It's high time for federal legislation to allow private insurers to back mortgage buyers, as the Canada Mortgage and Housing Corp. does today, according to a C.D. Howe Institute report.
CMHC, a prominent local employer in Ottawa, is currently mandated by federal law to provide insurance when the down payment on a house is less than 20 per cent.
This represents a nearly 100 per cent, $500 billion share of the Canadian mortgage insurance market, wrote Finn Poschmann, the vice-president of research at the C.D. Howe Institute. The arrangement gives the potential to expose Canadian taxpayers to "large, ill-defined risks", he wrote.
"One key step would be for the ... CMHC to wind back, over time, its mortgage insurance book. Such a shift would leave a role for CMHC to backstop, or reinsure – for a risk-adjusted price – the financing arrangements that support the insurance contracts that cover the risk of ordinary lending defaults," he wrote.
"It would also limit government policy to its more clearly justifiable economic role – assisting in the managing of undiversifiable risks that markets on their own, in times of financial crisis, may not be able to manage well."
CMHC, a Crown corporation, was founded as the Central Mortgage and Housing Corp. in 1946 to help returning war veterans find housing. In 1954, it began offering mortgage insurance in a bid to make housing more affordable, accelerating the program in the 1960s and 1970s.
According to Mr. Poschmann, mortgage backing led CMHC into trouble in the past. In 1984, for example, the CMHC had a $800-million mortgage-insurance deficit due to defaults in its low-income housing programs.
The message is particularly pertinent given the subprime crisis in the United States mortgage market in 2008-09, which saw government-backed adjustable rate mortgages rise above the affordability of thousands of low-income lenders and sparked defaults, Mr. Poschmann stated.
Moving to a private-insurance model would not only protect taxpayers from risk, he added, but would also discourage people least able to afford homes from buying them.
"The message from the Canadian and U.S. experience is that while federal guarantees against mortgage default may facilitate lending, that guarantee socializes risks that are larger than they would have been absent a government role," he wrote.
"The best way forward, therefore, is for CMHC to limit growth in its mortgage insurance book, the better to insulate taxpayers against risks that they might neither wish nor need to share in."