Canada Mortgage and Housing Corp. will pay a special dividend of $4-billion to the federal government over the next two years, saying it has excess capital above its required targets.

The federal Crown corporation reported a sharp drop in insurance volumes in the first quarter this year as fewer buyers qualified for mortgage insurance under new federal stress-test rules, but said it nonetheless has sufficient excess capital to pay a one-time special dividend to the federal government.

"The special dividend returns excess capital to the government that has been accumulated over many years," CMHC spokesman Jonathan Rotondo said on Thursday. "Even after paying this special dividend, we are well capitalized."

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The $4-billion will be paid in instalments over a period not to exceed two years. CMHC is also proceeding with separate plans to begin paying a regular quarterly dividend to the federal government, declaring its first $145-million dividend in the first quarter this year.

CMHC provides mortgage insurance to protect financial institutions from default risk if a homeowner cannot make mortgage payments on a property. Home buyers are required to purchase the coverage when they do not have down a payment of at least 20 per cent of the purchase price of a home.

The $4-billion dividend comes months after CMHC raised premiums for consumers in response to new capital requirements that were introduced for mortgage insurers on Jan. 1 this year by Canada's financial regulator, the Office of the Superintendent of Financial Institutions (OSFI).

Mr. Rotondo said the recent premium increase was required to ensure prices reflect current capital requirements that apply to new policies written after Jan. 1.

The new capital requirements apply to all mortgage insurers, including Canada's two private-sector insurers – Genworth Financial Inc. and Canada Guaranty Mortgage Insurance Co. – which also raised premiums this year.

"The [CMHC] premium increases also help to preserve competition in the mortgage-loan insurance industry and contribute to financial stability," Mr. Rotondo said.

The Crown corporation, which earns returns on a commercial basis, has historically retained all of its net income as capital, but will now return money to the federal government when its capital exceeds its required targets. CMHC has not paid dividends since its creation in 1946.

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The federal government said CMHC's earnings are already incorporated in government accounts, so the $4-billion dividend will not reduce the government's projected budget deficit.

Finance Minister Bill Morneau said CMHC is abiding by good governance principles by sending excess funds to the government.

"CMHC's special $4-billion dividend is a sign of how well the Crown corporation is managing its mortgage loan insurance and securitization businesses," Mr. Morneau said in a statement Thursday.

The agency said CMHC will continue to hold capital "in line with its risk profile" and in accordance with statutory capital requirements set by OSFI.