Admitting failure and backtracking is difficult enough for most people, but when’s the last time you heard of a government-affiliated agency tapping out and issuing a public statement outlining their mistakes?  It’s a rare occurrence!  But that’s exactly what happened earlier this week when Canada’s federal housing agency (CMHC) came out with the news that it was reversing steps previously taken to tighten the consumer qualifications necessary for home buyers to obtain mortgage insurance.

First, a little background.  Major Canadian lenders are federally mandated to ensure that borrowers purchase mortgage insurance from either CMHC itself or another private insurer before proceeding with the lending process in cases where the borrower’s down payment is under the 20% mark.  Amid the initial financial uncertainty of the early stages of the pandemic last year, CMHC struck off on its own (independently of other private insurers) in making its underwriting practices for mortgage insurance stricter than ever.

Last year’s move included establishing the need for a minimum credit score of 680 for at least one borrower (up from 600), the restriction of ‘non-traditional’ financial sources’ ability to qualify as equity for the purposes of insurance, and limiting a borrower’s gross debt-service ratio and total debt service ratio to 35% (down from 39%) and 42% (down from 44%), respectively.  In making these qualifications more restrictive, CMHC had hoped to “protect homebuyers, reduce government and taxpayer risk, and support the stability of housing markets while curtailing excessive demand and unsustainable price growth,” according to their own press release.  Of course, they were also almost certainly expecting other insurers to follow their lead… but this did not turn out to be the case.

Rather than presenting lending institutions with a united front, CMHC’s competition decided to leave their underwriting standards right where they were – and this resulted in a huge decline in CMHC’s market share as lenders flocked to where they knew their borrowers were most like to find success with their applications for insurance.  Just how drastic was this fall-off in market share?  According to the Globe and Mail’s citation of research conducted by RBC, CMHC lost as much as 27% market share since last July – down from an estimated 45-50% to a paltry 23% today.

Here’s the kicker – none of this is predicted to make much of an impact in terms of cooling the country’s housing markets or making affording a home easier for those seeking a mortgage.  So, rather than making such a dramatic reversal out of any sort of regard for Canadian homebuyers, CMHC’s move to revert to its previous practices is a decision taken purely for self-preservation.  Disappointing, but not all that surprising.

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