UPDATE 2-Canada housing agency hikes premiums to reduce risk

Fri Feb 28, 2014 1:03pm EST
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OTTAWA Feb 28 (Reuters) - Canada's national housing agency announced on Friday it will increase its mortgage loan insurance premiums from May 1 to shore up its capital and reduce taxpayers' exposure to the housing market, which has been a big worry for the government.

The government-owned Canada Mortgage and Housing Corporation (CMHC), which plays a similar role to that of Fannie Mae and Freddie Mac in the United States, said the change would have no material impact on the housing market.

The premiums are typically paid by lenders but they may pass on the extra cost to borrowers. CMHC estimated consumers would see monthly mortgage payments rise by about C$5.

"The higher premiums reflect CMHC's higher capital targets," said Steven Mennill, CMHC's vice-president of insurance operations.

"This is not designed to affect housing market activity. This is simply an exercise in the annual review of our mortgage insurance premiums," he said.

Existing mortgages are not affected by the change.

CMHC has raised its capital reserves substantially since 2010. It has been under pressure to raise its premiums as well amid worries that its rapidly growing mortgage insurance business increases the risk to taxpayers in the case of a shock. CMHC issued insurance to 192,000 homeowners in 2013.

Last November, CMHC announced that as of Jan. 1 it would be required to pay the government a "risk fee" of an additional 3.25 percent of its insurance premiums, plus 10 basis points extra on the low-ratio portfolio insurance that it sells to banks.   Continued...