Lender risk sharing could exacerbate a housing downturn, fed draft report says
TORONTO — A federal proposal to have lenders shoulder more of the risk for potential mortgage defaults could dampen lending or intensify a decline in house prices, according to internal documents from the Department of Finance.
Proponents of lender risk sharing say it would encourage banks to be more cautious when lending to high-risk borrowers, thereby mitigating the impact of a correction in property prices.
But a draft report, obtained by The Canadian Press through an access-to-information request, says exposing financial institutions to a portion of mortgage default losses — through a deductible, for example — could actually make the housing market less stable in the event of a downturn.
That’s because lender risk sharing could exacerbate the downside of the lending cycle, during which banks typically become hesitant to hand out loans, the report says.