Mortgage insurance premiums should be hiked and a new stand-alone fund created — separate from the Canada Mortgage and Housing Corporation and private insurance funds — to protect taxpayers in the case of a housing market meltdown, says a new report.

More than half of the $1.2 trillion in outstanding mortgages across the country are now backstopped by Canadian taxpayers through the CMHC or private insurers.

That’s largely because house prices have risen so dramatically since the last recession, fewer homebuyers can come up with the 20 per cent down payments required, under federal banking regulations, to borrow without mortgage insurance, says a new report by the non-profit think tank the C.D. Howe Institute.

The worrisome downside of all that is that taxpayers could be on the hook for up to $9 billion in losses if the housing market goes into a severe downturn at the same time unemployment climbs, leaving thousands of homeowners defaulting on their monthly payments. That’s because Ottawa backstops 100 per cent of mortgage insurance through CMHC and 90 per through private insurers.

“In an era of rising house prices and high mortgage debt, heightened concern over the potential exposure of Canada’s mortgage insurance system — and taxpayers — is merited,” says the report being released Wednesday.

“While Canada has not experienced a US-style housing bust, house-price declines ranging from 30 per cent to 50 per cent have occurred in many other OECD (Organization for Economic Co-operation and Development) countries since 1970 … It is vital that Canada’s housing-finance system is able to withstand such a crisis.”

Losses could actually hit $17 billion in what the report’s authors acknowledge is the unlikely case that prices collapse 30 per cent of more in the coming years. But CMHC and the country’s two major private insurers, Genworth and Canada Guaranty, currently have about $8 billion in reserves to cover some of that.

The report points to privatizing CMHC’s mortgage insurance group as “a plausible option that could potentially encourage competition” in the high-priced and increasingly essential mortgage insurance sector. But economists and co-authors Thorsten Koeppl and James MacGee stop short of making that recommendation.

Instead, they encourage the creation of a new, separate insurance pool — based on a new, 10 per cent insurance surcharge — to ease the backstopping by taxpayers.

The idea is sure to be greeted with outrage by first-time buyers, many of whom complain insurance costs can add more than $14,000 on a $400,000 mortgage and further push home prices out of reach, especially in the high-cost Toronto and Vancouver real estate markets.

“We don’t think that we’re on the edge of a housing crisis today,” said MacGee in a telephone interview from his London, Ontario home. “But what we take away from what happened to housing markets in countries like the U.S. and Ireland is that we need to design a policy framework now so that if a crisis happens in the next decade or so, we’re ready for it.”

The new fund should be overseen by the Financial Institutions Supervisory Committee (FISC) so there is no political interference, and be allowed to accumulate reserves in advance of a housing crisis, up to a cap, as well as borrow against future revenue if needed in a downturn, says the report.

Insurance should only be available to residential homeowners, not investors buying up apartment buildings, as is now the case, it says.

The report notes that Ottawa has done much to tighten underwriting standards, in an effort to both cool the market and reduce the risk of bad loans.

“Underwriting standards are prudent and well enforced … However, while the architecture is sound, there is still scope for strengthening.”

Source: http://www.thestar.com/

By: Susan Pigg Business Reporter, Published on Wed Jul 08 2015