It also highlights how the U.S. government signalled an implicit public guarantee against financial failures by directing government sponsored enterprises (GSEs), similar to the CMHC, to buy and securitize mortgages for high-risk borrowers.
"In the wake of the recent financial crisis, American taxpayers are facing an enormous future liability to pay for the government bailout of the financial industry. Canadian taxpayers could face a similar liability because our government is so heavily involved in the mortgage insurance market through the CMHC,"
The report, written by researcher Neil Mohindra, examines the mortgage finance models in use in Australia and Canada, as well as the European covered bond model, focusing on the question of how to minimize risk to taxpayers while still achieving the housing objectives espoused by government policy-makers.
Australia had its own sub-prime debacle in the 1980s when a state government securitization agency created a program to fund mortgages for low-income borrowers. The program was a disaster and resulted in taxpayer losses of close to half a billion Australian dollars.
Once the Australian state governments got out of the mortgage securitization market, the private sector became active in securitizing residential mortgages. The Australian federal government also exited mortgage insurance by privatizing its mortgage insurer.
The study finds that home-ownership rates in the period following the privatization showed no adverse effects from the lack of government involvement in mortgage finance. In fact, the proportion of Australian homeowners relying on mortgage finance increased and housing quality improved.
"The Australian experience shows that a market for mortgage insurance can operate effectively without any form of government guarantee,"
"In order to lessen the taxpayer exposure and reduce the likelihood of a Canadian mortgage crisis, the government should emulate Australia and allow the private sector to take total responsibility for insuring and securitizing Canadian residential mortgages."
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