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July 28, 2011
Amid U.S. debt spectacle, Moody’s gives Canada top marks
As the debt spectacle continues in Washington, Moody’s Investor Service renewed Canada’s AAA credit rating on Thursday. While all eyes are on the United States as it tries to hammer out a deal to raise its borrowing limit by Aug. 2, avoid a debt default and a possible debt downgrade, Canada sailed through its annual credit checkup with flying colours.
Moody’s said the country’s high resiliency, government financial strength and low susceptibility to risk were key to the top marks. Here’s a breakdown of their reasons why Moody’s says Canada is so impressive:
Economic strength: Very high
* We missed the worst of the financial crisis because of the financial strength of our banks and only a mild downturn in the housing market.
* We had a stronger rebound from the recession, with a 3.2% rise in the GDP, compared with 2.9% south of the border. Moody’s says monetary policy and Ottawa’s stimulus program helped the recovery
We are different from the United States
* Open economy: Trade in goods and services makes up more than half of Canada’s GDP, compared with less than one third in the United States
* Lower federal debt
* Stronger banking system and housing market
* Higher domestic saving rate, resulting in less reliance on external financial markets
Institutional strength: Very high
* Fiscal discipline at the Bank of Canada, inflation control, government effectiveness and rule of law all rank highly
* While both the Liberals and Conservatives have been in power in the past 15 years, economic and fiscal policies have remained stable. Some tax differences, but overall goal of fiscal balance and declining debt has been a constant
* The proportion of total government debt credited to the provinces is the highest among major countries, however, as they have taken on “significant amounts of debt” relative to local governments in other countries
* At the end of 2009 total provincial, territorial and local government debt stood at $525-billion, close to the federal debt of $545-billion
* While risk of the federal government stepping in to assist the provinces with their debt payments is high, local ratings indicate little risk that such assistance would actually be needed, which reduces some liability pressure on Canada’s net position
Government financial strength: Very high
* This evaluation is based on a well-established pattern of budget surpluses at the federal level, except during exceptional circumstances such as the financial crisis, leading to declining government debt and debt ratios since the 1990s
* Compared with other Aaa sovereigns, Canada’s debt levels are at the median but the federal government position is relatively strong
* How Canada proceeds with its deficit reduction matters in the face of an aging population and rising healthcare demands is a political question
* But with the deficit peaking at 3.6% of GDP and debt still less than 40% Canada’s federal finances and outlook for next several years are supportive of the AAA rating
Susceptibility to event risk: Low
* Most important risks are related to the housing market and to separatism in Quebec, although the probability of either affecting Canada’s rating is quite low
* Country’s ability to deal with external shocks is well-documented, including how Canada handled the 2001 and 2009 recessions
* As majority of residential mortgages are guaranteed by the crown Canada Mortgage and Housing Corp. a major downturn in the housing market could affect the government’s balance sheet and debt levels, but even if this happened the additional debt taken on by the government would not affect the rating
July 25 2011
CMHC must level playing field for private insurers: Carleton University professor
Another critic has taken a shot at the Canada Mortgage and Housing Corporation (CMHC), claiming the arm’s length body needs more regulation.
Ian Lee, a professor in the Sprott School of Business at Carleton University, wrote a column today in the Vancouver Sun that the taxpayer-funded CMHC needs to be modernized and more regulated.
Lee wrote that CMHC provides mortgage guarantees to banks and other mortgage lenders of about $500 billion, or one third of Canada’s gross domestic product, representing 70% of the mortgage insurance market.
“As CMHC is a Crown corporation owned completely by the Canadian government, its insurance guarantees are backed by the Government of Canada,” Lee said. “That means Canadian taxpayers are liable for $500 billion to banks and mortgage lending institutions, should Canada experience a housing meltdown similar to the U.S. in 2008.”
He said CMHC should be under the jurisdiction of the Office of the Superintendent of Financial Institutions (OSFI) as other federally incorporated financial institutions in Canada already are.
Earlier this year, other critics such as the C.D. Howe Institute, a University of Guelph professor, and Capital Economics also raised concern about CMHC, also calling for Canada to open up the market to more private insurers.
JULY 20 2011
Policy numbers slip for CMHC
By Vernon Clement Jones
Canada Mortgage and Housing Corp insured 643,991 homes last year – a staggering 187,091 less than it had expected — reflecting a drop in demand for its product but also default insurance in general.
While all high-ratio mortgages must carry that insurance – from either CMHC, Genworth or Canada Guaranty – overall demand fell in 2010 as residential construction and the sale of existing homes dropped off after the introduction of tougher qualifying terms, pegged to the five-year benchmark rate.
Still, CMHC still managed a profit, providing $106.1 billion in insurance last year. It’s about $17 billion below the $123 billion it had budgeted for.
Lenders and brokers are suggesting that the gap isn’t just about new qualifying terms but increased competition in the marketplace.
For its first quarter this year, Genworth Canada wrote $101 million in net premiums, a 7 per cent increase over the same period last year.
“We delivered solid net premiums written in a slower origination market,” said Brian Hurley, company chairman and CEO.
CMHC’s other competitor is also making ground, last month announcing a deal with BMO .
“We are delighted to have the opportunity to work with the BMO Bank of Montreal team and to demonstrate the advantages of increased competition by offering improved choice among mortgage default insurance providers,” Charles said, in announcing the partnership.
The deal, with one of the two banks operating outside the broker channel, is nonetheless poised to significantly open the default mortgage insurance industry, making it more of a three-way contest and not just a battle between the CMHC and Genworth. That could, say analysts, create a more price competitive environment as well as boost Canada Guaranty’s efforts to grow connections with broker-channel lenders.
“The deal is good for the overall mortgage industry in that it demonstrates there is a need for a stronger competitive dynamic,” Charles told MortgageBrokerNews.ca, “and we’re filling that. We also continue to develop relations with prime mortgage originators and we compete in all market segments, inclusive of prime mono-line lenders.”
Still all default insurers are increasingly challenged to win business from the big banks, now finding it easier to securitize and sell off their low-risk mortgages without shelling out for portfolio insurance. Also at play, and working against CMHC, is the improving economy, which has increased the willingness of lenders to fund multi-unit residences without default insurance, a change the Crown corporation concedes hasn’t worked to its advantage..
