CMHC provides banks and lenders assurances

The Canada Mortgage and Housing Corporation passed its own stress test, including interest rates rising to the neighbourhood of 7%.

“We could withstand around 7% for a sustained period of time, which is a considerable increase over where rates are now,” Steve Mennil, CMHC’s chief risk officer, said of a posted mortgage rate hike.

“With regard to interest rates, the changes in rates are showing in a material way. We do show, in some of the financial stress scenarios, an increase in interest rates. Of all interest rate increases under these scenarios, there seems to be a consensus that there will be some rising interest rates in the future, although we’re quite confident we can withstand fairly extreme increases in the interest rates.”

The mortgage insurer determined that its capital holdings can withstand severe, albeit unlikely, financial duress, including sustained low oil prices, a global trade war, cyberattacks on national financial institutions, an earthquake and major volcanic eruption.

“We don’t really provide a degree as to the likelihood of these scenarios,” continued Mennil. “Any and all of them are potential, but we think they’re all quite extreme and unlikely.

To determine the strength of its mortgage loans and securitization businesses, CMHC began stress testing itself four years ago. Mennil says the organization is stronger today than it has been in years past.

“We do these stress tests annually and each year we confirm the capital that we hold and the capital required. Overall, we’re in a better position to withstand these positions than we were last year. One thing has changed materially since several previous stress tests and it’s that CMHC pays dividends to the government, which represents excess capital we believe we need to hold for these extreme scenarios, but the strength of the corporation is just as strong as it was in recent years.”

According to experts, Canada is due for a recession, and CMHC assures that a very severe housing downturn and large jump in the unemployment rate would need to persist for a number of years before its capital eroded in any meaningful way. Mennil, moreover, provided banks and lenders assurances, too.

“It is important to note that under all circumstances CMHC will continue to be fully responsible for all claims under mortgage insurance, and no losses will be taken by lenders or banks that have taken the loans.”

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