Canada’s mortgage insurance system gives our housing market a solid foundation. Home buyers who cannot make a 20 percent down payment are required to insure their mortgages against default and government, in turn, guarantees against a default on that insurance. This system encourages sound loans while protecting lenders, borrowers and the entire financial system from unreasonable risk. It served us admirably in the recent financial crisis. But it has one important failing: it denies consumers benefits from full competition by giving the public Canada Mortgage and Housing Corporation (CMHC) an unfair advantage over private firms. As a public entity, CHMC mortgage insurance policies are 100 percent guaranteed by the federal government. But the government has chosen to give private mortgage insurance firm policies only a 90 percent guarantee. That means banks whose customers insure through a private firm must set aside some capital reserves against the remote possibility of default by the insurer, but not if they use the CMHC. Thus, rates of return are higher on CHMC-backed mort-gages. And when profit margins are thin and banks are nervous about their capital reserves, as in the financial crisis beginning in 2008, it makes a major and harmful difference.

The policy contradicts the 2006 federal budget which sought to encourage greater competition within the MI sector. The decision to allow private competitors to the CMHC, beginning in the 1960s, has been fully justified by innovations in lending practices and re-ductions in mortgage insurance rates that have taken place especially since Genworth Financial Canada, the other major player, entered the market in 1995. he key component of Canada’s solid mortgage insurance system is the requirement that high loan-to-value mortgages be insured with significant government backing. The system can be improved by pursuing the move to a fully competitive model, wherein a CMHC MI spin-off competes on a level playing field under continued strong regulatory control of lending criteria. Removing the punitive differential in the guarantee rate would be a major step in creating a more homebuyer-friendly marketplace. Part of the trigger for the global financial crisis was poor mortgage lending practices in the United States. Some borrowers obtained home loans without a proper vetting of their incomes and other debts. Under the terms of these loans, borrowers could not afford the higher loan payments after a first few years of reduced interest rates even if they had the income they reported. Lenders had assumed that house values would continue to increase, and that rising values would protect the principal on such loans. To compound the problem, providers bundled the loans into securities in ever more complicated ways. It became impossible for investors truly to know the risk underlying the pool of assets in which they were investing.