Mortgage Insurance in Canada: Make it more competitive

The Macdonald-Laurier Institute (MLI) today released “Mortgage Insurance in Canada: Basically sound but room for improvement”, a paper by University of Guelph Associate Professor of Marketing and Consumer Studies Jane Londerville. The study highlights an important flaw in this country’s otherwise solid system of mortgage insurance and explains how to fix it. A flaw that harms home buyers by tilting the playing field unfairly and inefficiently in favour of the publicly-owned Canada Mortgage and Housing Corporation (CMHC).

Learn how more competition can be brought to Canada’s mortgage insurance sector…read the key recommendations of the Londerville paper and review the whole paper.


EXECUTIVE SUMMARY (version française)

Canada’s mortgage insurance system gives our housing market a solid foundation. Home buyers who cannot make a 20 percent down payment are required to insure their mortgages against default and government, in turn, guarantees against a default on that insurance. This system encourages sound loans while protecting lenders, borrowers and the entire financial system from unreasonable risk.

It served us admirably in the recent financial crisis. But it has one important failing: it denies consumers benefits from full competition by giving the public Canada Mortgage and Housing Corporation (CMHC) an unfair advantage over private firms.

As a public entity, CHMC mortgage insurance policies are 100 percent guaranteed by the federal government. But the government has chosen to give private mortgage insurance firm policies only a 90 percent guarantee.

That means banks whose customers insure through a private firm must set aside some capital reserves against the remote possibility of default by the insurer, but not if they use the CMHC. Thus, rates of return are higher on CHMC-backed mortgages. And when profit margins are thin and banks are nervous about their capital reserves, as in the financial crisis beginning in 2008, it makes a major and harmful difference.

The policy contradicts the 2006 federal budget which sought to encourage greater competition within the MI sector. The decision to allow private competitors to the CMHC, beginning in the 1960s, has been fully justified by innovations in lending practices and reductions in mortgage insurance rates that have taken place especially since Genworth Financial Canada, the other major player, entered the market in 1995.

The failure of other firms to gain or maintain a foothold, and the sharp drop in Genworth’s business after 2008, indicate that the unfair guarantee differential edge given to the CMHC is depriving consumers of the benefits of competition and discouraging new private insurers from entering the market.

The most plausible argument in favour of its special treatment is that the CMHC pursues other important social or environmental goals through its mortgage insurance business. But a so-called “cross-subsidy” of social objectives from the commercial operations of a public entity is the wrong way to pursue such goals. It deprives home buyers of the benefits of competition, it obscures accountability and it is unfair.

The key component of Canada’s solid mortgage insurance system is the requirement that high loan-to-value mortgages be insured with significant government backing. The system can be improved by pursuing the move to a fully competitive model, wherein a CMHC MI spin-off competes on a level playing field under continued strong regulatory control of lending criteria. Removing the punitive differential in the guarantee rate would be a major step in creating a more homebuyer-friendly marketplace.

  • New paper argues first-time homebuyers may be subsidizing Ottawa’s bottom line March 5, 2012

    Author urges thorough review of Canada’s mortgage insurance system to ensure fairness and sustainability MEDIA RELEASE OTTAWA, March 5, 2012 – As the debt crisis continues to reverberate in countries around the world, a new briefing paper rel...

  • MLI author Ian Lee in the Ottawa Citizen: Tame the CMHC Godzilla July 20, 2011

    On July 19, 2011, the Ottawa Citizen published an article by MLI author Ian Lee who discusses a number of important reasons to modernize the Canada Mortgage and Housing Corporation (CMHC) in Canada. In the article, he cites MLI's paper on mortgage i...

  • MLI's Mortgage Paper Makes Waves February 3, 2011

    In November, MLI published Mortgage Insurance in Canada by University of Guelph Associate Professor Jane Londerville. Almost three months later, even as other think tanks enter the debate, the paper continues to make waves across Canada's mortgage insu...

  • Jane Londerville on recent mortgage criteria changes January 21, 2011

    The federal government has, for the second time in months, again tightened the lending requirements for insured mortgages by reducing the amortization period from 35 to 30 years, reducing the limit for refinancing to 85% and dropping the ability to ins...

  • L'assurance hypothécaire au Canada November 18, 2010

    Le système canadien d’assurance hypothécaire procure de robustes fondations au marché immobilier. Les acheteurs qui ne peuvent se permettre une mise de fonds initiale de 20 % du prix total de la maison doivent assurer leur hypothèque contre l...

  • Mortgage Insurance in Canada November 18, 2010

    The Macdonald-Laurier Institute (MLI) today released “Mortgage Insurance in Canada: Basically sound but room for improvement”, a paper by University of Guelph Associate Professor of Marketing and Consumer Studies Jane Londerville. The study hig...

View the complete list.

Related posts:

  1. Mortgage Insurance in Canada The Macdonald-Laurier Institute (MLI) today released “Mortgage Insurance in Canada: Basically sound but room for...
  2. MLI Author Jane Londerville presented paper on mortgage insurance at third meeting of the Standing Committee on Finance for Bill C-3 On Monday June 20, 2011, MLI author Dr. Jane Londerville was asked to be a...
  3. Straight Talk with Jane Londerville: Government bias in favour of CMHC hurting house-buyers MEDIA RELEASE OTTAWA, June 4, 2012 – Homebuyers who need mortgage insurance are best served...
  4. Jane Londerville on recent mortgage criteria changes The federal government has, for the second time in months, again tightened the lending requirements...
  5. MLI’s Mortgage Paper Makes Waves In November, MLI published Mortgage Insurance in Canada by University of Guelph Associate Professor Jane...

Please note that the link above was live when posted. Older links may no longer be functional.