November 18, 1998

To:Community and Neighbourhood Services Committee

From:City Clerk

Subject:Increase In Mortgage Insurance Premiums For Existing Rental Housing

The Council Strategy Committee for People without Homes at its meeting of November 16, 1998, had before it a report dated October 30, 1998, from the Commissioner of Community and Neighbourhood Services, regarding a recent decision made by Canada Mortgage and Housing Corporation to increase the fees and premiums charged by the Canada Mortgage and Housing Corporation to insure mortgages on existing rental housing.

The Council Strategy Committee directed that the following recommendations, as contained in the noted report, be forwarded to the Community and Neighbourhood Services Committee for consideration:

"It is recommended that:

(1)City Council express to the Federal Minister Responsible for the Canada Mortgage and Housing Corporation its strong opposition to the increase in mortgage insurance premiums for existing rental housing announced for January 1, 1999, and request that the increase be rescinded given the potential negative impact on affordability of rental housing; and

(2)City Council strongly urge the Federal Minister Responsible for the Canada Mortgage and Housing Corporation to reduce mortgage insurance premiums for new rental housing in order to encourage the construction of new multi-residential rental housing."

City Clerk

Frank Baldassini

c:Commissioner of Community and Neighbourhood Services

General Manager of Shelter, Housing and Support Division

Acting Director of Policy and Programs, Shelter, Housing and Support Division

Mr. Peter Zimmerman, Assistant to Councillor Layton

October 30, 1998

To:Council Strategy Committee for People Without Homes

From:Commissioner of Community and Neighbourhood Services

Subject:Increase In Mortgage Insurance Premiums For Existing Rental Housing

Purpose:

To inform the committee of a recent decision made by the Canada Mortgage and Housing Corporation to

increase the fees and premiums charged by the Canada Mortgage and Housing Corporation to insure mortgages on existing rental housing.

Financial Implications:

No direct implications for the City.

Recommendations:

It is recommended that:

1. City Council express to the Federal Minister Responsible for the Canada Mortgage and Housing Corporation its strong opposition to the increase in mortgage insurance premiums for existing rental housing announced for January 1, 1999, and request that the increase be rescinded given the potential negative impact on affordability of rental housing.

2. City Council strongly urge the Federal Minister Responsible for the Canada Mortgage and Housing Corporation to reduce mortgage insurance premiums for new rental housing in order to encourage the construction of new multi-residential rental housing.

Background:

The president of CMHC announced on October 9, 1998 that insurance premiums and underwriting fees for existing rental housing are being increased (see attached news release). As of January 1, 1999, the premiums for mortgage insurance on existing rental housing will increase as shown in Appendix 1.

CMHC indicates that mortgage insurance for the purchase of existing rental buildings has not been viable and over the past 25 years and they have lost more than $200 million on the program. They suggest that the increases are necessary to ensure the long term viability of the program.

This premium change will increase monthly carrying costs by approximately $4.00 per unit (for a mortgage at 85% of value, on a project worth $5 million, with 100 apartment units) or $1.80 per unit (for the same project with a mortgage at 75% of value).

Comments:

The federal government, through the Canada Mortgage and Housing Corporation (CMHC), provides mortgage insurance for the financing of rental and ownership housing. Such insurance is critical to the financing of new and existing housing given the conservative nature of private lenders - mortgage insurance is generally mandatory for "high ratio" lending, i.e. where the value of the loan exceeds 65% of the value of the property/building being built or purchased. CMHC is currently the only provider of mortgage insurance for rental housing, insuring loans with a total value of $2.27 billion for almost 69,000 existing rental units in 1997.

Over the years, CMHC has developed three mortgage insurance products for rental housing:

i) insuring 100% of private financing for subsidized housing, where mandated as part of the social housing programs

ii)insuring mortgages for new private rental housing construction

iii)insuring the refinancing/purchase of existing private rental housing

In the case of social housing, any losses to the federal government as a result of mortgage defaults are considered a program cost of social housing: in some cases the social housing program agreement requires that the cost be covered by, or shared with, the Province.

In the case of insurance for other rental housing, CMHC has a mandate to be commercially viable. CMHC's rationale is that it provides a public service in making high ratio lending available for rental housing across the country, and to do so it must ensure that the program is economically viable. The program is appealing because mortgage insurance reduces the lender's exposure to loss, and as a result borrowers can obtain lower interest rates. As long as this interest rate benefit exceeds the cost of the insurance premium, the program will be attractive to borrowers.

Despite the fact that CMHC operates the program as a business venture rather than a policy tool, it has a significant impact on the rental housing market in the City of Toronto. For example, in 1996, CMHC raised the mortgage insurance premiums for new rental housing mortgages using the rationale that its assessment of financial risk justified this increase. In effect, this created premiums that were higher than at other times over the past 40 years (up to 5 percent for an 85 percent loan). Metro Council opposed this increase in April 1997, citing the negative impact on new rental construction. Recently, Mayor Lastman has requested that the federal government lower its mortgage insurance premiums to stimulate the building of rental housing (see Appendix). CMHC staff indicate that the premiums for new rental housing are now under review.

Conclusion

This increase in mortgage insurance costs is disconcerting for two reasons:

First, it results in additional financing costs that landlords will eventually pass through to tenants as rent increases. This impact could not come at a worse possible time for the City of Toronto, with an affordable housing crisis and no construction of new rental housing. The City recently capped the property tax increases on multi-residential rental buildings at 2.5% to avoid just such an impact.

Second, it is extremely disconcerting that the federal government has not taken steps to use mortgage insurance as a tool to stimulate rental housing development. For example, mortgage insurance premiums should be reduced to encourage new rental housing. This announcement sends a message that the federal government has not considered the broader impact of its mortgage insurance program on the rental market in Toronto.

Contact Name:

Rob Cressman

Phone: 392-0601

Fax: 392-0548

Email: rcressma@city.toronto.on.ca

Joanne Campbell

General Manager

Shelter, Housing and Support

Division

Shirley Hoy

Commissioner of Community &

Neighbourhood Services

APPENDIX 1

INCREASE IN MORTGAGE INSURANCE PREMIUMS AND FEES

As of January 1, 1999, the premiums for mortgage insurance related to the purchase of existing rental housing will increase as follows:

LOAN TO VALUECURRENT PREMIUMREVISED PREMIUM

85%3.00%4.50%

80%2.00%3.50%

75%1.50%2.25%

70%1.50%2.00%

65%1.50%1.75%

Underwriting fees will also be increased on January 1, 1999 for existing buildings, as follows:

CURRENT FEESNEW FEES

$125 per unit for first 50 units$150 per unit for first 100 units

$50 per unit after$100 per unit after

$50 per bed$100 per bed

No minimumMinimum of $600 per loan

No maximumMaximum of $50,000 per loan

APPENDIX 2

REDUCING MORTGAGE INSURANCE PREMIUMS FOR NEW RENTAL HOUSING

Research has shown that reducing CMHC mortgage insurance premiums can contribute to the feasibility of building new rental housing. Mayor Mel Lastman has proposed that CMHC reduce the rate to approximately 1% of the value of the loan on private rental apartments.

The Metro Housing Stakeholder Panel (1997) held the view that instead of having all rental housing projects across Canada subject to the same premium, mortgage insurance premiums should be flexible based on risk. It was the understanding of the Panel and consultants that the mortgage defaults involved in CMHC's financial risk analysis which gave rise to the increased premiums, reflected risks greater than those likely to apply in rental housing development in Toronto today (1995). Given Toronto's continued economic growth since 1995, and soaring demand for affordable rental housing, its likely that the risk remains low.

CMHC has not supported this proposal because mortgage insurance premiums represent a very small proportion of rental costs and would have a minimal impact on rental viability and affordability; and would not reduce rents by more than $10 per month. Reducing the premium by one-half would reduce the gap between market and economic rents by about 4%. Although the amount is small, what the CMHC response fails to recognize is that reducing premiums is just one part of a total package of measures which, when combined, can make rental housing development viable. As reported by the Housing Stakeholder Panel, the idea behind providing mortgage insurance at a modest costs and on reasonable terms is to help a project get affordable financing, and it is the affordable financing which contributes to the overall viability of the project. Although the direct contribution of reduced premiums is small, it is important.

In addition, it is CMHC's position that mortgage loan insurance under the National Housing Act already contributes to affordable housing by making it possible for rental housing investors with low down payments to obtain mortgage financing at prime interest rates. Although it is true that NHA mortgages help, the issue is really about whether or not the landlord can even get a mortgage.