CMHC Wants Financial Institutions to Share Mortgage Risk
The Canadian Housing and Mortgage Corporation (CHMC) may soon be asking banks to bear more risk with insuring mortgages, says Canadian author and portfolio manager Hilliard MacBeth.
Currently, the CMHC offers insurance on mortgages where the borrower makes less than a 20 per cent down payment on a property.
This extra layer of protection makes offering mortgages very attractive to lenders but without that backstop, it may mean financial institutions are less willing to offer favourable rates on home loans.
MacBeth states that getting banks to assume more responsibility may be putting Canada’s housing market in an even more vulnerable position than it was before.
“There is no other market in the world where the government, and therefore the taxpayer, takes the full hit on the first 25 percent of the losses. It’s an amazing situation,” he said.
CMHC released the results of their latest stress test on Tuesday, outlining the worst case scenario that could face the housing market. In their test case, prices plunged 30 per cent due to a 5 per cent increase in unemployment rates.
Given their parameters, they predicted that insurance claims would be eight times higher than they are now. The agency anticipated this would cost them $13 billion in five years, leaving them to run a $2.8 billion deficit.
Evan Siddall, president and CEO of CMHC, said that releasing the stress test results were the “next step in our transparency”. It was their intention to show the disproportionate amount of risk that the agency assumes.
“These losses are [to be] fully borne by us, with no losses taken by the banks and lenders that originated the loans,” said Siddall in a speech to a Bay Street audience on Tuesday.
“[We] are exploring ways to share these risks (and profits and losses) more equitably in the financial system,” he reported.
The crown corporation insured 54 per cent of the mortgages last year, coming to 175,169 new home loans valued at $41.7 billion.
“Without that CMHC subsidy, the banks might find it impossible to offer the amount of financing and mortgages that they do now. That could really hurt the housing market,” said MacBeth.
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