Lender risk sharing threatens housing: report

TORONTO A federal proposal to have lenders shoulder more of the risk for potential mortgage defaults could dampen lending or intensify a decline in house prices, according to internal documents from the Department of Finance.

Proponents of lender risk sharing say it would encourage banks to be more cautious when lending to high-risk borrowers, thereby mitigating the impact of a correction in property prices.

But a draft report, obtained through an access-to-information request, says exposing financial institutions to a portion of mortgage default losses — through a deductible, for example — could actually make the housing market less stable in the event of a downturn.

That’s because lender risk sharing could exacerbate the downside of the lending cycle, during which banks typically become hesitant to hand out loans, the report says.

The Department of Finance has been exploring so-called lender risk sharing since before the election of Justin Trudeau’s Liberal government in 2015.

Evan Siddall, CEO of Canada Mortgage and Housing Corp., says the federal government is in the process of reviewing submissions it received during consultations on lender risk sharing. “Those are being reviewed, and they are now looking for additional information from lenders, quantitative information from lenders, to further analyze the idea,” Siddall said in Toronto last month. “We won’t have that data until later this year at the earliest.”

The Department of Finance said says it will provide updates on developments as appropriate.

“The government recognizes that lender risk sharing would represent a meaningful change to the mortgage insurance framework, and the importance of fully understanding the potential issues and impacts that could be associated with it,” a spokeswoman for the department said in an email.

“The Department of Finance continues to review and refine input received from stakeholders through the public consultation process.”

The proposal has been met with some criticism, notably from the Canadian Bankers Association, which wrote to CMHC in 2014 saying that lender risk sharing could hurt the country’s financial stability.

The industry group also made a submission to the government earlier this year, arguing that a mortgage insurance deductible would likely increase costs for borrowers and leave smaller, regional lenders at a competitive disadvantage.