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CMHC sees profit fall in core mortgage insurance business

Canada Mortgage and Housing Corporation saw profit from its core mortgage insurance business fall in the latest quarter, as losses from claims increased.

The lower profits also come as Ottawa has taken steps to curb the crown corporation’s growth, including enforcing a hard limit of $600 billion on the amount of insurance that it can have in force.

CMHC’s total insurance-in-force crept up to $576 billion at the end of June, the mortgage lender said in its second-quarter results, which were released Wednesday. To keep it in check CMHC has dramatically curbed the amount of portfolio insurance it is offering to banks. And it said that its future sales of mortgage insurance will continue to be offset as each year Canadians pay off about $60 billion of mortgages that it has already insured.

The crown corporation’s losses on mortgage insurance claims rose to $168 million for the three months ended in June, up from $144 million in the same period of 2011.

That’s part of the reason why profit from CMHC’s core mortgage insurance business fell to $255 million, down from $341 million. The profit was also hurt because CMHC recognized paper losses on a mutual fund investment as international stock markets fell.

CMHC said that the moves that Finance Minister Jim Flaherty made this summer to tighten the housing market, including reducing the maximum length of insured mortgages to 25 years from 30 years, will cause its homeowner insurance volumes to be lower this year than previously expected.

On a conference call with reporters, officials said that it’s too early to determine exactly what impact the rule changes will have. CMHC said that while there have been considerable swings in monthly estimates of housing starts activity, the trend has been rising and “some reduction of the current robust pace of housing starts is expected later this year and next year.”

Total residential sales through the Multiple Listings Service will remain relatively stable for the remainder of this year and next, maintaining balanced market conditions in most Canadian housing markets, CMHC predicts.

“House prices are expected to grow at a rate close [to] or slightly below inflation,” Mathieu Laberge, CMHC’s deputy chief economist, told reporters. Growth in employment, net migration flows and incomes are among the factors supporting the market, he added.

Higher home prices are helping to keep the revenue that CMHC takes in from mortgage insurance premiums up even though the growth of its mortgage insurance portfolio is slowing.

In total, including its securitization business and other activities, CMHC reported second-quarter profits of $335 million, down from $383 million a year ago.

The crown corporation said that the volume of portfolio insurance it is offering has been about 40 percent lower so far this year than last year. Portfolio insurance is a product that banks buy from CMHC which covers entire portfolios of lower-risk mortgages with higher down payments.

Banks like it because once those mortgages are insured, they can be securitized or sold into bonds. Portfolio insurance accounts for about 43 percent of CMHC’s total insurance-in-force, and the crown corporation is now making only a small amount available to banks as it seeks to stay within its $600 billion limit.

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