Lend­ing may dampen

Pro­posal to have lenders shoul­der more risk

The Guardian (Charlottetown) - - BUSI­NESS -

A fed­eral pro­posal to have lenders shoul­der more of the risk for po­ten­tial mort­gage de­faults could dampen lend­ing or in­ten­sify a de­cline in house prices, ac­cord­ing to in­ter­nal doc­u­ments from the Depart­ment of Fi­nance.

Pro­po­nents of lender risk shar­ing say it would en­cour­age banks to be more cautious when lend­ing to high-risk bor­row­ers, thereby mit­i­gat­ing the im­pact of a cor­rec­tion in prop­erty prices.

But a draft re­port, ob­tained by The Cana­dian Press through an ac­cess-to-in­for­ma­tion re­quest, says ex­pos­ing fi­nan­cial in­sti­tu­tions to a por­tion of mort­gage de­fault losses - through a de­ductible, for ex­am­ple - could ac­tu­ally make the hous­ing mar­ket less sta­ble in the event of a down­turn. That’s be­cause lender risk shar­ing could ex­ac­er­bate the down­side of the lend­ing cy­cle, dur­ing which banks typ­i­cally be­come hes­i­tant to hand out loans, the re­port says. The Depart­ment of Fi­nance has been ex­plor­ing so-called lender risk shar­ing since be­fore the elec­tion of Justin Trudeau’s Lib­eral gov­ern­ment in 2015. The draft re­port was pre­pared within the first sev­eral months of Trudeau’s cabi­net be­ing sworn in.

Evan Sid­dall, CEO of Canada Mort­gage and Hous­ing Corp., says the fed­eral gov­ern­ment is in the process of re­view­ing sub­mis­sions it re­ceived dur­ing con­sul­ta­tions on lender risk shar­ing.

“Those are be­ing re­viewed, and they are now look­ing for ad­di­tional in­for­ma­tion from lenders, quan­ti­ta­tive in­for­ma­tion from lenders, to fur­ther an­a­lyze the idea,” Sid­dall said fol­low­ing a speech he de­liv­ered in Toronto last month.

“We won’t have that data un­til later this year at the ear­li­est.”

Rapidly es­ca­lat­ing house prices in the Toronto and Van­cou­ver ar­eas have caused some Cana­di­ans to take on record amounts of debt rel­a­tive to their in­comes, spark­ing con­cerns about grow­ing risk in the real es­tate mar­ket.

The In­ter­na­tional Mon­e­tary Fund and the OECD have called on Ot­tawa to min­i­mize the po­ten­tial costs to tax­pay­ers in the event of a hous­ing mar­ket crash.

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