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CMHC is “walking a tight rope” on mortgage insurance: Author

Hilliard MacBeth says the Canada Mortgage and Housing Corporation (CMHC) is becoming increasingly serious about sharing the risk of insuring mortgages, but the author and portfolio manager warns that asking lenders to put more skin in the game could be risky for Canada’s already vulnerable housing market.

“I’m sure the CMHC feels like they are walking a tightrope on this one,” said portfolio manager at Richardson GMP and author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash in an interview with BNN.

“They would like to reduce the subsidy to the Canadian banking industry, but the problem is they have to be careful how they do it.”

Macbeth, who has been pounding the table about an impending correction in the Canadian housing market for years, says unwinding this uniquely Canadian arrangement would be an uphill battle, and could ultimately prove negative for a housing market the agency says is becoming increasingly vulnerable. The insurance backstop the CMHC provides is seen as an essential motivator for lenders to offer favourable financing to homebuyers.

“There is no other market in the world where the government, and therefore the taxpayer, takes the full hit on the first 25 percent of the losses. It’s an amazing situation,” said MacBeth, who called for Canada’s housing bubble to burst this past summer.

CMHC revealed the results of its latest stress test for the first time Tuesday, outlining the worst scare scenario for the housing market where prices plunge 30 percent after unemployment spikes by 5-percent, brought on by global economic deflation, a more profound oil shock, or an earthquake on the West Coast.

The fallout would be an eight-fold increase in insurance claims amounting to more than $13 billion over five years. The agency’s $7.5-billion profit would sink to a $2.8-billion loss.

CMHC president and chief executive officer Evan Siddall called the release of the stress test a “next step in our transparency” – openly acknowledging the disproportionate risk exposure he says the CMHC is saddled with.

“These losses are [to be] fully borne by us, with no losses taken by the banks and lenders that originated the loans,” said Siddall in a behind-closed doors speech to a Bay Street audience on Tuesday.

“Insurers would not design a situation this way, if done from the start. Good insurance practice includes skin in the game by the insured to align behavior and incentives and avoid moral hazard. As I said, we are exploring ways to share these risks (and profits and losses) more equitably in the financial system.”

The Crown Corporation insured 175,169 new home loans last year worth $41.7-billion, that’s roughly 54 percent of the market. That number has fallen to about 50 percent in 2015, according to the agency.

“Without that CMHC subsidy, the banks might find it impossible to offer the amount of financing and mortgages that they do now. That could really hurt the housing market,” said MacBeth.

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