Author urges thorough review of Canada's mortgage insurance system to ensure fairness and sustainability
OTTAWA, March 5, 2012 – As the debt crisis continues to reverberate in countries around the world, a new briefing paper released by the Macdonald-Laurier Institute recommends a thorough review of Canada's mortgage finance system.
Among other issues, the report's author, mortgage finance expert Professor Jane Londerville, raises concerns about the cost of mortgage insurance, used primarily by first-time homeowners who cannot afford to put the required 20 per cent down on a house. CMHC's boast of having sent the federal government $14 billion between 2001 and 2010 may well have come at the expense of buyers who have no choice but to pay the flat, upfront mortgage insurance fee.
"CMHC may be helping to fill government coffers through what is essentially a levy on young homebuyers," says Londerville. "I believe we need to take a close look at innovations in other jurisdictions to see if we can make mortgage insurance in Canada more affordable, while still preserving the security of our existing system."
The briefing paper also raises concerns about the government policy of providing a different level of insurance backing on mortgages provided by the Canada Mortgage and Housing Corporation (CMHC) versus private providers. The government provides 100 per cent backing on mortgages insured through CMHC, but only 90 per cent backing for mortgages insured through private mortgage insurance companies.
"We need to take a careful look at how we lend money for the purchase of homes in Canada," says Londerville. "We need to step back and look at the impact of policies implemented during the roar of the financial crisis, and how they are affecting Canadians and our financial stability. We have an excellent system envied around the world, but that doesn't mean it cannot be improved."
Since the onset of the financial crisis, banks have shown a strong preference for the 100 per cent guarantee provided by CMHC. This explains in part the ballooning of the liabilities on CMHC's books. Today, CMHC insures close to $600 billion worth of mortgages, almost double the $350 billion it did in 2007. By comparison, at least one of Canada's two private sector mortgage insurance providers had a decline in insurance written in 2009 during the financial crisis.
"Considering the skyrocketing demand for mortgage insurance, the rationale for the government's different treatment of private mortgage insurers and the CMHC is not clear," says Londerville. "We need to do a thorough review of both to see if there is any real disparity in the types of loans insured by these two groups."
The Londerville briefing paper echoes the sentiments of a December 2011 report by the International Monetary Fund that highlights the need to review the role of the CMHC and its growing insurance portfolio.
Londerville suggests the scope of the proposed review of mortgage insurance include the following:
- The criteria used to lend to homeowners;
- The oversight and regulation of the CMHC, with an eye to bringing it under the oversight of the Office of the Superintendent of Financial Institutions like the banks;
- Whether financial institutions should be allowed to secure default insurance from CMHC for mortgages with more than 20% down (i.e. the loan-to-value ratio of less than 80 per cent);
- If insured loans should be eligible for use as security in covered bonds;
- Whether the distinction of having 100 per cent government backing provided to CMHC and 90 per cent backing provided to private sector providers makes sense; and
- The current pricing structure of mortgage insurance, including an examination of more affordable fee structures in other jurisdictions.
Jane Londerville is an Associate Professor of Real Estate at the University of Guelph and the author of the 2010 study Mortgage Insurance in Canada: Basically Sound but Room for Improvement, published by the Macdonald-Laurier Institute.
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