End CMHC mortgage insurance, IMF urges

Despite its stability, system could distort market, report says

The federal government should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp., the International Monetary Fund said Wednesday.

The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 per cent for the country next year. Such a recommendation appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages.

Some analysts have credited the system for providing much needed confidence in Canada’s housing sector during the 2008-09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.

The IMF concedes the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, IMF mission chief for Canada, told reporters in Toronto.

CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the United States but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. “In this case size matters. It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.