November 4, 2014 / 12:12 AM / 4 years ago

More to be done on housing risk exposure: Bank of Canada official

OTTAWA (Reuters) - While Canada’s housing market has proven to be sound in the aftermath of the global financial crisis, more needs to be done to rebalance risk exposures among market participants, according to a Bank of Canada official.

Potential changes needed may include creation of a private-label mortgage securitization market, Bank of Canada deputy governor Lawrence Schembri wrote in an article published by Britain’s National Institute of Economic and Social Research on Tuesday.

The article was based on a presentation Schembri made at the Bank of England in September.

The paper looked at why Canada’s housing market was relatively steady even as the U.S. market collapsed in the financial crisis. Schembri credited the strength of Canada’s regulatory and supervisory regime.

But since the crisis, Canada’s housing market has boomed as home buyers spurred by record low borrowing costs take on large debt loads.

“These post-crisis imbalances have accelerated a trend in which the government has become more exposed to the Canadian housing market via its guarantees on mortgage insurance and mortgage securitization,” Schembri wrote.

“This trend is not sustainable. The housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures among the participants in this market.”

The Canadian government is exposed to the market through the Canada Mortgage and Housing Corp. The federal housing agency provides mortgage insurance to qualified home buyers who make a down payment of less than 20 percent. It also helps securitize mortgage loans with government backing.

Canadian Finance Minister Joe Oliver said in September the Conservative government wants to reduce government involvement in the mortgage market.

In the article, Schembri said measures may be necessary to promote the development of a deep, liquid private-label securitization market, which has not existed in Canada.

Schembri said that while the rises in household debt levels and home prices “represent the most significant vulnerabilities to the Canadian financial system,” the tightening of mortgage rules in recent years has mitigated the vulnerabilities.

“These vulnerabilities will likely subside when the global recovery gains momentum and long-term interest and mortgage rates increase,” he wrote.

Reporting by Leah Schnurr; Editing by Jeffrey Hodgson and James Dalgleish

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