Morneau Says Any Mortgage Risk Sharing Measures Would Be Gradual

Canadian Finance Minister Bill Morneau said any changes to rules on how lenders share mortgage risk would be “well-thought out” and “gradual.”

The finance department will publish a consultation paper on risk sharing in the near future, Morneau said Thursday in Washington, three days after he released sweeping changes to federal rules on mortgage insurance.

On the table is the proposition lenders such as Royal Bank of Canada should bear more risk in the C$1.4 trillion ($1.1 trillion) mortgage market, and some analysts say such a move may crimp earnings and slow one of the only parts of the economy that’s actually growing. Morneau acted after previous measures failed to curb escalating prices in Vancouver and Toronto, leading to record consumer debt burdens.

“At this stage, we haven’t identified any particular outcome because we do want to hear from people and we haven’t set out any definitive time frame,” Morneau said. The document will have “multiple ideas embedded in it,” he said, declining to give further specifics.

The government backs 100 percent of insurance sold by state-owned Canada Mortgage & Housing Corp., and 90 percent of guarantees sold by private competitors such as Genworth MI Canada Inc. The new rules are intended to cool home prices in part by tightening access to mortgages.

The finance department considered various risk-sharing options last year, according to a draft report of a July 2015 meeting, the Globe and Mail reported Thursday. One option would see lenders absorb a fixed percentage of the value of a defaulted loan, known as "first loss", while a second scenario -- “split loss” -- would have lenders pay a percentage of the total losses associated with soured home loans, according to the Globe.

A third option would see insurers cover the full claim on mortgage defaults and charge lenders a fee. Yet another option is putting a time limit on mortgage insurance, the paper reported.

The new measures won approval from the Bank of Canada Thursday, with Senior Deputy Governor Carolyn Wilkins saying in a speech from Trois-Rivieres, Quebec they “will help mitigate risks to the financial system.”

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