Article content continued

A spokesman for CMHC would not comment. OSFI could not be reached.

“The idea is being floated around right now,” said a senior industry source, who asked not to be identified. “What they are trying to do is make sure lenders have some skin in the game.”

Any implementation might not happen for at least a couple of years while the amount of the deductible is still open to consideration. It’s likely to be in a range of 5% to 10% of a mortgage.

Canadians with less than a 20% down payment on a home must get mortgage default insurance when borrowing from a financial institution regulated by Ottawa. Those consumer loans, which are insured and ultimately backed by the federal government, are often securitized and then sold to investors.

The insurers guarantee the full and timely payment of principle and interest. If say a $100,000 loan in a securitized pool goes bad and, ultimately the bank can only recoup $70,000 of that loan, the insurer is responsible for the remaining $30,000.

“They are structured so the lender is compensated for missed principle and interest and any legal and settlement costs,” says Finn Poschmann, director of research of with C.D. Howe Institute, about the current situation. He says the average recovery rate on defaults is usually about 70% of the mortgage.

“The idea is you could design a mortgage insurance product that has a deductible in it,” said Mr. Poschmann.

CMHC, which controls a majority of the market, has been reviewing its operations since new chief executive Evan Siddall, a former investment banker, took over last year. The Crown corporation has been scaling back its in-force insurance while it no longer insures second homes.