Canada's Condominium Magazine
The government of Canada’s role in housing is clear: it’s to promote housing affordability and choice, to facilitate access to financing for home buyers, and to keep the housing sector strong. This is all laid out in the National Housing Act. In support of these objectives, the government extends low-cost funding to mortgage lenders. At present, mortgage insurance backed by the government covers 100 per cent of lender claims for mortgages that default. The government has been exploring ways to reduce that 100 per cent guarantee and spread some of the risk to the lenders. One way it has proposed is through some form of deductible scheme.
The lenders, mainly the big banks, do not think this a good idea. In their submission to the Department of Finance standing committee, the Canadian Bankers Association argues that forcing lenders to assume more risk through some sort of deductible formula would be counter to the intentions of the National Housing Act. This is because the banks would be compelled to pass along their increased costs to consumers through higher, more risk-based pricing, and this would keep a lot of mainly first-time homebuyers out of the market. It would be especially difficult for Canadians in poorer economic regions where unemployment is higher, the banks argue.
Besides, there really is no need for this move, in their view. The banks say that they are already doing everything necessary to avoid mortgage defaults. Why add a bothersome deductible to the banks’ burden when they already take such a “prudent” approach to their mortgage lending? With about $1 trillion in insured and uninsured mortgages, the banks have “strong incentive and interest” in ensuring that the mortgage market remains healthy. No need for the government to worry. The industry, says the submission, believes some other way should be found, one that achieves the same ends but continues to meet the objectives of the National Housing Act.
The question is not whether lenders should undertake a deductible. The real question is whether the benefits of a deductible to the housing finance system and overall economy outweigh its costs (including reduced access to and/or higher cost credit). The introduction of a deductible would represent a significant structural change to the current housing finance system that would be difficult to reverse. A deductible would add complexity and uncertainty to a system that has hitherto functioned simply and efficiently, and benefitted Canadians both socially and economically.
This is a view that is enthusiastically shared, not surprisingly, by that other pillar of the mortgage industry, the brokers. The group that represents them, Mortgage Professionals of Canada (MPC), was in Ottawa today arguing more or less the same point. They are very concerned that the proposed risk-sharing model for lenders to share in losses of insured mortgage claims will result in higher mortgage costs that are out of reach for many Canadians.
Combined with other restrictions, which include higher mortgage insurance premiums that take effect on March 17, the risk-sharing will have a negative economic impact on housing in Canada. “We believe moving ahead with a risk sharing provision would be additional burden on the market and will further the divide between rural and urban Canada,” the group said in a statement. Higher interest rates and reduced purchasing power will only undermine support for the middle class and home ownership, contrary to the government’s election campaign promise to keep home ownership within reach for more Canadians.
Canadians are already paying thousands more over their mortgage term in interest payments and many first-time homebuyers are unable to qualify for a mortgage. This is hurting Canadian consumers and slowing the Canadian economy. This is why we are calling for some common-sense adjustments to the new rules that will help soften the impact of these changes on middle class Canadians. We are also asking the government to refrain from any further changes to the housing market for at least eighteen months.
The changes that have been implemented so far, including the introduction of the stress test to qualify new mortgage borrowers, have not done much to cool the real estate markets in Toronto and Vancouver, though they have harmed markets elsewhere, according to MPC CEO Paul Taylor. For the average Canadian home buyer, the stress test requirement has cut their purchasing power by about $80,000, he said. Canadians already pay “thousands more over their mortgage term in interest payments” and many are unable to qualify for a mortgage at all. MPC wants the government to hold off making any further changes for at least eighteen months. This would preclude such changes showing up in the upcoming federal budget.
For its part, the government has said that the additional risk it wants the banks to assume would be “modest.” In an example given to illustrate the principle, the government says that a lender holding a mortgage of $300,000 that goes into default could be responsible for just 5 per cent of the loss, or $15,000. The losses could be much higher, of course. And even though mortgage defaults are low in Canada, at less than half a percentage point, one can understand why the banks would not willingly embrace such losses.
From their perspective, adding a deductible would “add complexity and uncertainty” to a system that has been working “simply and efficiently.” The real question is whether such a solution’s benefits would outweigh its costs.