Government should reduce taxpayers’ exposure to mortgage insurance

Entitled “What Government’s Should Do In Mortgage Markets” the report says the government’s role in mortgage markets, through the Canada Mortgage and Housing Corporation (CMHC) may “encourage excessive lending risks in the consumer marketplace, potentially creating unmanageably large risks in financial markets.”

According to the report’s author, Finn Poschmann, vice president of research at the institute, CMHC’s mortgage insurance book now backstops mortgage lending equivalent to more than 30% of gross domestic product. While the net exposure is less than this, the arrangement subjects Canadian taxpayers to large, ill-defined risks.

“There is no reason for federal taxpayers to be exposed to large mortgage insurance liabilities,” says Poschmann. “On the other hand, private insurers are able to manage such exposures, provided that they are adequately capitalized, prudently managed and regulated, and able to access liquid financial markets. Private insurers currently compete on the margins of the mortgage insurance business, which is dominated by CMHC.”

The report recommends:

* That federal policy should limit public exposure to mortgage lending risks, by winding back
* CMHC’s role in the provision of mortgage insurance, and allow private providers to take on a larger role. The agency’s capital and staff would be well employed in reinsurance and securitization functions that backed private market insurers.
* Independent of whether Ottawa pursues the first recommendation, Parliament should adopt legislation that formally requires CMHC to comply with, and report on, compliance with OSFI guidelines, so that market participants compete on level footing.
* Finally, Parliament should adopt legislation that would support covered bond issuance by domestic financial institutions and clarify creditor arrangements in the event of the bankruptcy of a federally regulated deposit-taking institution. Such legislation would allow those institutions to more readily compete for low-cost capital in the international bond market and better serve the domestic mortgage lending market.

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