The Canadian Mortgage Insurance Market

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Snap shot of the Canadian Mortgage and Mortgage Insurance Market circa 2007.

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The Canadian Mortgage Insurance Market

  1. 1. The Canadian Mortgage Insurance Market Scott Wilkinson Idea Associates Ltd July 2007
  2. 2. Idea Associates is a Toronto based consultancy focused on financial services products and markets ePayments Credit Cards Mortgages Deposits Wealth Leading Financial Insurance Services companies Industry Analysis through the process of VoC Analysis implementing new Strategic Design product and market Business Model Design opportunities. Implementation New Product Strategies Cross-Border Opportunities Process Redesign Mergers & Alliances Disruption Plays Idea Associates Ltd Client Confidential 2
  3. 3. 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 capital Mortgage 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. Idea Associates Ltd Client Confidential 3
  4. 4. 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? Idea Associates Ltd Client Confidential 4
  5. 5. Canadian MI in force in 2005 surpassed $400 billion … 52% of originations were insured and 53% of total mortgage assets were insured 53% of mortgage assets insured in 2005 MI profits surpassed $1.3 bn in 2005 … down 2006 % Ins ur e d M or tgage As s e ts 60% $1,500,000 T o tal In co m e (000's) 55% CMHC 50% Real i gnment 45% $1,000,000 40% Genwor t h ent er s mar ket 35% Pr oper t y Val ue &T r ust Col l apse $500,000 30% 25% 20% $- 2001 2002 2003 2004 2005 2006 0 3 6 9 2 5 8 01 04 8 8 8 8 9 9 9 20 20 Genworth Income $86,536 $129,362 $197,974 $239,328 $306,588 $250,403 Sour c e: B ank of Canada, OS FI, Idea A ssoc i at es CM HC Total Income $345,000 $544,000 $667,000 $950,000 $1,002,000 $1,026,000 Annual MI premiums exceeded $2 bn in 2006 Annual Premiums Written 2002 - 2006 MI capital reserves were $5- bn in 2006 Capital Reserve: 2001 2006 2,500,000 6,000,000 5,000,000 2,000,000 4,000,000 1,500,000 (000's) (000's) 3,731,000 1,446,000 1,492,000 1,383,000 3,000,000 3,406,000 1,000,000 1,203,000 3,112,000 1,285,000 2,000,000 2,237,000 500,000 1,380,000 1,000,000 938,000 603587 1,082,249 1,351,000 385,247 503,654 471,259 533,889 588,427 876,773 281,933 - 373,869 0 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Canada is the second largest MI market outside of the US… stable, lucrative, low risk market Canada is the second largest MI market outside of the US… stable, lucrative, low risk market Idea Associates Ltd 5 Sources: Bank of Canada 2004, CMHC Housing Observer 2005. Idea Confidential Analysis 2006. Client Associates
  6. 6. The Canadian MI value chain reflects the bias of automated primary market servicing … costs are field sales, training and underwriting 1 4 MI AUS Master Lender 7 8 9 10 5 6 Agreement Premium Wholesale Claims Product 2 Application Underwriting Recognition & Servicing Insurance Management Design Platform Investment Integration Canadian MI Competitive Dynamics Annual Quota 1. All deposit taking lenders must use MI. There are no 7. Premiums are charged up front and amortized over Agreement product substitutions. life of loan (OSFI directed). Private insurers pay 3 2. MIs are integrated into the lender platform. Real- CMHC ~2% of gross premiums for 90% guaranty. Field sales time mainframe to mainframe deal adjudication. 8. Policy is for life of mortgage and premiums are non- & Training 3. Borrowers have a choice in MI but in practice refundable. Policies are portable to new properties lenders allocate MI by quota – relationship, capital and or new mortgages. Servicing is associated with 12 costs, local training benefits and claims drive ensuring loan details are up to date as 1/5 customer selections. base renew annually. Government 4. MI AUS (Emili & Omniscore) are highly evolved 9. MIs approached by lenders on ad hoc basis for Guaranty and many lenders have begun to outsource wholesale insurance associated with securitization of underwriting decisions conventional portfolio. 11 5. Data is electronically sent to MIs via lender systems 10. When a loan falls into arrears (3 months) lenders or from the broker system directly. Lenders and will notify insurers of a claim process. Insurers Regulatory brokers can pre-approve customers directly with the attempt work out to minimize losses. Additional Approval MI. foreclosure process is 90-120 days. •OSFI 6. Underwriting is automated on a deal by deal basis. 11. MIs are regulated by OSFI and comply to the Bank •Bank Act Key determinants: LTV, property value, debt Act, Insurance Act, National Housing Act. •Insurance Act servicing ration and credit score. Minimum credit 12. The government guaranty of MI means that MI •NHA score is 620. Max LTV is 95%. MI pricing is by mortgages are treated as sovereign debt for purposes •Finance LTV only. No risk based pricing or incentive of capital reserve. Capital reserve for non-insured pricing. mortgages is 4%. Canadian MI is centered on retail deal supply and adjudication Canadian MI is centered on retail deal supply and adjudication Idea Associates Ltd Client Confidential 6
  7. 7. The Mortgage Insurance value chain is symbiotic to the mortgage value chain. Master Mortgage Closing & Funding / Default & Product Lender Underwriting Servicing Origination Fulfillment Securitization Recovery Design Agreement Filogix $ Platform MI AUS Integration Annual Quota Premium Wholesale Claims Product Agreement Application Underwriting Servicing Recognition Insurance Management Design Field sales & Training • Pre-approval • AU System Fee • Collect • portfolio • Work-out • Risk • Application • Evaluate: premium at enhancement • Foreclosure monitoring • Validation • Income & closing for • Claims pay- • Switches Debt Service • Pay 10% gross securitization out • Customer Government • Credit rating to CMHC for deals • Claim Gov’t enquiries • Property reinsurance reinsurance Guaranty valuation • Amortize • Decision & cert revenue • Invest capital Regulatory Marketing/Sales/Admin Approval Inputs: Marketing/Sales/Admin • Purchase Agreement • Fire insurance cert • Municipal tax Investment of Capital • Client proof of Investment of Capital • Appraisal, AVM or MLS data income/assets •Title insurance (CMHC) • Credit Bureau •New home guaranty Financial Management/Credit Rating Financial Management/Credit Rating IT/Operations IT/Operations Idea Associates Ltd Client Confidential 7
  8. 8. The two entrenched mortgage insurers in Canada are CMHC and Genworth – both are well capitalized, sophisticated and aggressive CMHC Genworth Year of Inception 1954 1996 Lines of Business HLV Insurance HLV Insurance Portfolio insurance Portfolio Insurance Securitization AU systems (OmniScore) AU systems (Emili) 2005 Insurance in Force ($ Billion) $278 bn $124 bn 2005 Premiums Written ($ million) $1,560 $471 2005 Capital ($ Billion) $3.4 $1.1 2005 % Claims versus insurance in force 0.043% 0.028% MI Markets Served Prime Prime Alt-A Alt-A Vacation properties Vacation properties FI Coverage National (app. 3500 FIs) National (app. 3500 FIs) DBRS Credit Rating[1] AAA (Sovereign) AA Capital Relief Afforded to Lenders •100% •90% CMHC remains the default MI provider: brand, sovereign debt status and quasi-public mission CMHC remains the default MI provider: brand, sovereign debt status and quasi-public mission allows them to outspend Genworth on sales, training and claims. allows them to outspend Genworth on sales, training and claims. Idea Associates Ltd Client Confidential 8 [1] Dominion Bond Rating Service. May 2006. http://www.dbrs.com/intnlweb/jsp/search/searchResults.faces
  9. 9. 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. Mortgage Insurance Market Size - 2006, 2011, 2016 Age Category 20-25 25-29 30-39 40-49 50-59 Total Statistics Canada Population Estimates by Age Category (000's) Population Estimate for 2006 2,253 2,226 4,574 5,370 4,446 18,869 Population Estimate 2011 2,295 2,330 4,682 5,121 4,979 19,407 Population Estimate for 2016 2,304 2,377 4,925 4,822 5,310 19,738 Mortgage and MI Purchase Likelihood % Householders By Age Category Percent 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 Idea Associates Ltd Client Confidential 9 Source: Idea Associates Analysis, Statistics Canada, Clayton Research 2005
  10. 10. 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 substitutes Borrowers pay for MI – Prime, Prime-Alt A customers only Enables house purchase (accessibility & affordability)… seen as a commodity/utility that is not often used… a one time pain Consumer housing demand, demographics, regional dynamics impact Government MI demand and risk costs. • System stability & Consumers currently have the final choice on which MI to use but rarely invoke that choice… but regulators are eager to preserve perception of efficacy choice Lender • Consumer benefit/ Primary beneficiary of the MI … as intermediary and investor protection MI seen as a way to expand potential market … but lenders do not • Competition and collect compensation for MI Mortgage business margins are thin … profitability weaker than US industry power markets Overall, lender community is very profitable and powerful in economy … • Government makes them target of consumerist pressures financial risk Securitizer/Investor MI enhancement of MBS pool directly impacts salability and economics • Housing finance of offer access & Securitization relatively new and peripheral in Canada … 80% of mortgage assets still held on book affordability Dominant 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 aakey stakeholder The real customer is the lender … but government is key stakeholder Idea Associates Ltd Client Confidential 10
  11. 11. 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 2004 and grew to $180 bn in 2005 … originations are expected to grow by 7% in 2006. Annual Mortgage Originations On + Que + BC + AB = 91% Mortgage Market 180,000 160,000 140,000 ($ Billion Originated) 120,000 100,000 Existing 80,000 New 60,000 40,000 20,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 The Canadian mortgage market is driven by the “have” provinces … The Canadian mortgage market is driven by the “have” provinces … Idea Associates Ltd Source: CMHC Housing Observer 2005, CMHC 2003 Client Confidential 11
  12. 12. 98% of mortgages in Canada were originated as closed/fixed term in 2005 … 85% of mortgages had a =< 5 years 2005 CIMBL Survey of Mortgage Products in Canada All Open • Canadian market moved to short term > 5 YR C/F 13% 1% products in the 80’s to hedge lenders 5 YR C/F against risk exposures. 32% Other • Popularity of Fixed Rate, Closed 1% mortgages driven by pricing and generally 1 YR C/F favorable exit clauses for sale of house. 14% • The average mortgage account duration is 7 years .. Customers switch mortgage 4 YR C/F banks 3 times assuming 25 yr amortization 8% • Rates, product flexibility drive customer 2 YR C/F 15% satisfaction 3 YR C/F 16% Closed Term, Fixed 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, Variable rate Typically short term (6mth, 1 year) also offered in 5 year terms. Many banks offer variable mortgages with caps (50 bps). Open term, fixed/variable Offered at ~200 bps premium to closed mortgages. Short term rates products also offered with conversion opportunity to fixed rate products. Line of Credit Bundle Hybrid mortgage + line of credit offers allow customers to borrow money at mortgage rate as a line of credit. (ARM component). Idea Associates Ltd Client Confidential 12
  13. 13. Supporting mortgage growth has been the strong housing sales volumes and prices … MLS Total Residential Sales - 1995 - 2004 MLS Average Residential Price 1995 - 2004 500,000 240,000 450,000 Total Annual Units Sold 400,000 220,000 Average Sale Price ($) 350,000 200,000 300,000 250,000 180,000 200,000 160,000 150,000 100,000 140,000 50,000 120,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 100,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: CMHC Housing Observer 2005 Source: CMHC Canadian Housing Observer, 2005 2001 House Ownship by Provice 2004 Total Units Sold by Province 78.2 80.0 73.1 70.8 74.5 70.8 70.4 67.8 67.8 66.3 70.0 65.8 Alberta, 57,460, 13% British Columbia, % of Total Newfoundland and 60.0 63.0 96,385, 21% Labrador, 3,380, 1% 57.9 50.0 53.1 Prince Edward Island, 1,500, 0% 40.0 Nova Scotia, 8,873, 30.0 2% 20.0 New Brunswick, 24.2 5,979, 1% Y a a nd Sa Ma io O c ut a ta un tia s ar dor n bi an Q k a t tob be ad ie t T uk o ar av ic sh ber N Isl a um co ew or a ue Manitoba, 12,098, 3% sw nt an ni un Ontario, 197,354, 43% ew a S E abr rit Al ol ch C d N er C L ov Br dw d sk Saskatchewan, an es it i Br w 8,172, 2% d N ce an th Quebec, 64,907, 14% in or dl Pr N un fo Source: CMHC Housing Observer 2005 ew N Source: CMHC Housing Observer 2005 Ontario comprises 40% of the housing market … 90% of market volume in 44provinces Ontario comprises 40% of the housing market … 90% of market volume in provinces Idea Associates Ltd 13 Source: CMHC Housing Observer. 2005. Client Confidential
  14. 14. Top Banks account for 80% of total mortgage volume … large banks continue to grow market share at the expense of non-bank lenders. Market Share of Originations By FI Type Mortgage Assets by Lender - Feb 2006 100% 80% 0.6% 2.8% 100% 8.2% Total Other 2.1% 2.4% 60% 2.5% Total Trust Companies 90% 3.0% 40% Total Chartered Banks 8.2% 80% 9.8% 20% 70% 12.3% 0% 60% 15.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 50% 40% 15.1% Annual Growth In Mortgage Assets by FI Class 2001 - 2005 30% Foreign Banks, 13.96% 17.9% 20% 10% 0% CAGR of Mortgage Assets by Institution Type 2001 - 2005 N a t io n a l M a n u lif e In s u ra n c e D e s ja r d in s BN S IN G S p e c ia l H SBC P u rp o s e C IB C C U BM O R BC TD C a is s e Domestic Banks, L if e CAGR 1.73% Loan Companies, - Life Insurance, - 4.03% Trust Companies, - 4.25% 5.68% From an MI perspective, only 10 customer relationships count … From an MI perspective, only 10 customer relationships count … Idea Associates Ltd Client Confidential 14 Source: OSFI 2006. William Dunning 2006. CMHC Housing Observer 2005.
  15. 15. Not all banks use MI the same way across their portfolio … banks have different needs/strategies for HLV mortgages RBC Allocation of Residential Mortgage Assets - Royal Bank: Insured Vs Uninsured Total marketshare: 17.9% Insured, Total Mortgage Assets: $92 bn 33,594,384 , 36% Distribution Network: 1700 branches (no brokers) Head of Mortgages: Catherine Adams Uninsured, 58,595,032 , 64% BNS Allocation of Residential Mortgage Assets - ScotiaBank • National mortgage Insured Vs Uninsured Total marketshare: 15.1% industry leaders Total Mortgage Assets: $77 bn Insured, 27,565,875 , • Internal focus or Distribution Network: 1200 branches & broker 35% leaders synergies Head of Mortgages: Charles Lambert • System capacity and Uninsured, 50,231,165 , analytics 65% • Risk tolerance TD Canada Trust • Revenue driven TDCT Allocation of Residential Mortgage Assets - Insured Vs Uninsured Total marketshare: 9.8% decision making Total Mortgage Assets: $51 bn Distribution Network: 1700 branches & broker Uninsured, leaders 22,049,345 , 44% Head of Mortgages: Rick Mathes Insured, 28,597,661 , 56% Idea Associates Ltd Client Confidential 15
  16. 16. The increased demand for mortgage capital has been met by lenders with excess capital and through alternate channels like securitization. • There Securitization vehicles in CMHC Securitization in Force Canada: $129,500 National Housing Trust $103,709 CMHC derived Mortgage insured (sovereign status) $80,800 ($M) Approved lenders/debt only $59,994 $45,473 (conforming, conventional) Value in 2006 ~$130 bn Private Issuance Bank and Security firm issues … 2002 2003 2004 2005 2006 corporate debt status 70% of MBS non-conforming (alt-a, Total Asset Backed Securities Market and Non-NHA sub-prime) Residential MBS Market Value 2001 - 2006 ($B) GMAC is the major lender in the $25 $22 $21 market $20 $14 Issues associated with risk $15 $12 $12 $11 transparency … requires costly $10 $5 discounts versus NHA issues. $- Value in 2006 ~$25 bn 2001 2002 2003 2004 2005 Mar-06 Securitized mortgage debt $155 bn …. ~25% Source: DBRS 2001 - 2006 Total MBS Value of assets Unlike US, Securitization is aatreasury tool not alternate capital and risk management Unlike US, Securitization is treasury tool not alternate capital and risk management Idea Associates Ltd Client Confidential 16 Source: Dominion Bond Rating Service. 2005. CMHC Website.
  17. 17. 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 benefit Perception of increased choice, lower costs and increased mortgage funds access and affordability Systemic benefit/risks Government exposure to MI default Systemic benefit or risks to overall banking competition – particularly overall concentration with Big 5 Overall risk exposure to public purse, of industry to MI guaranty Lender benefits Ability to create “fair” revenues Perception of profit off of consumers’ requirement for MI Capital cost supplement and risk free returns CMHC (and, Genworth) impact The government does not want to bail out existing MI Product innovation and competition Desire for competition is aapolicy issue not aamarket issue driven by non-banking FI and consumer Desire for competition is policy issue not market issue driven by non-banking FI and consumer lobby lobby Idea Associates Ltd Client Confidential 17
  18. 18. Typical mortgage spread is ~160 bps … creates 16 bps per year on contribution • Lender profitability driven by up- front costs Size of rate discount – spread can be as Canadian M ortgage Profit & Expe nse Allocation low as 120 bps Broker fees 100 – 150 bps one time up 180 160 60 160 Basis Points front 140 120 4 100 25 Appraisal fees $75 - $250 80 23 60 4 • The “average” MI mortgage in 40 20 28 16 0 2005: A es n ry ve g d ... tio & tin ea su Fe $180,000 principal er G ct bu ke pr ea es S du nt S tri ar el R Tr ro ro on M nn Fixed rate pf P C ha U & C ng 5 year term ci vi er 25 year amortization S average spread 160 bps average MI premium 173 bps Lenders will jump on opportunity to increase revenue … 25 bps is 25% boost in annual contribution Lenders will jump on opportunity to increase revenue … 25 bps is 25% boost in annual contribution Idea Associates Ltd Client Confidential 18
  19. 19. 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 40bps Canadian lenders don’t charge fees for mortgage applications and pay fees for customers for renewal and refinancing Canadian lenders pay for broker fees and for refinance and renewal legal costs. Mortgage Business Contribution Analysis: U.S. and Canadian Large Mortgage Lender $10,000 $8,000 $6,000 Contribution Difference US Lender Nominal Dollars Cumulative $4,000 Income (US$) Canadian Lender $2,000 Cumulative Income ($C) $0 -$2,000 -$4,000 Ye 1 2 3 4 5 Ye 6 7 8 Ye 9 Ye 0 Ye 1 Ye 12 Ye 3 Ye 14 Ye 5 Ye 6 Ye 17 Ye 8 Ye 9 Ye 0 Ye 1 Ye 2 23 1 1 1 1 1 1 1 2 2 2 ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar ar Ye Ye Ye Ye Ye Ye Ye Mortgage Year Difference in Operating Income Canada - US Cdn Cumulative Income US Cumulative Income Canadian lenders desperately need new revenue sources to increase profitability Idea Associates Ltd Sources: Bank of Canada, U.S. Federal Reserve, 2001. Client Confidential 19 * U.S. data available only to June, 2000. We therefore compared 9/96-6/00 rates for short-term.
  20. 20. US and Canadian credit and delinquency distribution is also different Distribution of Population by Credit Score and Rate of Deliquency FICO is the benchmark credit standard. Globally, countries experience ranges of credit 30% 100% performance based on cultural norms. Canada % of Canadian 27% Rate of Credit Delinquency 25% 24% 80% P opulation 78% tends to be more conservative than US as 20% 60% 19% 60% 15% reflected by the distribution of population and 10% 39% 11% 40% delinquencies by credit score. This is also 6% 23% 5% 20% 5% 4% 4% 12% reflected in the relative sizes of sub-prime 0% 5% 2% 1% 0% lending markets. 9 9 9 9 9 9 0< 49 59 64 69 74 79 84 <5 85 0< 0< 0< 0< 0< 0< 55 60 65 70 75 Beacon-FICO Score 80 Canadian Distribution Canadian Delinquency Rates US Credit Score Distribution and Delinquency Experience 30% 100% 87% 27% 90% 25% Delinquency Experience 80% 71% 70% US Population 20% Sources: www.fairisaac.com, www.experian.ca 18% 60% 15% 51% 15% 50% 13% 12% 40% 10% 31% 30% 8% 20% 5% 5% 15% 10% 2% 5% 0% 2% 1% 0% 300-499 500-549 550-599 600-649 650-699 700-749 750-799 800-850 US Population Delinquency rate Canadians default experiences is ¼ of the US experience Canadians default experiences is ¼ of the US experience Idea Associates Ltd Client Confidential 20
  21. 21. 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 5 10 Unemployment Rate (right scale) 4 9 % Growth Disposable Income 5 Year Mortgage Rate 3 (right scale) 8 % 2 7 Annual Increase in 1 6 Disposble Income (left scale) 0 5 -1 4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Canadian Housing Observer, 2005 Assuming constant interest rates… housing affordability conditions remain strong Assuming constant interest rates… housing affordability conditions remain strong Idea Associates Ltd Client Confidential 21
  22. 22. 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 1992 LTV is still primary indicator of default rate with Canadian MIs reporting defaults of 8-10x at 95% LTV compared to 80% LTV While debt servicing ratio is relatively steady, there has been a 20% increase in debt to disposable income since the high-rate early 90’s Claims Expense 2001- 2006 400,000 350,000 300,000 250,000 (000's) 200,000 150,000 100,000 50,000 - 2001 2002 2003 2004 2005 2006 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 World Bank Housing Finance Conference 2003 Insurer/LTV Relative Risk: 80% LTV = 1.0 80% LTV 85% LTV 90% LTV 95% LTV U.S. Mortgage Information 1.0 2.53 2.3 4.38 Corp. Canada: GE Mortgage 1.0 n.a. 4.08 10.63 Insurance Canada: Mortgage Insurance 1.0 1.99 3.45 7.69 Corp Idea Associates Ltd Client Confidential 22
  23. 23. About the Author Scott Wilkinson MBA CMC Idea Associates Ltd 416-669-5540 scott.wilkinson@ideaassoc.com 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. Idea Associates Ltd Client Confidential 23
  24. 24. • Appendix Idea Associates Ltd Client Confidential 24
  25. 25. Translating Canadian market to US will be challenging … so similar, so different. Canada US Industry Organization Vertical – Big Banks, Horizontal, regional with national dominance of securitizers Mortgage Industry Small – generalist Large – deep mortgage bankers industry, Product Short-term, fixed, closed Long-term, open Pricing/Fees National with relationship* Regional. Pricing based discounts. Common fees. on value & risk. High fees Securitization Add on to treasury Core product (Fannie & Freddie), large off-prime market MI Model Upfront. Lifetime. Pricing Monthly until value of loan by LTV. reduced to 77%. Pricing varies by risk, value of loan. Idea Associates Ltd Client Confidential 25
  26. 26. US Canadian Mortgage Glossary …. ;) Canada US Credit Score Beacon (Fico) FICO Refinance Consumer borrows more Consumer moves to lower money at end of term rate Portability MI policy lifetime, MI N/A policy number can be used at new lender Balloon Loan Renewal Short-term mortgage loan Servicer N/A Company that provides statement collects fees for securitized mortgages. Primary MI stakeholder. Mortgage Executive Banker temporarily in Lifetime career. mortgage group … Specialties in insurance, generalist servicing, origination. Idea Associates Ltd Client Confidential 26

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