Canadian Mortgage Insurers Worried by Proposed Reforms

Published: October 12, 2016

Updated: July 24, 2018

Author: Luke Jones

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The Canadian mortgage insurance industry and banks have reacted angrily to recent housing rule reforms that will ultimately lead to higher mortgage rates. The institutions argue that the changing laws will make it harder for borrowers to get mortgages and could force them to unregulated borrowing. Small real estate markets are expected to take a hit also, while homeowners will be punished by higher rates and cost of home insurance.

Reforms will be focused on risk sharing. Big banks and mortgage insurers will be required to share mortgage defaults. This essentially means lenders will be forced to share the burden through deductibles should a mortgage loan turn bad. This would bring the mortgage insurance market closer to the auto insurance industry. Other proposals involve banks paying insurers in the event of loss.

These points will be hot topics when the big banks hold their scheduled regular meetings with the finance department later this week. Mortgage defaults in Canada are actually very rare, something banks will use as an incentive to avoid sharing costs. Financial institutions and insurance companies will argue that it is simply not worth the cost of setting up shared risk. Delinquency and arrears of more than 90 days actually stands at 0.28 per cent in the Canadian market. That is a figure five times lower than the United State, according to statistics from the Canadian Bankers Association.

“We don’t understand what a deductible is intended to achieve as a policy outcome,” Darren Hannah, vice president of finance, risk and prudential policy at the Canadian Bankers Association, said by phone. “If it’s supposed to be something to improve the quality of underwriting, well the quality of underwriting is already very strong.”

The association represents 59 of the largest foreign and domestic lenders says that the proposal for deductibles is of particular concern.