January 31, 2011 – The federal government’s role in mortgage markets is pervasive and should be scaled back, while encouraging more competition in the mortgage insurance business, according to a study released today by the C.D. Howe Institute. In “What Governments Should Do in Mortgage Markets,” author Finn Poschmann, Vice President, Research, at the Institute, notes that the mortgage insurance book of Canada Mortgage and Housing Corporation, CMHC, which is a Crown agency, now backstops mortgage lending equivalent to more than 30 percent of gross domestic product. While the net exposure is less than this, the arrangement subjects Canadian taxpayers to large, ill-defined risks. Poschmann suggests several steps to manage these risks better.
Accordingly, Poschmann recommends:
- That federal policy should limit taxpayer exposure to mortgage lending risks, by winding back CMHC’s role in the direct provision of mortgage insurance, and allow domestic and foreign providers to take on a larger role. The agency instead would undertake the reinsurance and securitization functions that back private insurers.
- Independent of whether Ottawa pursues this recommendation, Parliament should place CMHC under the supervision of the Office of the Superintendent of Financial Institutions, on a level footing with other market participants.
- Parliament should also adopt legislation that would support covered bonds – bonds backed by assets such as mortgages as well as the full faith and credit of the lending institution – by domestic financial institutions and clarify creditor arrangements in the event of the bankruptcy of a federally regulated deposit-taking institution. Such legislation would help those institutions compete for low-cost capital and better serve the domestic mortgage lending market.
These proposals would not affect the federal government’s ability to pursue financial stability objectives with guidelines on the terms and conditions of mortgage lending, or requirements for mortgage insurance, says the author. Nor would they constrain its ability to intervene in mortgage bond markets, as occurred during the recent financial crisis. Other political objectives for federal housing policy that Ottawa might pursue, such as affordable housing or promotion of home ownership, do not require financial exposure for taxpayers through direct participation in mortgage insurance, he argues.
For more information contact: Finn Poschmann, Vice President Research, Philippe Bergevin, Policy Analyst, C.D. Howe Institute, 416-865-1904