Canada’s banking industry association has criticized a federal Liberal proposal that would see them take on more of the risk involved in lending out mortgages.
The Canadian Bankers Association (CBA) said in a submission to the Department of Finance that the proposal would “undermine” access to mortgages for Canadians, by increasing mortgage rates, reducing competition and excluding some people from getting mortgages at all.
Buildings in Toronto's financial district. Visible are the headquarters of CIBC, Royal Bank of Canada and TD Canada Trust. (Photo: Peter Mintz/Design Pics via Getty Images)
The proposal would see mortgage lenders pay a deductible on their insurance when a mortgage defaults. Currently, mortgage insurance covers the full cost of a defaulted mortgage.
That arrangement has some critics worried about “moral hazard”: Since someone else pays when things go wrong, the banks have little incentive to make sure that their insured mortgages have been lent out responsibly.
Many organizations, including the IMF, have suggested that the government phase out or privatize the Canada Mortgage and Housing Corp., the country’s government-run mortgage insurer, in order to reduce risk in the housing market.
Finance Minister Bill Morneau's department is weighing a proposal to make banks pay a deductible on their insurance when a mortgage defaults. (Phot" Reuters/Chris Helgren)
But the CBA’s report argues, in essence, that if it ain’t broke, don’t fix it.
“Canada’s housing finance system has demonstrated considerable resilience and stability over time,” the report said, referring to the fact that Canada avoided the U.S.’s housing crash last decade.
“The historical success of Canada’s system creates a strong presumption in favour of existing arrangements.”
The report argues that forcing the banks to take on more of the risk of insured mortgages would make it riskier for lenders, which means they would demand higher mortgage rates.
Additionally, it would mean some regional and smaller lenders, who depend more on insured mortgages, would stop lending, reducing competition.
“The impact would be particularly acute for first-time homebuyers,” the report stated.
Canadians now have the highest household debt burden among the major G7 economies, largely due to growth in mortgage lending. (Chart: Parliamentary Budget Office)
Though Canada’s banks have been lauded in recent years for being well-run and well-capitalized, many organizations have less positive things to say about Canadians’ household debt, which has been driven by rising mortgages and is now the highest in the G7, at 166 per cent of disposable income.
The Parliamentary Budget Office warned last year that Canadians risk a debt crisis by 2020 if interest rates were to rise.
The CBA argued in its report that lenders vigorously stress-test their mortgage portfolios to ensure borrowers can still afford their mortgages should mortgage rates go up.