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Moody’s estimates this group accounts for about six per cent of Canada’s $1.6 trillion mortgage market.

“In the event of a housing downturn, these riskier loans could exacerbate price declines,” the report warns.

Jason Mercer, an assistant vice-president at Moody’s, and lead analyst on the report, says these riskier loans would be likely to go into default first, causing a chain reaction as those homes are sold off.

“When those houses are sold in foreclosure, prices of nearby properties fall…. A close analogy would be a tinder box,” Mercer said.

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Moody’s notes, however, that almost 90 per cent of Canadian mortgage-holders receive their loans from deposit-taking institutions such as banks or co-operatives, and three-quarters of the outstanding mortgage debt is held by seven large financial institutions, including the country’s six biggest banks and co-operative Desjardins Group.

While these seven large lenders could lose nearly $12 billion in a U.S.-style downturn — and mortgage insurers including CMHC would rack up further losses of as much as $6 billion — Moody’s concludes the big banks would be able to absorb a downturn without “catastrophic” losses that would shake their stability.

“We believe that while a U.S.-severity mortgage event would lead to substantial losses, it would not threaten rated bank solvency,” the ratings agency’s report said.

If the insurers did not reject claims on the scale that occurred during the U.S. housing meltdown, when mortgage paperwork was frequently challenged, the losses in the stress scenario would be split almost evenly between the banks and mortgage insurers, says Mercer.