“…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.”
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.