CMHC’s Siddall Says Canada’s Banks Have No Skin in Market Game

  • CEO of national housing agency is pleased with new regulations
  • CMHC is monitoring impact of rules on the unregulated space

The head of Canada’s housing agency said banks are getting a free ride in the country’s real estate market, leaving insurers and taxpayers to shoulder all of the risk of a downturn.

Evan Siddall, chief executive officer at the government-backed Canada Mortgage and Housing Corp., made the comments at the agency’s conference in Ottawa Tuesday, a day after the federal finance department announced broad new measures to curtail risk.

“Mortgage loan insurance is on 100 percent of the loss, so we -- us, Genworth and Canada Guaranty -- insure all of that loss," Siddall said, referring to CMHC’s two main private-sector competitors. “And lenders have, as I’ve said in the past, no skin in the game and therefore the incentives are misaligned with good risk management."

The new federal measures are aimed at containing the risk of a housing correction in a country where home prices in some cities have doubled in the last decade. Finance Minister Bill Morneau said he plans to begin consultations this fall about a potential requirement for lenders to take on some portion of losses on insured mortgages that default.

On the Hook

In Canada, mortgages with a down payment of less than 20 percent must be insured through CMHC or one of the private-sector firms such as Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co. If the homeowner defaults on the mortgage, the insurers are on the hook for the entire loss.

Siddall said in a 2014 interview with Bloomberg that banks could take on more risk by using a deductible, similar to how the insurance industry operates. At the time, Siddall said his agency was seeking to reduce the risk to taxpayers.

Past mortgage tightening has pushed borrowers into the shadow market, or the segment that isn’t regulated by the Office of the Superintendent of Financial Institutions, which has doubled to about 13 percent of total outstanding home loans.

Although shadow lending isn’t currently a concern, CMHC is monitoring the sector, Siddall said. “We don’t think it’s a threat in the short-run but in the long-run we’re looking at it, in particular as a result of the announcements yesterday and the evolution of the Canadian real estate market," he said, adding the new rules also apply to non-OSFI regulated -- or alternative -- lenders.

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