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Who should bear housing market risk? by Justin da Rosa | 02 Dec 2015

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A roundup of the heated discussion about mortgage defaults and future risk


Who should bear housing market risk?

Don’t expect the big banks to take on any more risk when it comes to insuring homes – at least if this one group has its way.
The Canadian Bankers Association sent a letter to CMHC last summer, warning that forcing banks to take on more risk associated with home loans could lead to financial instability.
The letter, was obtained by The Canadian Press through an access-to-information request.
“As the CMHC explores options to reduce the federal government’s exposure to the housing market, we would like to ensure that any changes made to the housing finance system are done so with a complete understanding of their implications on the housing and mortgage markets,” the association said in a letter, dated Aug. 6, 2014.
Under current rules, the Canadian government backs all mortgage default insurance – meaning tax payers are on the hook in the event of wide-spread defaults.
The Conservative government had been considering ways in which to better share the risk, including forcing the banks to shoulder some responsibility.
“In our role as an adviser to government, we are evaluating a range of ideas on future improvements to our housing finance system, including risk-sharing with lenders to further confront moral hazard,” CMHC President and Chief Executive Officer Evan Siddall told the Saint James Club in late September of last year.
A Department of Finance representative told the Canadian Press that both the IMF and OECD have recommended the current government saddle banks with some of that risk.
“Following these recommendations, the Department of Finance has undertaken preliminary work to study the implications of lender risk sharing on Canada’s housing finance framework,” David Barnabe says in an email.
Last year, the Office of the Superintendent of Financial Institutions said it will not force Canada’s banks to assume more mortgage risk, despite calls from many in the industry for them to do so.
“This is an initiative that really belongs to the government as a whole," OSFI superintendent Jeremy Rudin told reporters following a speech at the Economic club of Canada, in October 2014. "It’s something that, if there’s an interest, it would be an issue for the Minister of Finance to lead.”
It remains to be seen what – if anything – the current Liberal government plans to do regarding mortgage default risk sharing.
  • Tony Piattelli on 2015-12-02 11:11:18 AM

    Not even sure why this is an issue. The company that is collecting the insurance premium should be on the hook for any mortgage default as that's the reason clients pay the premium. Must be a pretty good business to be able collect the premium and then shun the responsibility that goes with obligation of collecting the premiums.

  • DeJong on 2015-12-02 10:57:28 PM

    Come on Tony! Give me another example of an insurance policy you have that doesn't require a deductible. It's rare for a reason. It's hard to argue that this isn't common sense.

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