Broker: Expect banks to fight against risk sharing

A former banker argues in favour of saddling Canadian banks with more mortgage risk, but don’t expect those lending behemoths to take it lying down

A former banker argues in favour of saddling Canadian banks with more mortgage risks, but don’t expect those lending behemoths to take it lying down.

“Having no skin in the game is very risky and lenders should have more skin in the game. They are making the loan, so they have to assume the risk,” Walid Hammami, a Quebec-based broker, told MortgageBrokerNews.ca. “You have to expect the banks will fight this to the death. And I think they will win.”

The Canadian government is once again toying with the idea of forcing mortgage lenders to shoulder more of the risk associated with insured mortgages.

As it stands, those loans are insured by CMHC – a Crown Corporation – and two private sector insurers, Canadian Guaranty and Genworth.

However, Ottawa is considering implementing a deductible to be paid by lenders for high ratio mortgages.

“As recommended by the International Monetary Fund and the Organization for Economic Co-operation and Development, the implications of lenders bearing a portion of losses on insured mortgages that default (lender risk-sharing) is one area, among others, where work is being done by the department,” Paul Duchesne, a Finance Canada spokesperson, told the Globe and Mail earlier this week.

If risk sharing is indeed forced upon banks Hammami, a former investment trader, argues bank stocks will be impacted.

“They would have to re-evaluate the portfolio and see how much risk is there. And if there is an increase in risk, the bank’s stock will be impacted," he said. "They will look at the loan-to-value of the risk and it will have an impact on the valuation of their stock.”

And brokers could also be impacted.

“I’ll tell you what would happen on the broker side: Banks will be much more careful and strict with approvals. We would have to regroup and rethink how we do mortgages,” Hammami said.