Lending may dampen

Proposal to have lenders shoulder more risk

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.