Teachers Want A Piece Of The Mortgage Insurance Pie

Ontario Teachers’ Pension Plan is buying into the mortgage-insurance market, a move that should provide a new challenge to Crown corporation Canada Mortgage and Housing Corp., which controls about 75% of the multibillion-dollar industry.

The pension fund, which has strong links to most of the major financial institutions that sell mortgage insurance to homeowners, said yesterday it is buying the Canadian subsidiary of American International Group Inc., AIG United Guaranty Canada. No price was disclosed but the Canadian unit had assets of $274-million and total equity of $127-million as of September 30, 2009.

In announcing the deal, the pension giant said it had teamed up with Stephen Smith, a Toronto-based investor who is making the purchase through his private family holding company, National Mortgage Guaranty.

Mr. Smith is also president of First National Financial, which was one of the first financial institutions to offer AIG products after the company entered the Canadian marketplace in March 2006.
“We’ve spoken to a number of potential [bank] customers prior to signing this transaction, and we had good discussions with all of them,” said Erol Uzumeri, senior vice-president of Teachers’ Private Capital. He noted Teachers “has good relationships with all of them.”
During the height of the housing boom in Canada, three private insurers joined Genworth Financial Canada, which still controls about a quarter of the market. As of Dec. 31, 2008, there were $908-billion in outstanding mortgages in Canada.
Consumers are required to buy mortgage-default insurance if they are borrowing from a financial institution regulated by the Bank Act and have less than a 20% down payment on their home. The mortgage insurance makes sure financial institutions are covered for losses should a consumer default. In 2008, that high-ratio market generated $70-billion in new loans.
Mr. Uzumeri does not predict Teachers will engage in price wars or introduce any exotic new products to the landscape to grow its market share.

Previous battles between mortgage insurers have been blamed for such things as longer amortization periods, which stretched from the traditional 25 years to 40 years during this housing cycle before the government mandated they be capped at 35 years.
Teachers plans to rebrand the company to shake off the stigma attached to the AIG name, investing new capital and providing high-quality service. “We will be focused on building relationships with partners like banks,” Mr. Uzumeri said. “Our plans are modest. CMHC is and will always will be a dominant provider of mortgage insurance in Canada, but there is room for third-party providers.”
Teachers had been studying the Canadian mortgage market for two years. “The Canadian housing market is one of the most stable in the world. We have conservative lending practices, mortgage financing through the big banks, we don’t have any non-recourse mortgages and we don’t have tax incentives that encourage people to [accumulate debt],” Mr. Uzumeri said.
Before its parent company imploded, the Canadian operations had made some inroads into the marketplace. Vince Gaetano, vice-president of broker Monster Mortgage, said AIG probably had about 4% to 5% of the Canadian market but is well under 1% now.
“It has a big upside. They are at less than 1% of the market and have nowhere else to go but up,” joked Mr. Gaetano, who says the company’s Canadian public profile will have to be rebranded effectively.

But he said Teachers could prove to be effective at competing with powerhouses CMHC and Genworth. Up until now, most financial institutions have been reluctant to include a third insurance option because it required changes to their computer and operating systems. The other two private insurers left the market months ago.

“If Teachers put some pressure to some of their lenders, who knows what will happen?” Mr. Gaetano said.

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