The mandate of CMHC is to get smaller, but is this perhaps a move towards privatization?

The Canada Mortgage and Housing Corp.’s decision to cut back its mortgage default insurance coverage was likely directed by the department of finance as part of an ongoing plan to lighten the risk load at the Crown corporation, sources told the Financial Post.

“This is all coming from finance,” an industry source said, indicating that one of Ottawa’s goals is to offload a greater slice of mortgage insurance business on private insurers.  CMHC, which controls a majority of the market with just two other private players making up the rest, said a week ago it would get out of the business of insuring second homes and require self-employed Canadians to have third-party income validation.

Canadians with less than a 20% down payment on a house and borrowing from a federally regulated bank must get the insurance to cover their loan. CMHC’s insurance is 100% backstopped by the federal government while private insurers, Genworth Canada and Canada Guaranty are only 90% backed.

“The mandate of CMHC is to get smaller,” said the source, who noted the department of finance took tighter control of CMHC in 2012 when it put the agency under the direct supervision of Office of the Superintendent of Financial Institutions.

On Friday, Canada’s two private mortgage insurers said that they would not match the changes to their product line-ups as announced by CMHC.  Both Genworth and Canada Guarantee will, however, adjust their Second Home products by restricting eligible properties to one unit.

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