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Canadian banks and mortgage insurers are rallying against new government housing rules that they say will lead to higher mortgage rates, hurt small real estate markets and drive borrowers toward unregulated lenders.

The flash point for the big banks, which hold their regular meetings with the finance department this week, is the risk sharing proposal that would require the industry to shoulder a burden of mortgage defaults.

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Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., the second and third-largest mortgage insurance providers, will lobby the department against risk sharing in coming weeks, people familiar with their plans said.

Risk sharing will most likely involve lenders paying a deductible if a loan sours, similar to what drivers pay in the event of a car crash, according to people familiar with the government plans. Other risk-sharing measures that have been reviewed by the finance department include banks paying a fee to insurers to manage the loss, or taking a portion of the loss, according to a July 2015 briefing note from the department.