Mortgage insurance reform proposed

by |
The C.D. Howe Institute released a comprehensive study on the effect mortgage default insurance would have on the economy in the event of a housing downturn, and provided guidelines for ensuring losses would be minimized.
“…while the architecture is sound, there is still scope for strengthening,” Thorsten Koeppl and Jame MacGee of the C.D. Howe Institute wrote in a study, released Wednesday. “Our recommendations focus on better aligning the structure, pricing and oversight of the government-supported mortgage insurance backstop with the objective of mitigating the likelihood and damage from housing crises.”
In the report -- entitled Mortgage Insurance as a Macroprudential Tool: Dealing with the Risk of a Housing Market Crash in Canada -- the pair put forth a number of recommendations, including implementing a “backstop fund” that accumulates reserves in preparation for a potential housing crash. That fund would only be available for the residential ownership market.
They believe this would help alleviate the pressures placed on the economy in the event of a housing downturn.
“Our analysis indicates that a low-probability severe housing crash could result in roughly $17 billion of losses for mortgage insurers,” Koeppl and MacGee wrote. “Although mortgage insurers’ reserves currently exceed the minimum required, these losses would leave the federal government with a bill of up to $9 billion to recapitalize mortgage insurers.”
However, the proposed fee would be paid by mortgage holders, which would mean an increase to premiums. This, of course, could slow down the market and negatively impact broker business.
“One practical solution to the tail-risk problem is to mandate participation in government-sponsored backstop fund that charges all mortgage insurers a fee to guarantee policies,” they wrote.
The pair also addressed the future of the CMHC, which they admit they don’t quite have an answer for – but that it could include privatization.
“One question that our analysis does not answer is the future role of the CMHC. On the one hand, the mortgage insurance architecture we outline does not rely on a continued CMHC role in underwriting mortgage insurance,” they wrote. “This leaves spinning off the mortgage insurance group as a separate (potentially privatized) entity as a plausible option that could potentially encourage competition.”
  • Dustan Woodhouse on 2015-07-09 10:57:04 AM

    Perhaps I am misinformed, but I believe that CMHC coffers have been raided by the Fed to the tune of at least 15 Billion already, if so then returning 9B$ of (premiums collected) would hardly be offside.

    It also seems to me that if the risk of a crash in a 1.2 Trillion $ mortgage market results in the Fed only having to write a cheque for 9B$ (again with funded specifically collected by CMHC in the first place) then the system is well prepared for whatever may come.

    Albeit in my own estimation an incredibly small chance that what comes will be any sort of crash at all.

    More likely a prolonged flat market, at some point. Not the hyperbolic drop so many have been claiming we are due for since the dawn of time.

  • Andre Asselin on 2015-07-09 8:01:36 PM

    Please download the report and go to Page 25 to see the calculation prepared by the authors of this study.

    According to the authors, CMHC and Genworth together hold $19.2 Billion as "starting capital".This is actually more funds than the $17 billion required to cover the catastrophic scenario computed by the C.D. Howe authors. The authors further show that, after all losses are paid without Government aid, CMHC would still have $4 billion of capital left to continue operating. Then the authors compute how much capital would be required to bring both CMHC and Genworth to the holding 175% of the Minimum Capital...and conclude that these insurers would be short about $8 billion to return to that 175% Minimum Capital state they had before the crisis.

    In other words, these authors show that mortgage insurance funds would save our financial system from incurring a $17 billion hit without costing taxpayers a penny...and all the article finds to say is that the mortgage insures would be $8 billion short to achieve a normal capital ratio - AFTER THE CRISIS.

    Note the authors themselves acknowledge that, after being hit by the crisis, and after having disbursed the $17 billion (which the authors also acknowledge would be a severe scenario), that the policy-makers would probably give the mortgage insurers a transition period to rebuild their capital near what it was before the crisis.

    Mortgage insurance is there to protect the financial system against a catastrophic risk. The report shows it can actually do that currently and spare Canadians taxpayers from incurring losses. That is what the article should celebrate. Imagine if there was no mortgage insurance instead, and Canadians Banks were to be hit with a $17 billion you think...may be..that taxpayers would be asked to cover some losses in that instance.

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