It was just a couple of days ago that we published a post talking about mortgage insurance. There are three companies in Canada that provide it – Genworth, AIG United Guaranty, and the Canadian Housing and Mortgage Corporation – which insures mortgages in Ottawa and is the only federally-backed company of the three. And while it’s been CMHC that has been largely in the news, and heavily criticized for different practices, it’s Genworth that had their status lowered from “positive” to “stable” on Monday.
Standard & Poor’s Rating Services made the change based on the fact that “the household accumulation of debt is moderating but the consumer leverage remains high and vulnerable to changes in interest rates,” according to a statement made by the agency. They went on to touch on high loan-to-value debt, which has been a concern with so many Canadians taking out second mortgages.
In the statement they continued on to say, “With higher interest rates, debt servicing may come under pressure, especially for high loan-to-value borrowers. The combination of macroeconomic factors may begin to weigh on housing prices. In fact, the pace of price appreciation has slowed in most major real estate markets across Canada…We are projecting a mid-single-digit decline in average house prices in the near term.”
That drop in prices is what many are fearful about in Canada, and this recent move from S&P is certainly only going to heighten those fears. The agency also believes that with house prices declining, the country is most likely going to see a hard landing happen very soon with the prices in the housing market.
But there’s more. High loan-to-value ratios and falling prices are just part of it. And even though it was released prior to Mark Carney’s interest rate announcement, the two sound very much alike. S&P also lists global economic factors as huge concerns, and ones that could greatly affect Canada’s economy. “Such risks could also come from contagion from the Eurozone sovereign debt crisis, slowdownin global economy, and oil price shocks from geopolitical tensions,” they continued on in their statement.
Despite this, and a drop in employment levels that Canada is currently experiencing and could continue to see, the agency still allowed Genworth to maintain their AA rating. The organization also doesn’t expect Genworth’s business to decline any, saying that they expect that the operation of the company, as well as its position with its current capital, will remain steady.
