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The changes will mean Canada’s banks have higher quality portfolios under their pooled mortgages, according to Jason Mercer, assistant vice president in the financial institutions group at Moody’s Investors Service.

“Going forward, only higher quality portfolios can be insured,” he said. “That’ll encourage stronger underwriting practices.”

The government also said it will begin public consultations on modifying the distribution of risk in housing finance by introducing “a modest level of lender risk sharing” for government-backed insured mortgages. National Bank Financial analyst Peter Routledge said in a Monday note that he expects the government to introduce any risk sharing initiative in a “very gradual manner” in light of current market dynamics.

Under Canadian law, home buyers who put down less than 20 per cent of the cost of the home must insure the mortgage. Portfolio insurance, which allows lenders to insure mortgages that aren’t already backstopped by the housing agency, makes up about 35 per cent of the mortgage insurance market in Canada. In its last quarterly financial report, CMHC said that portfolio insurance made up $189 billion of its $523 billion insurance-in-force.

The government’s housing agency said more than a year ago that banks need to take more responsibility for risk in the market. Canada Mortgage and Housing has already reduced the amount of portfolio insurance it provides to Canadian banks in a conscious effort to lower its exposure to Canada’s housing market, Mercer added.

“The vehicles we own at the moment are fully, irrevocably guaranteed by the government of Canada, so their yield is impacted by the level of liquidity in the market much more than by creditworthiness,” Addenda’s Pepin said.

Bloomberg News