OECD recommends Canada tighten mortgage insurance further

Wed Jun 11, 2014 3:05pm EDT
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OTTAWA, June 11 (Reuters) - The Organization for Economic Co-operation and Development endorsed the Bank of Canada's accommodative monetary policy on Wednesday but recommended that Canadian authorities tighten mortgage insurance further to promote financial stability.

The OECD's survey of Canada found that economic growth "has been fairly solid and in any case higher than in most other OECD countries since the trough of the recession." It noted the "highly accommodative" monetary policy at the central bank.

"Given the current low underlying inflation rate, uncertainty surrounding the amount of economic slack and signs of housing-market stabilization, the bank should maintain its supportive policy stance for the time being," it said, adding that accommodation would need to be withdrawn as slack diminishes and inflation pressures rise.

The Bank of Canada has kept its policy rate at 1 percent since September 2010.

While high house prices and household debt create concerns, the OECD said the probability of a major broad-based correction appeared low.

"The quality of mortgage loans remains high, and recent macro-prudential tightening has moderated household borrowing," it said.

Nonetheless, it recommended that mortgage insurance be tightened to cover only part of lenders' losses in the case of a default by the borrower.

"Imposing a deductible on mortgage insurance, as is common in other lines of insurance, would help promote stability by better aligning the interests of the lenders and those of the insurer, thereby reducing moral hazard," the report said.

It also recommended that the dominance of the government's Canada Mortgage and Housing Corp in insurance could be reduced by progressively lowering the amount of insurance it can write and raising that of the private providers.

(Reporting by Randall Palmer; Editing by Dan Grebler)