Canada's Mortgage Insurance System Needs an Overhaul
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The US mortgage crisis of the early 2000’s has forced the Canadian government to take a closer look at their own mortgage insurance systems. A report released by a nonprofit think tank, the C.D. Howe Institute, calls for an overhaul before Canada hits its own mortgage market meltdown.
According to the report, more than half of the $1.2 trillion dollars in mortgage debt is backed by Canadian taxpayers through the Canada Mortgage and Housing Corporation (CMHA). The report states that soaring house prices have forced Canadians to mortgage with less than the 20 percent required to borrow without mortgage insurance.
“In an era of rising house prices and high mortgage debt, heightened concern over the potential exposure of Canada’s mortgage insurance system — and taxpayers — is merited,” says the report.
The report highlights that in the event of an economic downturn, increased unemployment and a housing market downturn, the taxpayer could potentially be on the hook for up to $9 billion in losses if homeowners are forced to default on their mortgages.
To protect taxpayers, C.D. Howe calls for higher mortgage insurance premiums, the privatization of the CMHA, and the establishment of a stand-alone fund to help defray the costs of defaulted mortgages. Not everyone is in agreement with all the recommendations, however.
Thorsten Koeppl and James MacGee, Economists and coauthors of the study, said they would stop short of privatizing the CMHA. As an alternative, they encourage the creation of a separate fund as a backstop for mortgage insurance reserve fund governed separately from CMHA.
“We don’t think that we’re on the edge of a housing crisis today,” said MacGee. “But what we take away from what happened to housing markets in [other] countries….is that we need to design a policy framework now so that if a crisis happens...we’re ready for it.”
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