Coming To Your Town - Overhaul of Mortgage-Insurance System Canadian lenders currently transfer nearly all of the risk linked to mortgage loans to mortgage-insurance providers, which have government backing. Under Canada’s mortgage system, home buyers are required to take out mortgage insurance if making a down payment of less than 20% of the total price of a home. The current setup means lenders’ loss exposure for insured mortgages is limited and spread across their loan portfolio.
Canada is proposing a major shake-up of its taxpayer-backed mortgage-insurance system that could see banks shoulder up to 10% of the losses related to house-loan defaults.
The plans were detailed in a policy paper issued Friday by Canada’s finance department as the government looks to shift some of the risk associated with the country’s housing market from taxpayers to the financial services industry. The proposals build on measures unveiled early this month aimed at cooling housing markets in the country’s biggest cities.
The government said its preliminary analysis of the two approaches—based on historical mortgage insurance claims data—would result in Canadian lenders facing the equivalent of between 5% and 10% of the outstanding loan principal of defaulted loans.