Canada to restrict portfolio insurance on banks’ balance sheets

125px-Flag_of_Canada.svgIn an effort to reduce risks to taxpayers resulting from housing market instabilities, the Canadian government is restricting the amount of portfolio insurance that banks are allowed to keep on their balance sheets.

Since the financial crisis in 2008, some lenders have held mortgages that carry portfolio insurance, or government guarantee on mortgages with more than 20 percent equity, in order to meet capital requirements, Businessweek reports.

The move also seeks to ensure the insured mortgages are connected to products securitized by Canada Mortgage & Housing Corp, Canada’s federal housing administration. CMHC, which has the government’s highest credit rating, provides most mortgage insurance in Canada.

“It means for the banks, those ways to fund themselves become a little bit more expensive,” Michael Gregory, the senior economist at Bank of Montreal’s BMO Capital Markets, said, according to Businessweek.

The budget released by Canadian Finance Minister Jim Flaherty mandates that insured mortgages be securitized through CMHC only. Under Canadian law, mortgages with a down-payment of less than 20 percent are required to be insured.

“These measures will restore taxpayer-backed portfolio insurance to its original purpose of allowing access to funding for mortgage assets,” the finance ministry said, Businessweek reports.

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