Banks may be forced to carry some CMHC burden

Banks may be forced to carry some CMHC burden

Banks may be forced to carry some CMHC burden The CMHC is looking at a formula that would force banks to pay a deductible on mortgages insured by the crown corporation before claims are settled. The idea was briefly mentioned in the International Monetary Fund’s assessment of the Canadian housing market earlier this year and would enable the CMHC to move some of its financial burden on to the private sector; the banks are of course against the idea. The suggestion is that banks could take on risk of between 5 and 10 per cent of the value of the mortgage. Read the full story.
9 Comments
  • Ron Butler 2014-09-10 11:28:21 AM
    Couple of things, there is no "burden", CMHC is very profitable.

    It would change risk pricing and would automatically be a rate differentiator favoring balance sheet versus non-balance sheet lenders.

    It seems like backwards approach to increasing net revenue. Just increase premiums to raise more money. It is not as if the people who pay the premium pay the deductible so there is zero motivational economics here.
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  • Daniel McKay 2014-09-10 5:25:45 PM
    Fully agree that there is no "burden" associated with CMHC as their mortgage insurance component is very profitable. I'm not sure if this is the best way to do it, but I really like the idea of forcing the banks to have some skin in the game. This should hopefully force them to scrutinize and properly underwrite their deals submitted by their employees a bit more closely. I'd love for them to have to pay deductibles on insured mortgages and then lose that money and receive no compensation on the defaulted mortgages when CMHC discovers that they granted approval based on misrepresentation or fraud on the part of that bank or their employee(s). We've all had deals where we had to tell the client's they don't meet insurer guidelines or that they were declined by the insurer only to find out down the road that they somehow got an insured mortgage through a bank branch. I'm hoping that if implemented, this policy will help curb or at the very least cost the banks on those deals.
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  • Ron Butler 2014-09-10 6:00:38 PM
    Please be aware that lenders relentlessly mitigate their risks and they know how to price so they would simply build the future cost of projected deductible losses into their rates.

    In the end the entire borrowing public would end up funding the deductibles for those that defaulted through higher rate. Like every other government idea it seems to make sense and it appeals to the public: let the big banks suck up some deductible costs to teach them to be better underwriters but in the end that will never happen. The banks will build the cost into the rates and the good borrowers will end up paying for the defaulters.
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