Mortgage insurance market heating up: good news for consumers

Posted on 01. Oct, 2010 by in News

Garry Marr, Financial Post · Wednesday, Sept. 22, 2010

Mortgage default insurance is something you have to pay if you can’t come up with a 20% down payment on your house.

You pay the premium and the insurance covers the bank in the rare event — defaults in this country are still below 1% — you don’t make your mortgage payments. But it is a transaction between your bank and your mortgage insurer.

So, why should you care about the mortgage default insurance market and another new entrant into the market?

For starters, more competition is almost never a bad thing. The last time competition heated up in the mortgage insurance market, consumers saw significant reductions in fees.

This time, the $2.5-billion mortgage insurance market landed a major heavyweight in the Ontario Teachers’ Pension Plan. Together with partner National Guaranty Holdings Inc., Teachers’ took control of American International Group Inc.’s struggling AIG United Guaranty Mortgage Insurance Co. about six months ago.

At one point during the housing boom, there were six mortgage insurers approved for Canada, although not all of them got off the ground. The competition, or at least the threat of it, is credited with driving down premiums.

Crown corporation Canada Mortgage and Housing Corp. controls about 75% of the market. Before competition heated things up, the premium for mortgage default insurance was 3.5% of the value of a home when someone was making the minimum 5% down payment. That premium dropped to 2.75%.

“The premiums certainly did come off when there was all of that competition facing the Canadian market,” says Gary Siegle, Calgary-based regional manager for mortgage broker Invis Inc.

He points to other disappearing fees, such as a $235 charge to fill out an application. Restrictions on making your insurance portable are also going away. Longer amortizations, which may or may not be a good thing, are another product of increased competition.

But when the recession came along, taking the housing market with it for a brief period, private mortgage insurers got crunched. The banks only wanted to do business with CMHC, which has 100% of its mortgages backed by the government. Private insurers were only backed to 90% and by the end of the credit crisis there were only two private insurers left in Canada–Genworth and AIG.

With the credit markets calmer and Teachers’ now in the market, will the battle for market share heat up again?

Andrew Charles, chief executive of Canada Guaranty, which changed its branding from AIG, is cautious when discussing his plans. “We’ve made good progress with the major financial institutions,” he says.

But don’t count on big breaks on mortgages as a result of the new competition from Teachers’. The government has already cracked down on the sector, limiting amortizations to 35 years, banning zero-money-down mortgages and creating tougher qualifying rules for mortgages.

“The Department of Finance has established the sandbox and we are operating within it and that will continue,” Mr. Charles says.

Still, another private player in the mortgage insurance market is bound to be good for consumers.

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