Banking group warned government about mortgage risk sharing plan, documents show

TORONTO – The Canadian Bankers Association warned the former Conservative government that a proposal to have banks shoulder more of the risk associated with home mortgage loans could hurt the country’s financial stability.

The group’s position is revealed in a letter it sent to Canada Mortgage and Housing Corporation, which 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,” reads the letter, dated Aug. 6, 2014.

Homebuyers with less than a 20 per cent down payment are required to get mortgage default insurance — either from CMHC or one of the private mortgage insurers — when borrowing from a bank. The insurance covers the banks in cases where borrowers default on their loans.

Although both CMHC and private mortgage insurers are self sustainable, with claims covered by the premiums paid by policy holders, all mortgage default insurance is backed by Ottawa. That means that in a dire crisis, such as a major housing market collapse, taxpayers could be left footing part of the bill.

The Conservative government had been looking at ways to reduce taxpayer exposure to the housing market, and the idea of forcing banks to pay a deductible on mortgage insurance claims was one of the ideas that it had floated.

It’s unclear whether the new Liberal government will pursue this path.

A spokesman for the Department of Finance noted that both the International Monetary Fund and the OECD have recommended the government consider requiring banks to bear a portion of the losses on insured mortgages that default in order to minimize the potential costs to taxpayers.

“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 said in an email.

But the Canadian Bankers Association’s letter cautions that introducing a mortgage deductible could lead to higher mortgage rates for consumers and says it would be “prudent” for the government to assess whether such a policy could impede the mandate of CMHC, a Crown corporation, to maintain financial stability.

The association says measures implemented by CMHC during the last financial crisis helped “ensure the resiliency of the Canadian financial system,” and warns that changes to the system could make it more difficult for CMHC to implement similar policies in the event of future crises.

“Adding a deductible would make the mortgage financing system more complex, with few clear benefits,” the letter says.

From the perspective of the bankers’ association, such changes simply aren’t necessary.

“One of the possible rationales for implementing a mortgage insurance deductible could be to change the behaviour of economic actors, so the question to be asked is, ‘What behaviour needs to be changed?'” Maura Drew-Lytle, director of communications for the CBA, said in an email.

“When looking at bank mortgage portfolios, there is little evidence that a change in behaviour is needed. The banking industry applies prudent origination and underwriting standards, which are the same for insured and uninsured mortgages.”

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