Canadian model ‘would give mortgage market credibility’

If the Irish mortgage market is to regain credibility then it should copy the Canadian model which has remained stable since the 1950s, according to Angel Mas, president and chief executive of Mortgage Insurance Europe at Genworth.

Canadian model ‘would give mortgage market credibility’

The Canadian model is based on a universal mortgage insurance scheme, which forces banks to take out protection against defaults.

In the 1950s, the Canadian government was faced with a twin dilemma, explains Mr Mas. It wanted a stable financial system as well as encouraging young people to take out mortgages.

The problem at the time was that when Canadians graduated from college and took up their first employment, they had to go into the rental market. But renting weighed on their ability to save up for deposits needed to take out a mortgage.

The emphasis at that time was low loan-to-value mortgages, which meant that a huge cohort of young people were excluded from the property market.

As a way of getting around this, the Canadian government came up with the idea of mortgage insurance. If a bank wanted to issue a high loan to value mortgage of between 90%-95% of the asking price, then the bank would have to take out mortgage insurance to protect itself against the risk of default.

As the insurance company is in line for first order losses, it ensures that only credit worthy customers are given mortgages.

If the housing market is overheating, the Canadian financial regulator will direct the insurance companies to only insure mortgages with a 20-year lifespan or shorter. This means that banks will have to reign in their lending.

It has proved much more effective than using interest rates to take the froth out of the market, says Mr Mas.

Moreover, Canadian banks have remained very stable through the cycle compared to banks in the US which followed a much more deregulated mortgage market.

Mr Mas says that there are many similarities between present day and Canada in the 1950s because the younger generation across many OECD economies is becoming increasingly excluded from the housing market.

Other countries that have adopted this model include Australia, Hong Kong, and more recently Finland.

The Government has been looking at introducing a mortgage insurance scheme in this country.

Mr Mas has had discussions with both the Central Bank and Department of Finance about what it would involve.

“The Irish system requires a new framework for mortgage lending in the future,” he said.

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