“I believe that the ultimate proposal for lenders to take on the burden of more risk could ... have a far reaching impact; this is something that CMHC proposed a number of months ago, almost a year ago, and it does appear that it’s going to happen,” Dr. Sherry Cooper, chief economist with Dominion Lending Centres
, told MortgageBrokerNews.ca. “And it means the banks will probably have to cover 5-10% of the potential loss in their mortgage book.
“The risk of their mortgage book moves up, that means they have to hold more capital against their mortgage lending which makes the cost of capital more expensive and you better believe they’re going to try to pass that off to the consumer.”
In addition to its recent changes to mortgage insurance rules, the Department announced a consultation process that could lead to lender risk sharing. As it stands, banks don’t have any skin in the game.
“Today, the Government announced that it would launch a public consultation process this fall to seek information and feedback on how modifying the distribution of risk in the housing finance framework by introducing a modest level of lender risk sharing for government-backed insured mortgages could enhance the current system,” the Department of Finance said in its technical briefing of the changes. “Canada’s system of 100 per cent government-backed mortgage default insurance is unique compared to approaches in other countries.
“A lender risk sharing policy would aim to rebalance risk in the housing finance system so that lenders retain a meaningful, but manageable, level of exposure to mortgage default risk.”
The Globe and Mail reported Thursday that while banks have claimed publicly there is no need for risk sharing, bank executives have privately expressed support for the potential measure.
“Philosophically, people aren’t all that fussed,” one executive told the Globe.
It may be the most overlooked aspect of the Ministry of Finance’s most recent rule change announcement, but one economist who expects banks will soon shoulder more mortgage risk believes it will have a major impact on consumers.