Should a United States-style housing collapse occur in Canada then mortgage lenders and insurers could see the loss of close to $17 billion, warns a new report from Moody’s Investors Service.
With the Canadian mortgage market facing “systemic vulnerability,” a significant crisis could lead Canadian banks and mortgage insurers losing more than $17 billion. Moreover, housing prices could tumble by more than 35 percent.
The report notes that some of the vulnerabilities to the nation’s mortgage market is, according to the Financial Post, “the potential for downward pressure on prices emanating from a sub-group of lightly regulated mortgage lenders that have slipped through the regulatory cracks and do not face the tighter underwriting standards imposed on deposit-taking banks and some credit unions.”
Researchers say that this element of the market accounts for roughly six percent of the $1.6 trillion Canadian mortgage market.
“In the event of a housing downturn, these riskier loans could exacerbate price declines,” the report warns. “We believe that while a U.S.-severity mortgage event would lead to substantial losses, it would not threaten rated bank solvency.”
Canada’s six largest banks hold more than two-thirds of the $1.6 trillion mortgage debt, followed by eight percent “other” banks and three percent “other” lenders.
The risky loans would first head into default and then prompt a chain reaction to nearby homes.
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