OTTAWA, June 4, 2012 – Homebuyers who need mortgage insurance are best served when there is competition for their business. To maximize such competition there needs to be a level playing field for mortgages insured by private companies and those backed by the federal Canada Mortgage and Housing Corporation (CMHC), argues mortgage finance expert Jane Londerville in the latest installment of the Macdonald-Laurier Institute's Straight Talk series.
Londerville, an associate professor of real estate at the University of Guelph, says there is a "government-based distortion" in rules between the private firms and the CMHC. That is, the government guarantees 90 per cent of the mortgages insured by private companies, but 100 per cent of mortgages insured by the CMHC.
"The result is simply not a level playing field," says Londerville. "Either all participants should be at 100-per-cent guarantee, or zero guarantee, or something in between."
During the financial crisis, she notes, CMHC continued to write mortgage insurance while there was a drop-off in what banks sent to the leading private insurer, Genworth Financial Canada. "This is because banks were so tight on capital that the extra capital reserves they had to hold to cover even that 10-per-cent guarantee gap made a substantial difference to them."
Londerville says such a change would allow for more competition in the mortgage insurance business, what is 70-per-cent held by the CHMC.
Londerville is also critical of banks' lending criteria, which average in the range of 42 per cent of gross income, including mortgage, credit cards and other personal debt. She notes that after-tax income is a far better measure of ability to pay than pre-tax income.
Further, banks fail to recognize that higher income earners are able to carry higher debt ratios.
"If you are making $200,000, then 42 per cent numbers are probably not a problem, but if you are making $60,000 . . . those numbers are pretty scary."
She calls for mandatory education for first-time home buyers, in which those requiring mortgage insurance (usually first time buyers) would be required to complete a simple education program to qualify for a mortgage. The course would cover all costs that come with home ownership, including insurance, maintenance, property taxes, land transfer taxes and other associated costs.
Jane Londerville is an Associate Professor of Real Estate at the University of Guelph.
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