Is a Big Mortgage Shakeup Coming to Canada’s Banks?

According to reports, there could be big changes in the world of Canadian mortgages.

As it stands today, mortgages with less than a 20% down payment are forced to get mortgage default insurance, a premium paid by the borrower to protect the lender in case of default. If the lender sells the property and doesn’t get what is owing, the insurer picks up the rest of the tab.

There are two main mortgage default insurers in Canada. Canada Mortgage and Housing Corporation (CMHC) is the main one. The branch of the federal government makes the rules, sets rates, and so on. Genworth MI Canada Inc. (TSX:MIC) offers identical products at the same price. It just follows CMHC’s lead.

As housing prices keep going up in Canada – especially in Toronto – CMHC is beginning to become concerned about a bubble. The organization has already made several changes to its insurance products over the years, making it tougher for Canadians to afford a home.

The big fear is CMHC will ask Canada’s largest banks to share some of the default risk. The idea currently being floated is banks will be forced to pay a deductible if a borrower defaults.

The Canadian Bankers Association, naturally, is against any changes to the current system. "The industry believes that policy alternatives should be considered to achieve the same ends, but are simpler and less disruptive to the existing lending structure," the organization said in a statement.

One thing is certain. Real estate prices in Toronto remain very hot, and the government has an appetite to pop the bubble. Thus, it looks likely more changes could be coming.