CardsMortgagesMortgagesDepositsDepositsWealth Wealth
InsuranceInsurance
Industry AnalysisIndustry AnalysisVoCVoC AnalysisAnalysis
Strategic DesignStrategic DesignBusiness Model DesignBusiness Model Design
ImplementationImplementation
3Idea Associates LtdClient Confidential
MI was developed to protect investors from the risk of default and therefore increase housing finance access and affordability.
• Mortgage insurance allows consumers to buy homes with a lower down payment and lower interest rate as the risk of default is offset by the insurance policy.
Mortgage insurance is most applicable to countries with a large 25-45 demographic with moderate wealth.
Poor people don’t buy homes … for the middle classes. Characteristics of mortgage insurance:
Used for loans where loan-to-value ratio is greater than 80%.Income created from premiums and invested capitalMortgage insurance’s create value by “lending” the credit rating of the insurer to lenders.
– Globally, mortgage insurance is provided by private companies … limits the companies to those with AA credit ratings or above.
Mortgage insurance risk is catastrophic … losses come in tidal waves– Industry structure marketed by slow builds by insurers during booms
followed by exits during recessions… geographic risk mitigation vital.
4Idea Associates LtdClient Confidential
The Canadian mortgage insurance market is defined by the following characteristics
• Mortgage Insurance is Prevalent … over 50% of originations
• It is a Highly Profitable Duopoly …. $1.5 bn
• It is A Hybrid Public And Private System … government guaranty
• Consumers and Lenders Drive the Market for Insurance … Lenders make the decisions
• It is Highly Efficient And Effective … favours entrenched competitors
• The Industry is Prone to Catastrophic Losses and Exits … how soon, where the next “Texas” scenario?
5Idea Associates LtdClient Confidential
Capital Reserve: 2001 - 2006
373,869 533,889 588,427 876,773 1,082,249 1,351,000938,0001,380,000
2,237,0003,112,000
3,406,0003,731,000
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2001 2002 2003 2004 2005 2006
(000
's)
Annual Premiums Written 2002 - 2006
281,933 385,247 503,654 471,259 603587
1,285,000 1,203,0001,446,000 1,492,000 1,383,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2002 2003 2004 2005 2006
(000
's)
Canadian MI in force in 2005 surpassed $400 billion … 52% of originations were insured and 53% of total mortgage assets were insured
% Insured Mortgage Assets
20%
25%
30%
35%
40%
45%
50%
55%
60%
80 83 86 89 92 95 98
2001
2004
Source: Bank of Canada, OSFI, Idea Associat es
CMHCReal ignment
Genwor th enter s mar ket
Pr oper ty Value & Tr ust Col lapse
Canada is the second largest MI market outside of the US… stable, lucrative, low risk marketCanada is the second largest MI market outside of the US… stable, lucrative, low risk market
53% of mortgage assets insured in 2005 MI profits surpassed $1.3 bn in 2005 … down 2006
Annual MI premiums exceeded $2 bn in 2006 MI capital reserves were $5 bn in 2006
Sources: Bank of Canada 2004, CMHC Housing Observer 2005. Idea Associates Analysis 2006.
$-
$500,000
$1,000,000
$1,500,000
Tota
l Inc
ome
(000
's)
Genworth Income $86,536 $129,362 $197,974 $239,328 $306,588 $250,403
CM HC Total Income $345,000 $544,000 $667,000 $950,000 $1,002,000 $1,026,000
2001 2002 2003 2004 2005 2006
6Idea Associates LtdClient Confidential
The Canadian MI value chain reflects the bias of automated primary market servicing … costs are field sales, training and underwriting
MasterLender Agreement
Platform Integration
Annual QuotaAgreement
Field sales & Training
Application UnderwritingPremium
Recognition & Investment
Servicing WholesaleInsurance
Claims Management
GovernmentGuaranty
MI AUS
Product Design
Regulatory Approval•OSFI•Bank Act•Insurance Act•NHA•Finance
Canadian MI Competitive Dynamics1. All deposit taking lenders must use MI. There are no
product substitutions.2. MIs are integrated into the lender platform. Real-
time mainframe to mainframe deal adjudication. 3. Borrowers have a choice in MI but in practice
lenders allocate MI by quota – relationship, capital costs, local training benefits and claims drive selections.
4. MI AUS (Emili & Omniscore) are highly evolved and many lenders have begun to outsource underwriting decisions
5. Data is electronically sent to MIs via lender systems or from the broker system directly. Lenders and brokers can pre-approve customers directly with the MI.
6. Underwriting is automated on a deal by deal basis. Key determinants: LTV, property value, debt servicing ration and credit score. Minimum credit score is 620. Max LTV is 95%. MI pricing is by LTV only. No risk based pricing or incentive pricing.
7. Premiums are charged up front and amortized over life of loan (OSFI directed). Private insurers pay CMHC ~2% of gross premiums for 90% guaranty.
8. Policy is for life of mortgage and premiums are non-refundable. Policies are portable to new properties and or new mortgages. Servicing is associated with ensuring loan details are up to date as 1/5 customer base renew annually.
9. MIs approached by lenders on ad hoc basis for wholesale insurance associated with securitization of conventional portfolio.
10. When a loan falls into arrears (3 months) lenders will notify insurers of a claim process. Insurers attempt work out to minimize losses. Additional foreclosure process is 90-120 days.
11. MIs are regulated by OSFI and comply to the Bank Act, Insurance Act, National Housing Act.
12. The government guaranty of MI means that MI mortgages are treated as sovereign debt for purposes of capital reserve. Capital reserve for non-insured mortgages is 4%.
4
11
12
3
2
1
9765 8 10
Canadian MI is centered on retail deal supply and adjudicationCanadian MI is centered on retail deal supply and adjudication
7Idea Associates LtdClient Confidential
MortgageOrigination Underwriting Closing &
Fulfillment ServicingFunding /Securitization
Default & Recovery
The Mortgage Insurance value chain is symbiotic to the mortgage value chain.
MasterLender
Agreement
Platform Integration
Annual QuotaAgreement
Field sales & Training
Application Underwriting Premium Recognition Servicing Wholesale
InsuranceClaims
Management
GovernmentGuaranty
MI AUS
• Pre-approval• Application• Validation
• AU System Fee• Evaluate:
• Income & Debt Service
• Credit rating• Property
valuation• Decision & cert
• Collect premium at closing
• Pay 10% gross to CMHC for reinsurance
• Amortize revenue
• Invest capital
• portfolio enhancement for securitization deals
Product Design
Product Design
• Risk monitoring
• Switches• Customer
enquiries
Regulatory Approval
• Work-out• Foreclosure• Claims pay-
out• Claim Gov’t
reinsurance
$
Inputs:• Purchase Agreement• Client proof of
income/assets• Credit Bureau
• Fire insurance cert• Municipal tax• Appraisal, AVM or MLS data
•Title insurance (CMHC)•New home guaranty
Filogix
Investment of CapitalInvestment of Capital
Financial Management/Credit RatingFinancial Management/Credit Rating
Marketing/Sales/AdminMarketing/Sales/Admin
IT/OperationsIT/Operations
8Idea Associates LtdClient Confidential
The two entrenched mortgage insurers in Canada are CMHC and Genworth –both are well capitalized, sophisticated and aggressive
•90%•100%Capital Relief Afforded to Lenders
AAAAA (Sovereign)DBRS Credit Rating[1]
National (app. 3500 FIs)National (app. 3500 FIs)FI Coverage
PrimeAlt-AVacation properties
PrimeAlt-AVacation properties
MI Markets Served
0.028%0.043%2005 % Claims versus insurance in force
$1.1$3.42005 Capital ($ Billion)
$471$1,5602005 Premiums Written($ million)
$124 bn$278 bn2005 Insurance in Force ($ Billion)
HLV InsurancePortfolio InsuranceAU systems (OmniScore)
HLV InsurancePortfolio insuranceSecuritizationAU systems (Emili)
Lines of Business
19961954 Year of Inception
Genworth CMHC
[1] Dominion Bond Rating Service. May 2006. http://www.dbrs.com/intnlweb/jsp/search/searchResults.faces
CMHC remains the default MI provider: brand, sovereign debt status and quasi-public mission allows them to outspend Genworth on sales, training and claims.
CMHC remains the default MI provider: brand, sovereign debt status and quasi-public mission allows them to outspend Genworth on sales, training and claims.
9Idea Associates LtdClient Confidential
The mortgage insurance market in Canada is expected to grow through 2016 … post boomer housing population smaller, but immigration impact expected
• Future growth scenario for MI in Canada indicates need for new MI starting in 2016 – 2021 as boomer echo reaches prime house ownership age.
20-25 25-29 30-39 40-49 50-59 TotalStatistics Canada Population Estimates by Age Category (000's)Population Estimate for 2006 2,253 2,226 4,574 5,370 4,446 18,869Population Estimate 2011 2,295 2,330 4,682 5,121 4,979 19,407Population Estimate for 2016 2,304 2,377 4,925 4,822 5,310 19,738
Mortgage and MI Purchase Likelihood % Householders By Age CategoryPercent who own homes 16% 47% 67% 74% 77%Percent with Mortgage 95% 90% 85% 70% 50%Percent with HLV Mortgage 73% 73% 65% 39% 39%Percent Taking MI 91% 91% 91% 42% 24%Total MI Population Market by segment 10.0% 27.9% 33.7% 8.5% 3.6%Number of Persons Per Household 1.56 1.56 1.56 1.56 1.56
Estimated # of MI Households (000's)2006 144.9 397.5 989.1 293.6 102.6 1,927.8 2011 147.6 416.1 1,012.5 280.0 114.9 1,971.1 2016 148.2 424.4 1,065.2 263.7 122.5 2,024.0
Assumption: Mortgage Balance % 0.95 0.898 0.85 0.7 0.5
Estimated MI Mortgage Assets ($ million)2006 (average MI Mortgage $185,000) 25,468$ 66,043$ 155,536$ 38,027$ 9,489$ 294,562$ 2011 (average MI Mortgage $205,000) 28,753$ 76,605$ 176,428$ 40,181$ 11,773$ 333,740$ 2016 (averge MI Mortgage $225,000) 31,679$ 85,756$ 203,711$ 41,532$ 13,780$ 376,459$
Mortgage Insurance Market Size - 2006, 2011, 2016
Age Category
Source: Idea Associates Analysis, Statistics Canada, Clayton Research 2005
10Idea Associates LtdClient Confidential
The lender (not the borrower) is the primary decision maker in the MI allocation … target product/executive at HO mortgage product group
• Mortgage insurers serve three market:Consumer
MI is mandatory - there are no product substitutesBorrowers pay for MI – Prime, Prime-Alt A customers onlyEnables house purchase (accessibility & affordability)… seen as a commodity/utility that is not often used… a one time painConsumer housing demand, demographics, regional dynamics impact MI demand and risk costs.Consumers currently have the final choice on which MI to use but rarely invoke that choice… but regulators are eager to preserve perception of choice
Lender Primary beneficiary of the MI … as intermediary and investorMI seen as a way to expand potential market … but lenders do notcollect compensation for MI Mortgage business margins are thin … profitability weaker than US marketsOverall, lender community is very profitable and powerful in economy … makes them target of consumerist pressures
Securitizer/InvestorMI enhancement of MBS pool directly impacts salability and economics of offerSecuritization relatively new and peripheral in Canada … 80% of mortgage assets still held on bookDominant conduit is CMHC … bank owned securities firms largest issuers and managers of portfolios on behalf of originating FIs.Mortgage exec’s play a peripheral role in securitization decision… Treasury, corporate executives and investor relations drive securitization decisions
The real customer is the lender … but government is a key stakeholderThe real customer is the lender … but government is a key stakeholder
Government• System stability & efficacy
• Consumer benefit/ protection
• Competition and industry power
• Government financial risk
• Housing finance access & affordability
11Idea Associates LtdClient Confidential
MI demand is driven by mortgage growth … itself driven by housing prices, capital availability and lender risk appetite…
• The value of annual mortgage originations surpassed $160 in 2004and grew to $180 bn in 2005 … originations are expected to grow by 7% in 2006.
Annual Mortgage Originations
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
($ B
illio
n O
rigin
ated
)
Existing New
Source: CMHC Housing Observer 2005, CMHC 2003
The Canadian mortgage market is driven by the “have” provinces …The Canadian mortgage market is driven by the “have” provinces …
On + Que + BC + AB = 91% Mortgage Market
12Idea Associates LtdClient Confidential
98% of mortgages in Canada were originated as closed/fixed term in 2005 … 85% of mortgages had a =< 5 years
Hybrid mortgage + line of credit offers allow customers to borrow money at mortgage rate as a line of credit. (ARM component).
Line of Credit Bundle
Offered at ~200 bps premium to closed mortgages. Short term products also offered with conversion opportunity to fixed rate products.
Open term, fixed/variable rates
Typically short term (6mth, 1 year) also offered in 5 year terms. Many banks offer variable mortgages with caps (50 bps).
Closed term, Variable rate
The primary product offer in the market. 3-5 year term most popular. Terms up to 10 years common, 25 available from RBC.
Closed Term, Fixed Rate,
2005 CIMBL Survey of Mortgage Products in Canada
2 YR C/F15%3 YR C/F
16%
4 YR C/F8%
5 YR C/F32%
All Open1%
> 5 YR C/F13%
Other1%
1 YR C/F14%
• Canadian market moved to short term products in the 80’s to hedge lenders against risk exposures.
• Popularity of Fixed Rate, Closed mortgages driven by pricing and generally favorable exit clauses for sale of house.
• The average mortgage account duration is 7 years .. Customers switch mortgage banks 3 times assuming 25 yr amortization
• Rates, product flexibility drive customer satisfaction
13Idea Associates LtdClient Confidential
Supporting mortgage growth has been the strong housing sales volumes and prices …
MLS Total Residential Sales - 1995 - 2004
050,000
100,000150,000200,000250,000300,000350,000400,000450,000500,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Tota
l Ann
ual U
nits
Sol
d
Source: CMHC Housing Observer 2005
2001 House Ownship by Provice
65.8
78.273.1 70.8
74.5
57.9
67.8 67.8 70.8 70.466.3
63.0
53.1
24.220.030.0
40.050.0
60.070.0
80.0
Canad
a
Newfou
ndlan
d and
Labra
dor
Prince
Edw
ard Is
land
Nova S
cotia
New Brun
swick
Quebe
cOnta
rioMan
itoba
Saska
tchew
anAlbe
rta
Brit ish
Colu
mbiaYuk
on
Northw
est T
erritorie
sNun
avut
% o
f Tot
al
Source: CMHC Housing Observer 2005
2004 Total Units Sold by Province
Ontario, 197,354, 43%
Quebec, 64,907, 14%
New Brunswick, 5,979, 1%
Prince Edward Island, 1,500, 0%
Nova Scotia, 8,873, 2%
Newfoundland and Labrador, 3,380, 1%
British Columbia, 96,385, 21%
Alberta, 57,460, 13%
Saskatchewan, 8,172, 2%
Manitoba, 12,098, 3%
Source: CMHC Housing Observer 2005
MLS Average Residential Price 1995 - 2004
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Ave
rage
Sal
e Pr
ice
($)
Source: CMHC Canadian Housing Observer, 2005
Ontario comprises 40% of the housing market … 90% of market volume in 4 provincesOntario comprises 40% of the housing market … 90% of market volume in 4 provinces
Source: CMHC Housing Observer. 2005.
14Idea Associates LtdClient Confidential
Top Banks account for 80% of total mortgage volume … large banks continue to grow market share at the expense of non-bank lenders.
Mortgage Assets by Lender - Feb 2006
8.2%3.0% 2.5%
2.1% 2.4%8.2%
9.8%
12.3%
15.0%
15.1%
17.9%
0.6% 2.8%
0%10%20%30%40%50%60%70%80%90%
100%
RBC BN
S
CIB
C
BMO TD
Cai
sse
Des
jard
ins
Nat
iona
l
HSB
C
ING
Man
ulife C
ULi
feIn
sura
nce
Spec
ial
Purp
ose
Annual Growth In Mortgage Assets by FI Class 2001 - 2005Foreign Banks,
13.96%
Life Insurance, -4.25%
Domestic Banks, 1.73%
Loan Companies, -4.03% Trust Companies, -
5.68%
CA
GR
From an MI perspective, only 10 customer relationships count … From an MI perspective, only 10 customer relationships count …
Source: OSFI 2006. William Dunning 2006. CMHC Housing Observer 2005.
CAGR of Mortgage Assets by Institution Type 2001 - 2005
Market Share of Originations By FI Type
0%
20%
40%
60%
80%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Total OtherTotal Trust CompaniesTotal Chartered Banks
15Idea Associates LtdClient Confidential
Not all banks use MI the same way across their portfolio … banks have different needs/strategies for HLV mortgages
• National mortgage industry leaders
• Internal focus or synergies
• System capacity and analytics
• Risk tolerance• Revenue driven
decision making
RBC Allocation of Residential Mortgage Assets - Insured Vs Uninsured
Insured, 33,594,384 ,
36%
Uninsured, 58,595,032 ,
64%
TDCT Allocation of Residential Mortgage Assets - Insured Vs Uninsured
Insured, 28,597,661 ,
56%
Uninsured, 22,049,345 ,
44%
BNS Allocation of Residential Mortgage Assets - Insured Vs Uninsured
Insured, 27,565,875 ,
35%
Uninsured, 50,231,165 ,
65%
TD Canada TrustTotal marketshare: 9.8%Total Mortgage Assets: $51 bnDistribution Network: 1700 branches & broker leadersHead of Mortgages: Rick Mathes
ScotiaBankTotal marketshare: 15.1%Total Mortgage Assets: $77 bnDistribution Network: 1200 branches & broker leadersHead of Mortgages: Charles Lambert
Royal Bank:Total marketshare: 17.9%Total Mortgage Assets: $92 bnDistribution Network: 1700 branches (no brokers)Head of Mortgages: Catherine Adams
16Idea Associates LtdClient Confidential
The increased demand for mortgage capital has been met by lenders with excess capital and through alternate channels like securitization.
• There Securitization vehicles in Canada:
National Housing TrustCMHC derivedMortgage insured (sovereign status)Approved lenders/debt only (conforming, conventional)Value in 2006 ~$130 bn
Private IssuanceBank and Security firm issues … corporate debt status70% of MBS non-conforming (alt-a, sub-prime) GMAC is the major lender in the marketIssues associated with risk transparency … requires costly discounts versus NHA issues.Value in 2006 ~$25 bn
Securitized mortgage debt $155 bn …. ~25% of assets
Total Asset Backed Securities Market and Non-NHA Residential MBS Market Value 2001 - 2006 ($B)
$12 $12 $11$14
$21 $22
$-
$5
$10
$15
$20
$25
2001 2002 2003 2004 2005 Mar-06
Total MBS ValueSource: DBRS 2001 - 2006
Source: Dominion Bond Rating Service. 2005. CMHC Website.
Unlike US, Securitization is a treasury tool not alternate capital and risk managementUnlike US, Securitization is a treasury tool not alternate capital and risk management
CMHC Securitization in Force
$45,473$59,994
$80,800
$103,709
$129,500
2002 2003 2004 2005 2006
($M
)
17Idea Associates LtdClient Confidential
The Canadian Government is a primary stakeholder … their interests revolve around consumer, regulatory prudence and perceptions of fairness.
• Key issues we need to consider from a political and regulatory perspective
Consumer benefitPerception of increased choice, lower costs and increased mortgage funds access and affordability
Systemic benefit/risksGovernment exposure to MI defaultSystemic benefit or risks to overall banking competition – particularly overall concentration with Big 5Overall risk exposure to public purse, of industry to MI guaranty
Lender benefitsAbility to create “fair” revenuesPerception of profit off of consumers’ requirement for MICapital cost supplement and risk free returns
CMHC (and, Genworth) impactThe government does not want to bail out existing MI Product innovation and competition
Desire for competition is a policy issue not a market issue driven by non-banking FI and consumer lobby
Desire for competition is a policy issue not a market issue driven by non-banking FI and consumer lobby
18Idea Associates LtdClient Confidential
Typical mortgage spread is ~160 bps … creates 16 bps per year oncontribution
• Lender profitability driven by up-front costs
Size of rate discount – spread can be as low as 120 bpsBroker fees 100 – 150 bps one time up frontAppraisal fees $75 - $250
• The “average” MI mortgage in 2005:
$180,000 principalFixed rate5 year term25 year amortizationaverage spread 160 bps average MI premium 173 bps
Canadian Mortgage Profit & Expense Allocation
160 60
425
234 28
160
20406080
100120140160180
Spread
Chann
el SG&A
Marketi
ng
Servici
ng &
Pro
duct.
..
Trea
sury
Reser
veUpfr
ont F
ees
Contrib
ution
Bas
is P
oint
s
Lenders will jump on opportunity to increase revenue … 25 bps is 25% boost in annual contributionLenders will jump on opportunity to increase revenue … 25 bps is 25% boost in annual contribution
19Idea Associates LtdClient ConfidentialSources: Bank of Canada, U.S. Federal Reserve, 2001.
* U.S. data available only to June, 2000. We therefore compared 9/96-6/00 rates for short-term.
Mortgages are not a profit centre for Canadian Banks and spreads have been decreasing… although mortgages drive other profit areas like deposits
• Canadian lenders operate at a lower profit than US industry averages.Mortgage spread is lower – between 120 – 160 bps compared to 180bps for US mortgage banks… operating income is 40bpsCanadian lenders don’t charge fees for mortgage applications and pay fees for customers for renewal and refinancingCanadian lenders pay for broker fees and for refinance and renewal legal costs.
Mortgage Business Contribution Analysis: U.S. and Canadian Large Mortgage Lender
-$4,000
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 1
0Yea
r 11
Year 1
2Yea
r 13
Year 1
4Yea
r 15
Year 1
6Yea
r 17
Year 1
8Yea
r 19
Year 2
0Yea
r 21
Year 2
2Yea
r 23
Mortgage Year
Nom
inal
Dol
lars
Difference in Operating Income Canada - US Cdn Cumulative Income US Cumulative Income
Contribution Difference
Canadian Lender Cumulative Income ($C)
US Lender Cumulative Income (US$)
Canadian lenders desperately need new revenue sources to increase profitability
20Idea Associates LtdClient Confidential
US and Canadian credit and delinquency distribution is also different
Distribution of Population by Credit Score and Rate of Deliquency
4% 4% 6%11%
19%
27%24%
5%
78%60%
39%23%
12% 5% 2% 1%0%5%
10%15%20%25%30%
<549
550<
59960
0<649
650<
69970
0<749
750<
79980
0<849
850<
Beacon-FICO Score
% o
f Can
adia
n Po
pula
tion
0%20%40%60%80%100%
Rat
e of
Cre
dit
Del
inqu
ency
Canadian Distribution Canadian Delinquency RatesUS Credit Score Distribution and Delinquency Experience
2%5%
8%
12%15%
18%
27%
13%
87%
71%
51%
31%
15%5% 2% 1%0%
5%
10%
15%
20%
25%
30%
300-499 500-549 550-599 600-649 650-699 700-749 750-799 800-850
US P
opul
atio
n
0%10%20%30%40%50%60%70%80%90%100%
Delin
quen
cy E
xper
ienc
e
US Population Delinquency rate
Canadians default experiences is ¼ of the US experienceCanadians default experiences is ¼ of the US experience
Sources: www.fairisaac.com, www.experian.ca
FICO is the benchmark credit standard. Globally, countries experience ranges of credit performance based on cultural norms. Canada tends to be more conservative than US as reflected by the distribution of population and delinquencies by credit score. This is also reflected in the relative sizes of sub-prime lending markets.
21Idea Associates LtdClient Confidential
Mortgage growth fueled by debt-affordability, employment and disposable income within beneficial macro-economic conditions in Canada.
• Canadians have increased debt load during the low-interest period …
Unemployment, 5 Year Mortgage and Growth in Disposable Income 1995 - 2004
-1
0
1
2
3
4
5
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
% G
row
th D
ispo
sabl
e In
com
e
4
5
6
7
8
9
10
%
Unemployment Rate (right scale)
Annual Increase in Disposble Income
(left scale)
5 Year Mortgage Rate (right scale)
Source: Canadian Housing Observer, 2005
Assuming constant interest rates… housing affordability conditions remain strongAssuming constant interest rates… housing affordability conditions remain strong
22Idea Associates LtdClient Confidential
Claims Expense 2001- 2006
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
(000
's)
CMHC Insurance Claims 335,000 139,000 188,000 51,000 119,000 209,000
Genworth Insuance Claims 26,172 12,381 10,602 25,751 34,455 45,962
2001 2002 2003 2004 2005 2006
Loan losses and debt servicing levels remain consistent as a result of low interest rate environment while debt increased by 10% since 2001
• MI Claims in 2005 $154 million dollars … driven by buoyant economy and low rates.Only .24% of customers in arrears in 2005 down from a high of .68% in 1992LTV is still primary indicator of default rate with Canadian MIs reporting defaults of 8-10x at 95% LTV compared to 80% LTVWhile debt servicing ratio is relatively steady, there has been a 20% increase in debt to disposable income since the high-rate early 90’s
Insurer/LTV Relative Risk: 80% LTV = 1.0
80% LTV 85% LTV 90% LTV 95% LTV
U.S. Mortgage Information Corp.
1.0 2.53 2.3 4.38
Canada: GE Mortgage Insurance
1.0 n.a. 4.08 10.63
Canada: Mortgage Insurance Corp
1.0 1.99 3.45 7.69
World Bank Housing Finance Conference 2003
23Idea Associates LtdClient Confidential
About the Author
Scott Wilkinson MBA CMCIdea Associates [email protected]
Scott leads companies through the process implementing new products and capturing emerging market opportunities.
Prior to founding Idea Associates in 2002, Scott was a senior consultant with leading U.S. based consultancies Organic Interactive and Dove Consulting. He has advised companies such as AGF Funds Management, Brookfield, MGIC, GE Capital, Wells Fargo, Bell Canada Enterprises, Chrysler Financial, American Express, Charles Schwab, IBM and others on product, market growth and operational efficiency strategies.
Scott is published author on the mortgage industry, housing affordability, payments and billing, interactive banking channels and B2B exchanges. He has published a number of industry white papers, is a contributing author to the “E-Finance Report” on the US Banking Industry published by McGraw-Hill and authored “The Evolving Impact of E-Commerce on Housing Finance and Affordability” in 2003. Scott also has published articles on eCommerce governance, financial services disruption strategy and innovation process. Before consulting, Scott spent 8 years with Royal Bank of Canada and CIBC, as a key member of teams assigned to develop new products, payments and channels.
Scott is a Certified Management Consultant, with a BA from the University of Toronto and an MBA (with Distinction) from Richard Ivey School of Business at the University of Western Ontario. Scott is a member of the Canadian Association of Management Consultants, the Product Development Management Association and the Canadian Association of Accredited Mortgage Professionals.
24Idea Associates LtdClient Confidential
• Appendix
25Idea Associates LtdClient Confidential
Translating Canadian market to US will be challenging … so similar, so different.
Monthly until value of loan reduced to 77%. Pricing varies by risk, value of loan.
Upfront. Lifetime. Pricing by LTV.
MI Model
Core product (Fannie & Freddie), large off-prime market
Add on to treasury Securitization
Regional. Pricing based on value & risk. High fees
National with relationship* discounts. Common fees.
Pricing/Fees
Long-term, openShort-term, fixed, closedProduct
Large – deep mortgage industry,
Small – generalist bankers
Mortgage Industry
Horizontal, regional with dominance of securitizers
Vertical – Big Banks, national
Industry Organization
USCanada
26Idea Associates LtdClient Confidential
US Canadian Mortgage Glossary …. ;)
Lifetime career. Specialties in insurance, servicing, origination.
Banker temporarily in mortgage group … generalist
Mortgage Executive
Company that provides statement collects fees for securitized mortgages. Primary MI stakeholder.
N/AServicer
Short-term mortgage loanRenewalBalloon Loan
N/AMI policy lifetime, MI policy number can be used at new lender
Portability
Consumer moves to lower rate
Consumer borrows more money at end of term
Refinance
FICOBeacon (Fico)Credit Score
USCanada
27Idea Associates LtdClient Confidential
The Canadian mortgage value chain is comparable to the US except fewer players are likely to be involved in a mortgage and lender plays are larger role…
OriginationClosing & Fulfillment
Funding &Investment Servicing
Delinquency Management
Product Design
• Bank/Lender• Broker• Mortgage
Insurer• Credit Bureau
• Bank/Lender• Broker• Lawyer• Title Insurer• Appraiser• Real Estate
Agent
• Bank/Lender • Bank/Lender • Bank/Lender• Lawyer/Courts
• Bank/Lender
• Bank/Lender• Broker• Mortgage
Insurer• Credit
Bureau• Developer• Secondary
Market• Private
insurers
• Bank/Lender• Broker• Lawyer• Title issuer• Title company• Appraiser• Real Estate
Agent• Funding bank• Secondary
market
• Bank/Lender• Wholesale
lender• Secondary
market conduit• Servicer
• Wholesale lender
• Secondary market conduit
• Servicer
• Wholesale lender
• Secondary market conduit
• Servicer• Collections
company• Community
service organizations
• Wholesale lender• Secondary
market conduit• Servicer• Software
companies• Servicers
Can
adia
n M
ortg
age
Stak
ehol
ders
U.S
. Mor
tgag
e St
akeh
olde
rs
Canadian banks play a larger role across the value chain. There are fewer stakeholders in a Canadian mortgage transaction and fewer supplier options.
Canadian banks play a larger role across the value chain. There are fewer stakeholders in a Canadian mortgage transaction and fewer supplier options.
The small size of Canada and economies of scale favor oligopolistic supplier structures … 2-3 leading suppliers with national scope
28Idea Associates LtdClient Confidential
Key differences between US and Canada MI markets: Mandatory MI, Hybrid Private and Public functionality and high penetration of MI.
$165 – 235 (discontinued)Application Fees
1.5% initial and 0.5% annual (private)0.65% -2.9% up frontAverage MI Consumer Cost
0.8%0.18%Mortgage Delinquency Rate
NoYesNational Coverage
FHAVA
CMHCKey Public Competitors
Private & PublicHybrid – Public/PrivatePrivate/Public
75%100%Capital relief for insured loans
AAAAA (Sovereign)Standard Investment Rating for MI Mortgages
RadianRepublic Triad UGI
CMG Genworth MGIC PMI
GenworthUGI (AIG), PMI, Triad
Key Private Mortgage Insurer Competitors
97-100%95%Maximum LV Covered
80%75%Mandatory Insurance LV
12-30%100%*MI Value Coverage
13.4% (private)7.5% (FHA)
52%% of Market under MI
NoYesMandatory MI
69%68%Home Ownership Rate
109 mm7.2 mmNumber of Owned Households
$724bn$403 bnValue of Insured Assets
$1000 bn$180bnAnnual Origination Market
$8,000 US$630Mortgage Market Size (bn assets)
USCanada
Source: CHMC, FHA and Federal Reserve. 2005.
29Idea Associates LtdClient Confidential
Paradoxically, it can be argued that the US government is more activist in housing policy than Canadian governments
• CanadaProvinces/Metropolitans own housing file
Subsidize rent, not ownership
CMHCCommercial mortgage insurance Productize already prime securitiesResearch for productivityGuaranty Private MI obligations
• USFHA, Veterans
Loan guaranty for needMortgage insurance of last resort
Fannie Mae, Freddie MacLender, create mortgage liquidity for banks and brokersSecuritizerSovereign debt status for securities … eliminates conventional mortgage business for lenders
State levelSubsidized housing with FHA fiat
Activist lending practices/ disclosures policies
30Idea Associates LtdClient Confidential
A typical mortgage transaction in Canada
Real Estate Broker Origination Underwriting Closing & Fulfillment Servicing Funding Default &
Recovery
I Have Financing Pre-Approval?
I want to buy a home
Create Purchase
offer
Offer Accepte
d
Input Purchase Offer Data
Ask Agent for Referral
Input Personal Credit Data
No
Product Selection
Mortgage Insurance
Account System
MortgageUnderwriting (real time)
Personal Credit Risk
Debt Servicing
Property Risk
MI Approval
Select Lender
Approval
Communicated Decision,
communications & Pricing
Reapply
Prepare Offer & Pricing
y
n
y n
y
y
y
y
Con
ditio
ns
CustomerSelect Lawyer
Distribute Documents
Perform Title
Title Insurance
Title Clean
Fix Issues
Prepare Documents
Errors?
Sign Documents
EFT Funds
Create Account
Set-up EFT Collection
Validate Terms
Collect Payments
Risk Monitoring
Renewal Notice
Payment Missed?
Annual Statement
Short-term Funding
Keep or Securitize?
Manage Rate Risks
Insurance??
Package Loan
Find Investors
Monitor Accounts
Identify Account in Arrears
Insurance?? Notify Insurers
Contact Customer
Identify Workout Strategy
Successful?
Identify Workout Strategy
y
Distribute Payments to Investors
y
y
Recover Mortgage
Value
Lender Controlled
Third Party/Outsourced
31Idea Associates LtdClient Confidential
CMHC/Genworth/UG Model: flow process of underwriting at POS
MortgageOrigination Underwriting Closing &
Fulfillment ServicingFunding /Securitization
Default & Recovery
MasterLender Agreement
Product Design
Filogix
Account System
MI Review(real time)
Personal Credit Risk
Debt Servicing
Property Risk
MI Approval
Flag Cert y
n
N
y
y
Doc
umen
tatio
n C
ondi
tions
Lis
t
Invest
Determine Portfolio Characteristics
Validate Docs
Price Wholesale
Value
Initiate Risk Mitigation Process
Payment Missed?
MI Req’d?
Conditional Approval
nDec
line
Settlement
Lender Collects MI
Payment Lender
Collects MI Docs
Lender Role
MI Role
As Needed
Fee Collection
PremiumRecognition
Post CloseProcesses
Duplicates lender processing… Duplicates lender processing…
32Idea Associates LtdClient Confidential
References
_____. Housing Finance. February 2006. Australian Bureau of Statistics. www. a b s . g o v. a u_____. First Home Ownership: Productivity Commission Inquiry Report. Australian Government Productivity Commission. No. 28, 31 March 2004Bank of Canada (2004): “Structural features of the Canadian housing and mortgage financing markets”, Financial System Review, 9-12, June. Bank of Canada (2004): “Financial position of the Canadian household sector: autumn 2004”, Financial System Review, 7-13, December. Bank of Canada (2005): “Developments in the Canadian residential mortgage market: new technology, competition, and strategies”, Financial System Review, 26-28, June. Bank of Canada (2005): “The subprime mortgage market in Canada”, Financial System Review, 18-19, December. Blood, Roger and. Whiteley, Douglas E. “Mortgage Default Insurance for the Russian Federation “ Prepared for Institute for Urban Economics. July 2004.
www.urbaneconomics.ru/eng/download.php?dl_id=49Chiuri, M. and Jappelli, T. 2001. 'Financial Market Imperfections and Home Ownership: A Comparative Study'. CEPR Discussion Paper no. 2717. London, Centre for Economic
Policy Research. http://www.cepr.org/pubs/dps/DP2717.asp._____. 2005 Annual Report. Canada Mortgage and Housing Corporation http://www.cmhc.ca/en/corp/about/anrecopl/upload/CMHC_Ann2005_E.pdf_____. The Canadian Housing Observer 2005. Canada Mortgage and Housing Corporation. 2005. www.cmhc.ca_____. The Budget Plan 2006: Focusing on Priorities. The Department of Finance. Government of Canada. 2006. www.fin.gc.ca_____.5 Year Historical Results (2005) . Canada Mortgage and Housing Corporation. http://www.cmhc.ca/en/corp/about/anrecopl/anrecopl_008.cfm?renderforprint=1_____. Housing Now. The Canada Mortgage and Housing Corporation. March 2006. www.cmhc.ca_____. “Long-Term Outlook On The Demand For Mortgages In Canada”. Issue 51. CMHC Research Summary. November 2000._____. “Statistical Report on Recent Performance of Securitizations Rated by DBRS”. Dominion Bond Rating Service. Monthly reports. December 2001, 2002, 2003, 2004,
2005. March 2006. Church, Elizabeth. “'Bubble' trouble in western real estate”. The Globe and Mail. May 31, 2006.Clayton Research. “Economic Analysis of the Statutory Requirements for Insurance on High Ration Mortgage Loans”. Submitted to Department of Finance for
Genworth Financial. 2005. http://www.fin.gc.ca/consultresp/06Rev_32e.htmlEllis, Black and Dixon Smith. “Housing finance in Australia”. Bank of International Settlements. 2005. http://www.bis.org/publ/wgpapers/cgfs26ellis.pdf_____. Lenders Briefing Note. Insurance Council of Australia. July, 2005. www.ica.com.auLehnert, A (2005): “Overview of US mortgage markets”, Bank of International Settlements. 2005. http://www.bis.org/publ/wgpapers/cgfs26lehnert.pdfLiu, David. “Exporting Mortgage Insurance Beyond the United States”. Housing Finance International. 2000. http://www.pmi-asia.com/media/pmi_dliuhfi0006.pdfLoke, Huston and Bridges, Scott. “2004 Year-End Review of Canadian Asset- Backed Securities”. Dominion Bond Rating Service. March 2005.Tracelet, Virginie. “The Structure of the Canadian Housing Market and Finance System”. Bank of International Settlements. 2005.
http://www.bis.org/publ/wgpapers/cgfs26traclet.pdf_____. Evidence Standing Committee On Natural Resources And Government Operations. Tuesday, April 13, 1999. Parliament of Canada.
http://www.parl.gc.ca/infocomdoc/36/1/nrgo/meetings/evidence/nrgoev60-e.htmWachter, Susan M. “Mandatory Mortgage Insurance in Canada: The Public Policy Consequences”. Submitted to Department of Finance for Genworth Financial. 2005.
http://www.fin.gc.ca/consultresp/06Rev_40e.htmlWilkinson, Scott. The Evolving Impact Of E-Commerce On Canadian Home Ownership Finance Access And Affordability. Canada Mortgage and Housing Corporation. 2003Will Dunning Inc. “The State of the Residential Mortgage Market in Canada”. The Canadian Institute of Mortgage Brokers and Lenders. October 2005. www.cimbl.ca