Government intervention in the mortgage insurance market is exposing Canadian taxpayers to enormous potential liabilities if Canada were to be hit with a mortgage default crisis similar to what occurred in the United States, according to a new peer-reviewed study released today by the Fraser Institute, Canada's leading public policy think-tank.
The report, Mortgage Finance Reform: Protecting Taxpayers from Liability, finds that the Canadian government is heavily exposed in the mortgage market because 43 per cent of all residential mortgages (including all loan-to-value mortgages over 80 per cent) are backed by the government through the federally owned Canada Mortgage and Housing Corporation (CMHC).
The report recommends that the federal government follow Australia's example by opening Canada's mortgage insurance market to full competition including the privatization of the CMHC.
"The CMHC dominates the Canadian mortgage insurance market because it enjoys regulatory advantages not available to private-sector companies. As a result, several private-sector mortgage companies have withdrawn from offering mortgage insurance in Canada," said Dr. Brett J. Skinner, Fraser Institute director of insurance policy research.
"The Canadian government should reduce taxpayer exposure by allowing the private sector to take responsibility for insuring and securitizing Canadian residential mortgages. This includes the complete privatization of the CMHC's mortgage insurance business."
The report points out that the Canadian model has the majority of risk concentrated with the Government of Canada, and therefore the taxpayer liability is much greater in Canada than in Australia. By privatizing the CMHC or removing its unfair regulatory advantages, the market would likely be more pluralistic with multiple mortgage insurance providers serving Canadians.
This would be similar to the Australian model of mortgage financing, which has been highly successful in achieving home ownership outcomes and has produced a stable mortgage market, but has minimized taxpayer liabilities during financial crises.
