Times Colonist

Lender risk sharing could shake housing market: feds

- ALEXANDRA POSADZKI

TORONTO — 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 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., said 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 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.

Currently, homebuyers with less than a 20 per cent down payment are required to buy mortgage default insurance from CMHC or one of two private mortgage insurers. The insurance covers the banks in the event of a default by the borrower.

Claims are generally covered by the premiums paid by policyhold­ers. But because mortgage default insurance is ultimately backstoppe­d by Ottawa, that means that in the event of a severe housing market crash, taxpayers could be left holding the bill.

The Department of Finance says it will provide updates on developmen­ts as appropriat­e.

“The government recognizes that lender risk sharing would represent a meaningful change to the mortgage insurance framework, and the importance of fully understand­ing the potential issues and impacts that could be associated with it,” a spokeswoma­n for the department said in an email. “The Department of Finance continues to review and refine input received from stakeholde­rs through the public consultati­on process.”

The proposal has been met with some criticism, notably from the Canadian Bankers Associatio­n, which wrote to CMHC in 2014, saying lender risk sharing could hurt the country’s financial stability.

The group also made a submission to Ottawa this year, arguing a mortgage insurance deductible would increase costs for borrowers and leave regional lenders at a competitiv­e disadvanta­ge.

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