BoC Governor addresses mortgage insurance exposure

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Brokers have already suggested it and now the deputy governor of the Bank of Canada, Lawrence Schembri, has suggested the creation of a “private-label mortgage securitization market.” 

“A deep liquid market of this type has not existed in Canada. One had existed in the United States, but collapsed during the crisis and has not recovered,” Schembri wrote in a recent article. “The expectation is that, as the government reduces the supply of guaranteed securitization instruments, a private market will develop, but this is an open question. Other measures may be necessary to promote this development.”

The article, entitled “Housing Finance in Canada: Looking Back to Move Forward,” which was obtained by MortgageBrokerNews.ca by request, addresses some of the exposures currently facing the housing market in Canada, as well as potential security measures that can be implemented to mitigate and share risk.

“Plans are currently under way … to enhance the system by considering reforms that will rebalance the government’s exposure to the housing sector, increase market discipline in the demand and supply of mortgage insurance, and maintain competition in the mortgage market,” Schembri wrote.

The purpose of these plans is to strike a better balance of risk among both the private and public sectors.

Along with the proposed risk sharing, Schembri mentions the need for smaller lending institutions to have access to appropriate funding so that they can properly compete with the larger banks.

“In the years ahead, the government and other federal agencies, including CMHC, will be working on these questions to adjust the housing finance framework in Canada in a manner that enhances it further and puts it on a sustainable track with a better balance of risk sharing within the system,” Schembri wrote.
  • Warren Ross on 2014-11-07 2:25:15 PM

    This guy is suggesting to move mortgage and housing risk from the government to the private sector. However, when the s**t hits the fan, and no one in the private sector is willing to buy or insure secured loans, it'll be up to the government to bail us out, and the cost will be way greater than under our current government regulated system. If the government is concerned about risk in markets like Vancouver and Toronto, they should come up with regional policy's to deal with those areas. Keep the system the way it is.

  • Rob Chandler on 2014-11-07 2:56:32 PM

    Reading between the lines - 1. let's adopt something that didn't work in the US; 2. let's provide no government of Canada guarantee and hope to attract current buyers of CMB and NHA-MBS; and 3. let's take away current funding sources for smaller institutions and provide this more expensive and unspecified source for them.

    Wouldn't it be simpler for the mortgage default insurers to charge a premium that corresponded to the economic risk inherent in this business? I guess Canada Guaranty and Genworth already think they do.

  • Janice Ashworth on 2014-11-07 3:07:25 PM

    I can not even make a educated comment without knowing at minimum - what were the stats from the last recession. Did many insured mortgages go into foreclosure? Did the insurers lose money during that time? Was it because of more lax underwriting guidelines at the time? Did the no down mortgages, BFS stated, and 5% rental purchase products offered at that time make an impact on those stats? How can we guess at what should be done now when we have no idea what happened in the past? I strongly feel that CMHC and the other insurers should release this data. What "sensitive information" excuses them from providing this? Are they just making too much money? Janice Ashworth - Jencor Mortgage

  • Janice Ashworth on 2014-11-07 3:07:26 PM

    I can not even make a educated comment without knowing at minimum - what were the stats from the last recession. Did many insured mortgages go into foreclosure? Did the insurers lose money during that time? Was it because of more lax underwriting guidelines at the time? Did the no down mortgages, BFS stated, and 5% rental purchase products offered at that time make an impact on those stats? How can we guess at what should be done now when we have no idea what happened in the past? I strongly feel that CMHC and the other insurers should release this data. What "sensitive information" excuses them from providing this? Are they just making too much money? Janice Ashworth - Jencor Mortgage

  • JSydneyH on 2014-11-07 3:15:28 PM

    The issue around government exposure to the housing market was caused by this very same government asking CMHC to bring more revenue to the table i.e. non-tax revenue, and when they did - by selling more insurance to the banks in bulk - they exposed the government to the housing market.

    The number of mortgages with less than 20% doesn't appear to have changed much over the past 25 years on a percentage basis, so we aren't really exposed to more risk in the key area CMHC was designed to address

    Not sure if I missed anything here, but it looks like the double edge sword coming back to get us.

  • Versico on 2014-11-08 1:22:14 PM

    CMHC was not established as a profit centre with a billion a year. It was created to help with home ownership. Originally if one was fortunate to have a CMHC insured loan your mortgage rate was discounted off the market rate. The crown corporation morphed into an insurance business with little regard paid to risk and its consequences.
    As for the comment on there not being enough data or information to make an informed decision there is in fact data and history behind past missteps.

  • tom adamson on 2014-11-10 8:48:41 AM

    I touched on this issue some 6 months back. Securitized mortgage product (in my opinion) is commercial trade and CMHC has/had/should never have been in this market.
    I am not slamming the securitized marketplace, there are many a great institution that got there start and still today provide excellent product to this industry.
    Think about it for 10 seconds. A private company bundles a billion dollar mortgage portfolio. Why, to make money. They go the market and find out they cannot get the premium (discount) they expected because to much of its portfolio is over exposed. The next product they bundle becomes insured, why, to make the money they were expecting. No one does this without financial reward.
    Surprise surprise 20 years later we have a problem. Why? Profit taking leaves the marketplace to thin and I agree with the deputy Governor. CMHC should not, never should have been, and does not belong in this commercial part of trade that this industry has grown to become.

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