Federal budget changes affect default insurance on low-ratio mortgages

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      One of the authors of the Canadian Mortgage Trends blog, Rob McLister, has pointed out that the federal budget has restricted the use of default insurance on low-ratio mortgages.

      “The Department of Finance says it will gradually prohibit lenders from bulk insuring low-ratio mortgages unless those mortgages are part of a CMHC-backed securitization program,” McLister wrote. “In addition, the government said it eventually intends to prohibit insured mortgages from being used in any non-CMHC sponsored securitization program.”

      He stated that the Department of Finance “ostensibly” wants to lower the federal government’s exposure to “nonessential” taxpayer-guaranteed mortgage insurance.

      McLister also pointed out that a federal Crown corporation, the Canada Mortgage and Housing Corporation, is approaching its legislated cap of $600 billion on mortgage insurance. “Bulk insurance eats into that available capacity and is deemed less essential to the housing market than regular [a.k.a. flow] insurance,” he wrote.

      Banks may need to “raise additional capital to hold low-ratio mortgages on their balance sheet (given that they can no longer bulk insure as freely)”, according to McLister.

      The Department of Finance told McLister that these changes are intended to “increase market discipline in residential lending and reduce taxpayer exposure to the housing sector”.

      One industry executive told Canadian Mortgage Trends: “I think this is the Department of Finance not trusting the banks.”