Canadian home buyers look poised to reap the rewards as U.S.-based mortgage insurance companies bid for a foothold in the hot domestic housing market.
The market had been a duopoly until 2006 between the Canadian Mortgage and Housing Corp (CMHC) set up by the federal government in 1946, and Genworth Financial, a U.S. company doing business in Canada since 1995.
That all changed when regulations were loosened last year, allowing more companies to enter the market, including U.S.-based AIG United Guaranty, PMI Group, and Triad Guaranty Insurance earlier this year.
Another U.S. mortgage insurer, MGIC Investment Corp, applied to enter the market this summer.
Mortgage insurance, which protects the lender against default, is necessary for homebuyers unable to afford the 20 percent downpayment typically required in Canada. That means about 45 to 55 percent of borrowers in the country, according to CMHC.
Indeed, the benefits of increased competition are already evident in Canada, said Brian Bell, vice president of corporate development at AIG United Guaranty.
They include longer amortization periods, or more time to repay the mortgage, and more options for people who have had difficulty qualifying for mortgage insurance, such as the self-employed and new Canadians, Bell said.
I think it's benefiting Canadians, agreed Adrian Mastracci, president at KCM Wealth Management Inc in Vancouver.
Ultimately, the changes enable more Canadians to buy property in a market that remains robust.
But Mastracci warned that the risks increased, too.
I think the consumer has to be careful he said.
While longer amortization periods allow more people to afford homes, the best investment for home-buyers is to pay off their mortgages as quickly as possible, Mastracci said.
The latest data on Canadian housing starts well exceeded analysts' expectations, rocketing 19.6 percent in August, month over month, to their highest since 1978.
NO.2 MORTGAGE INSURANCE MARKET
A booming economy, robust employment levels, sustained income growth and relatively low interest rates have helped Canada become the world's No. 2 mortgage insurance market.
This is a good market, said Janet Martin, president of PMI Group in Canada. We've had a good appreciation in the number of houses sold, so it's a good stable market.
That contrasts with the deteriorating mortgage-default situation in the United States triggered by lax lending conditions, which led to a credit crunch over several months beginning in August.
In Canada (we have) a more conservative underwriting process, said PMI's Martin. We stick to the three Cs of underwriting, which are collateral, capacity to pay, and character.
Many U.S. customers had been enticed into mortgages in by teaser rates which Canada doesn't allow, said Martin.
Teaser rates involve selling a mortgage at a lower interest rate for the first couple of years, then bumping the rate up after an agreed time period. That led to payment shock and contributed to a higher rate of loan defaults.
Even before the U.S. housing crisis, Bell said the U.S. market was flattening, while Canada's continued to grow.
By the end of 2004, the CMHC said it was insuring nearly C$244 billion in mortgage loans outstanding.
The CMHC has about a 70 percent share of the Canadian market. It posts its mortgage insurance premiums online, and charges between 0.5 percent and 3.1 percent, depending on the size of the downpayment and the loan. ($1=$0.96 Canadian)