EDITORIAL: Sharing the risk of mortgage insurance

Published on October 25, 2016

According to 2016 second quarter statistics from the Prince Albert and District Association of Realtors, the average selling price of a residential home is on the rise.  That local rise mirrors a similar trend across the country.

©Herald photo by Jason Kerr.

Friday afternoon must not have been much fun on Bay Street.

Mere weeks after the federal Liberals changed the rules for having the Canadian Mortgage and Housing Corporation put in a “stress test” for people seeking mortgage insurance, the Trudeau government released a proposal that shows it is now looking at having banks pick up some of the tab for coverage that has long worked in their favour.

What has happened for years is that for mortgage where prospective homeowners have less than 20 per cent down, CMHC has issu d mortgage insurance — paid for by the homeowners themselves.

It has let banks, and other lenders, risk much less of their reserves in the mortgage market, while letting them continue to collect mortgage interest to cover their “risk.”

Great system, hey?

The “stress test” was a mechanism to have buyers prove that they could handle the increased costs of higher interest rates, should those rates rise, instead of having their mortgages go into default. If they did default, CMHC — and potentially, Canada’s taxpayers — could end up holding the bag.

Banks and homebuilders didn’t like that change, saying it would slow the market, because new homebuyers would be able to borrow less.

Well, if that was a concern, just wait.

On Friday, the federal government released details that would see financial institutions take more responsibility for the money they are lending out for insured mortgages.

Right now, in the case of a default, CMHC covers not only a financial institution’s losses on a default, but also things like lost interest, and even the costs of foreclosing on a property, including legal fees and property maintenance.

It’s hardly a recipe for a financial institution to be careful or thoughtful about who it is lending money to, is it?

The new changes are almost guaranteed to cause a bit of a storm. There are two options being considered. One would see a deductible put in place of anywhere from five to 10 per cent — meaning the financial institution would actually have some risk, and would have to pay out part of the cost of a failed mortgage. The other option would see a fee being charged to the bank for the benefit of having the insurance.

On the one hand, you can argue that this will once again pose the risk of slowing Canada’s housing market, something that would affect scores of people in the industry, from realtors to homebuilders.

But on the other side of the coin, why exactly should the Canadian taxpayer serve as a banker for Canada’s wildly profitable banking and lending sector? And won’t it do something to focus the mind of lenders about whether someone is actually a good financial risk, if the lenders themselves actually have some skin in the game?