Brokers split on CMHC proposal

by |
Broker opinion is split -- following news that CMHC is considering banks to pay a deductible before mortgage claims are paid out – with some believing the move will lead to more careful underwriting and others thinking it could result in higher fees for clients.

“This should hopefully force them to scrutinize and properly underwrite their deals submitted by their employees a bit more closely,” Daniel McKay of Alberta Mortgage Centre wrote on “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).”

According to Financial Post Sources, OSFI and CMHC are in discussions about the potential policy change, though the Canadian Bankers Association, unsurprisingly, opposes the move.

And while most responsible underwriting may be one result, some brokers – who believe the banks will pass the extra cost onto the borrower -- aren’t so optimistic.

“In the end the entire borrowing public would end up funding the deductibles for those that defaulted through higher rate,” Ron Butler of Verico Butler Mortgage said. “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.”
  • Carmen Muscat on 2014-09-12 12:08:29 PM

    Instead of imposing a deductible, the Government should investigate the Bank when the mortgage is defaulted and then impose a deductible.
    This will make the banks more cautious and diligent in their lending.
    This hopefully will not effect the borrowing public.
    The banks make enough money on the public and should be legislated not to pass on the deductible to the consumer.

  • Andre Asselin on 2014-09-12 1:13:08 PM

    Why are people so aggressive/negative towards banks regarding their underwriting practices. Their default rate is one of the lowest in the world - standing at less than 1/3 of 1%. I think people have looked at what goes on in the USA and extrapolated that the behaviour of canadian banks is the same.

  • Victor Simone on 2014-09-13 8:36:25 AM

    @ M. Asselin,
    I feel the sentiments for this deductible, is more about the exceptions made by the banks at their branch, and specialist levels. These advantages the banks are enjoying has created two levels of underwriting 1. For the independents that have tougher conditions like NOAs 2. The huge banks that get the same approvals insured without NOAs.

    If we could all be on the same playing field at the insurers, it would help the independent channel for sure. This deductible seems like a good thing, imo.

    The banks have good lending practices, but the deductible is a standard feature in most every type of insurance plan. Moreover, this deductible may just help level the underwriting playing field by not paying claims to banks that don't properly underwrite the risk.

  • Angela Wong-Liao - Invis Inc on 2014-09-14 12:12:38 PM

    I am not sure that this deductible will not pass on to the consumers as banking is a business and one of the mandate for business is 'profit'. I am concerned about further tightening of the bank's underwriting, especially towards high ratio mortgage as most first time home buyers are high ratio mortgage clients.

  • Ron Butler on 2014-09-15 10:35:36 AM

    I think what many are missing is the fact that deductibles work when they are an economic motivator to have the insured think twice about making a claim or at least have the insured participate in the cost of the claim. In this case the mortgage defaulter is in the process of losing their home and the deductible will likely occur AFTER the mortgagor is out of the house and likely their economic interest in the issue has ceased. The lender who is now responsible for the deductible looks at this as an expense and spreads it out over their entire book of business.

    The idea that some lenders are radically less careful underwriters that others and this deductible will motivate them to be more diligent seems completely wrong to me. If you look at the stats that the mortgage insurers provide us; by far and away the largest contributor to default is loss of employment that occurs AFTER the underwriting and funding of the mortgage, in other words; an unforeseen event. That is why all the large lenders have almost identical default rates, they are all equally careful underwriters experiencing almost exactly the same number of unforeseen events. This is not supposition I am making: the insurer's studies are clear on this. Therefore the cost of the introduction of deductibles will simply be spread over the lender's entire book causing the non-defaulting public to pay for the defaults.

  • Andre Asselin on 2014-09-15 11:05:34 AM

    I agree with Ron Butler's comments. The idea of the deductible works when it is seen as a way to reduce "moral hazard". But as Mr. Butler, the borrower, who pays for the insurance, is not the beneficiary and will only gain enhanced access through insurance. If one looks at the American private or public mortgage default insurance schemes, there is no deductible - the insurance pays first, then the lender if the losses are very large i.e. there is a limit to the amount of coverage in the event of default. So a deductible would simply increase the "loss given default" assumptions made by lenders as they calculate their capital requirements. In the end, this would force them to differentiate between the interest/fees charged to insured borrowers based on other factors than LTV and other policy limits (for instance in addition to LTV, there is a minimum Beacon Score requirement, and maximum GDS/TDS ratios). I am not sure that Canadians are prepared for this "can of worms". To begin with, Canadians and public policy makers should first ask themselves "is there a problem here?". Do we have a sub-prime lending problem? (don't think so), Do we have an arrears/default problem ? (don't think so). Are banks over leveraged ? (don't think so - if they are, we should change the leverage ratio required by OSFI). When one reads the IMF study that gave rise to this idea of a deductible, one doesn't find a statement of the problem...but finds this potential idea as a recommendation. Perhaps the IMF could tell us where the idea of a deductible has been used successfully in the specialized field of mortgage default insurance.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions