Genworth MI (TSX: MIC) commented on the new OSFI Capital Adequacy Guidelines for Mortgage Insurers.
I’ve gone through the technical document, which is always an interesting read. If you can go through this document and be able to comfortably recite Section 3.1.1 and subsections underneath, you will know all there is to know about capital requirements for Canadian mortgage insurers (i.e. you’d know a serious component of what it takes to properly analyze Genworth MI or CMHC).
This is a consolidation document which incorporates some differences between the previous advisory guideline which was effective at the beginning of 2017.
Notably, the requirement for a mortgage insurer to update the required capital as a result in a credit change of the loaner has been removed in exchange for a flat 5% increase. They probably figured out that obtaining credit scores of your clients every year isn’t a sustainable operating practice.
This will require Genworth MI to retain more capital for the same amount of book liability, which has the effect of reducing return on equity.
There is a possibility that CMHC will increase mortgage insurance premiums as a result of this and Genworth MI would match it.
Here are some tidbits for those housing bears that think a crashing Canadian housing market will take down Genworth MI:
1. Loan-to-value is defined as follows:
For mortgages originated after December 31, 2015, the LTV input is calculated by dividing the outstanding loan balance on the reporting date by the property value on the origination date or the date of the most recent appraisal, provided that the appraisal was commissioned by an independent third party entity other than an insurer.
… and …
Note that if the value of LTV determined in this subsection is greater than 100% then an LTV input of 100% should be used in the formulas in subsections 3.1.1.2 and 3.1.1.3.
So in a crisis scenario, if people are suddenly underwater on their mortgages, it doesn’t matter to what degree they are underwater – the capital retention requirement only uses a maximum LTV of 100% (i.e. zero equity, not negative equity) in the calculation for how much capital they are to retain.
2. Wondering how much your credit score (at mortgage origination) affects how much capital your mortgage insurer has to retain? The “m-value” below is the factor that capital retained is affected.
Credit Score Impact on Mortgage Insurance Capital Required
| Credit Score | m |
|---|---|
| < 600 | 3.00 |
| [600,620) | 2.05 |
| [620,640) | 1.80 |
| [640,660) | 1.60 |
| [660,680) | 1.35 |
| [680,700) | 1.10 |
| [700,720) | 0.90 |
| [720,740) | 0.65 |
| [740,760) | 0.55 |
| [760,780) | 0.45 |
| ≥ 780 | 0.40 |
What’s interesting is that I do not see the phrase “credit score” defined anywhere in the document. Must be super-secret!