Fraser calls for private mortgage insurance

The Canadian government should sell Canada Mortgage and Housing Corp.'s mortgage insurance business and stop backstopping residential mortgages, which will eliminate the risk to taxpayers of having to pay for losses on home loans, according to a report from the Fraser Institute.

The Canadian government, through CMHC, provides most of the mortgage insurance in Canada. In addition, the government offers guarantees on the insurance sold by CMHC and its private competitors, so taxpayers bear the risk should a housing crash lead to losses on mortgages that are more than the insurers can handle.

That risk is real, according to the study by the conservative think tank. The study points out that in the early 1980s the CMHC piled up losses in its insurance business amid a tough mortgage market, and the government had to inject more than $200-million to eliminate the deficit in the insurance fund.

"It's not like we can pretend it will never happen, because it actually has happened," said Brett Skinner, the Fraser Institute's director of insurance policy research. "We're not immune to this and we know that there are business cycles that occur regularly, so we have to do what we can on the policy front to minimize taxpayer exposure to such liabilities."

The think tank, which according to its website appeals to those who "support greater choice, less government intervention, and more personal responsibility," argues that the experience in Australia shows privatization works and doesn't hurt the housing sector.

Australia got out of the business by selling its state-owned mortgage insurer to a private competitor in 1997.

The study suggests that it hasn't hurt the housing sector or the stability of the financial system in Australia to have the government out of the business of backstopping mortgages against default.

The home ownership rate in Australia is higher than in Canada, the study noted. In addition, the study found that Australia's privately run mortgage insurance industry performed well throughout the global economic troubles of recent years.

"Australia has done it and it actually seems to work very well," Mr. Skinner said.

An added benefit would be the removal of moral hazard that comes with the fact that mortgage lenders know they won't be on the hook for losses under the Canadian system, he argued. That should result in more conservative banks, he said.

"If a lender has no government backing to rely on they have an incentive to retain some capital to cover off their risks, and they also have an incentive not to make risky loans," he said. "The incentives to make risky loans are actually higher with government backing."