Financial industry pushing back against disruptive mortgage default proposal

February 28th, 2017  |  Canadian Business

As Canada continues to search for ways to best combat housing market irregularities across the country—most notably in the urban centres of Toronto and Vancouver—its financial industry is pushing back against at least one of the proposed changes.

The Canadian Bankers Association (CBA) has formally spoken out against a proposal from Bill Morneau's Finance Department that calls for banks to take on a greater share of mortgage defaults through a deductible. It would be given the designation of a "proportionate-loss" scenario, where banks pay a certain percentage of that initial loan loss.

The CBA prepared a report outlining its position on the matter.

"This submission has questioned whether a deductible is the most effective way to rebalance risks within the housing finance system," read a section of the report. "The industry believes that policy alternatives should be considered to achieve the same ends, but are simpler and less disruptive to the existing lending structure."

Some of those potential alternatives have already been discussed. One would be to have mortgage insurers buy reinsurance, which shifts the main burden of repayment to another insurer in the event of a default. Another would be to increase Canada's covered bond limit, a move that would raise private funding of uninsured mortgages while also reducing taxpayer support for mortgage financing.