The Canadian Mortgage Insurance Market

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.

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ePaymentsePaymentsCredit CardsCredit CardsMortgagesMortgagesDepositsDepositsWealth Wealth

InsuranceInsurance

Industry AnalysisIndustry AnalysisVoCVoC AnalysisAnalysis

Strategic DesignStrategic DesignBusiness Model DesignBusiness Model Design

ImplementationImplementation


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.


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?


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


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


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


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.


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


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


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


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


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


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%


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.


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


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


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

)


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


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


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.


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


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


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.


• Appendix


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


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


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


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.


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


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


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…


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

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The Canadian Mortgage Insurance Market

Economy & Finance