Canada’s financial industry is urging the federal government to consider alternatives to proposals that could require them to take on a greater share of mortgage defaults through a deductible – calling it one of the biggest shakeups to hit housing finance in 50 years.
“This submission has questioned whether a deductible is the most effective way to rebalance risks within the housing finance system,” the Canadian Bankers Association said in a report on Tuesday. “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.”
Policy alternatives could include allowing mortgage insurers to buy reinsurance, and increasing Canada’s covered bond limit to boost private funding of uninsured mortgages and reduce taxpayer support for mortgage financing, the association said. Covered bond insurance in Canada is capped at 4 percent of bank assets, which is lower than in most advanced economies, the group said.
Prime Minister Justin Trudeau’s government is holding public consultations on proposed policies since the finance department in October outlined two ways lenders could shoulder more risk in the country’s insured mortgage market. In a “first loss” approach, lenders would be responsible for a fixed portion of an outstanding loan at the time of default. Under a “proportionate-loss” scenario, banks would pay a percentage of the total loan loss.
“If the federal government decided to proceed with the deductible policy, the banking industry would be interested in providing feedback on these two approaches,” the CBA said in it submission.
The government has been trying to tamp down on runaway prices in Canada’s two most expensive housing markets, Toronto and Vancouver, while limiting taxpayer exposure. Average home prices in Toronto jumped more than 20 percent in January from the prior year, the fifth straight months of gains. Meanwhile, several national and international agencies and groups, from the International Monetary Fund to municipalities, have flagged that home-price growth has decoupled from economic fundamentals like job and wage increases.
Finance Minister Bill Morneau announced in October that he would tighten access to mortgage insurance for banks, while considering options for banks to have more skin in the game.
“The government should wait for a reasonable period of time to gauge the market’s reaction” to recent changes, the Trust Companies Association of Canada said in their own statement. The proposed risk-sharing approach could “disrupt the market” and the costs will outweigh any benefit, according to the submission. The association represents 21 companies including Equitable Group Inc. and Home Capital Group Inc.
The Candian Bankers Association works on behalf of 61 domestic banks, foreign bank subsidiaries and branches in the country including Royal Bank of Canada and Toronto-Dominion Bank.
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