Rethinking government-backed mortgage default insurance

Mortgage default insurance (MDI) is once again under the microscope.  The federal government of Mortgage Default InsuranceCanada is analyzing, again, the distribution of risk in the housing finance system.  But do we need more tinkering, or is it time for something more substantial?

MDI plays a significant role in managing the risk.  The government guarantees MDI so that borrowers can obtain bigger loans (>80% financing).  This not only supports greater access to homeownership but also promotes stability in the housing market, the financial system, and the economy.  It’s the latter of theses roles that is under the most scrutiny since promoting stability protects taxpayers from potential mortgage loan losses.  How do they do it?

The government can set eligibility rules for government-backed insured mortgages.  Between 2008 and 2015, five rounds of changes were made to the eligibility rules.  The latest were introduced last month on October 17th affecting high-ratio loans (>80% financing), and on November 30th, the same new rules will apply to low-ratio loans (<80% financing).  Tinkering with eligibility rules on borrower qualification will improve the overall credit quality on loans and reduce potential losses.  But it’s a piecemeal approach, and can take a number of attempts, as witnessed, before effecting the desired outcome.  That begs the question, is there a better way to reduce the risk faster, and by a greater amount?  Yes, there is.

Currently, MDI is provided by Canada Mortgage and Housing Corporation (CMHC), a federal crown corporation, and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.  The government backs 100% of the mortgage insurance obligations of CMHC, and to support competition in the MDI marketplace, the government backs private mortgage insurers’ obligations subject to a 10% deductible charged to the lender.  The same deductible is now being considered on CMHC insured mortgages.  But is this more tinkering?

To really reduce the risk, and expedite the process, requires a wholesale change in the fundamental way MDI is practiced in Canada.  In 2011 I started a petition to effect the necessary changes needed to MDI.  The federal government recently announced it would launch a public consultation process this fall to seek information and feedback on how to modify the distribution of risk in the housing finance system.  The time to get involved is now!  I need your support.

To learn more, please visit and support my petition below and help me fight for real effective change, and lets put an end to this continual tinkering, once and for all.  There is a better way.

https://www.gopetition.com/petition/41858.html

Thanks for your support.

P.S.  To follow my progress and be part of the dialogue visit my LinkedIn Showcase Page

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