Bhutta, Neil, Jane Dokko, and Hui Shan, 2010, “The Depth of Negative Equity and Mortgage Default Decisions,” Federal Reserve Board Finance and Economics Discussion Paper No. 2010–35, May.
Joyce, J. Robert and Michael F. Molesky, 2009, “Addressing Financial System Procyclicality: A Role for Private Mortgage Insurance,” Housing Finance International, March, pp 30–37.
Kiff, John, Steven Mennill, and Graydon Pualin, forthcoming, “How the Canadian Housing Finance System Performed Through the Credit Crisis: Lessons for Other Markets,” Journal of Structured Finance.
Prepared by John Kiff (MCM), based largely on Kiff, Mennill and Paulin (forthcoming).
Alberta does not always offer recourse to lenders, though this is dependent on both the vintage and nature of the loan. In Saskatchewan, recourse only applies to re-financed mortgages.
Strategic defaults are those in which the borrower stops making payments on mortgages where the outstanding loan balance exceeds the home value. See Bhutta, Dokko, and Shan (2010).
The FHA/VA programs are designed for low-income, first-time homebuyers with very small down payments. To qualify for an FHA loan, a borrower needs less than a five percent down payment. VA MI is only available to U.S. armed forces active duty personnel and veterans, reservist/National Guard members, and some surviving spouses.
Due to the regulatory capital reductions provided by MI, the majority of Canadian mortgages are insured, even those with loan-to-value ratios below the required threshold.
The government guarantees that lenders will receive the benefits payable by approved private mortgage insurers, less 10 percent of the original principal amount of the loan, in the event that the insurer is bankrupt or insolvent. This public-private model is close to that advocated in Joyce and Molesky (2009). However, they advocate a full guarantee to provide a level playing field between private insurers and CMHC. They also recommend removing the insurer insolvency condition, saying that it may introduce inadvertent procyclicality.
For borrowers with lower credit scores (below 680 on the FICO scale), the CMHC and private mortgage insurers set a debt service cost limit at 42 percent of gross income. The CMHC definition of debt service costs include mortgage principal and interest payments, property taxes, and heating expenses, plus other debt payments. For U.S. “conforming” mortgages debt service costs do not include heating costs, and they are limited to 28 percent of gross income. The maximum LTV on “conforming” loans is 80 percent.