Banks taking on more default risk: Not exactly a home run

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CMHC is still considering requiring mortgage lenders to pay a deductible on mortgage insurance claims but that plan may, in fact, harm clients according to one broker.

“It sounds like something banks would then work into the (mortgage) cost to a client,” Nick Bachusky, a broker with Verico The Mortgage Advisors, told MortgageBrokerNews.ca. “You have to see the stats as to why and how they would come to this decision; I’d like to see why it would be beneficial to clients.”

During a speech at the C.D. Howe Institute Roundtable Luncheon in Calgary earlier this week, Siddal said the Crown Corporation has not shelved a potential plan to require lenders to pay a ductable on mortgage insurance claims, according to the Canadian Press. It's a proposal that was first put forth by the Conservative government.

“We are working with our colleagues at the Department of Finance, the Bank of Canada and OSFI to explore ways to distribute risks more effectively across the financial system while maintaining Government support for housing finance,” Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation, said at the luncheon, according to his speaking notes.

The Canadian Bankers Association sent a letter to CMHC last summer, warning that forcing banks to take on more risk associated with home loans could lead to financial instability.

 The letter was obtained by The Canadian Press through an access-to-information request.

“As the CMHC explores options to reduce the federal government’s exposure to the housing market, we would like to ensure that any changes made to the housing finance system are done so with a complete understanding of their implications on the housing and mortgage markets,” the association said in a letter, dated Aug. 6, 2014.

And while the potential plan may encourage more prudent lending and help better safeguard the housing industry, Bachusky argues homebuyers could be negatively impacted.

“Who is this really going to benefit? I’m not sold,” Bachusky said. “It could cost more to Canadians if the lenders work it into mortgage costs.

“If it impacts (banker heads’) bonuses at the end of the year, they won’t take this lying down.”
  • Rob Chandler on 2016-03-16 9:12:40 AM

    The real issue here is the consequence on Canadian borrowers not living in major urban centres. Banks and other lenders will likely deal with the additional risk by foregoing lending in rural areas and lower income areas of the country - the places where mortgage defaults are highest and mostly costly to the insurance providers (CMHC). So what CMHC would achieve with such a policy would be to bias the affordability of home ownership to those living in major urban areas at the expense of other Canadians that do not. I don't think the federal government wants to take on a policy that would bifurcate the Canadian population in such a manner.

  • Guy on 2016-03-16 9:33:01 AM

    If this applies to bank deals, it might be a good thing for mortgage brokers. I get so tired of hearing Banks bending the rules on credit score and TDS to push files through when we brokers can't get them done with the very same institution making us look incompetent. This will make them think twice about filing quotas to make their balance sheet look good and bury all the defaults in their huge mortgage portfolio.

  • Trudy on 2016-03-16 10:22:44 AM

    Interesting, isn't this why clients pay insurance premiums to CMHC?

  • IMHO on 2016-03-17 7:30:02 AM

    This would end up affecting the monolines more than the banks as in many cases the banks have bent the rules to approve outside of the CMHC box anyway, so don't make a claim on a lot of defaults.

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