Originally Posted by
Buster
No, I don't think you understand how the market functions in this scenario. Risk has a price. People look at buying risk and they attach a price to that risk. (Risk of defaults, etc). The market calculates what you are describing and determines the price of all of those scenarios costing money and then the consensus determines its value. Your view is that the probability of loss is zero. So your contribution to the consensus would put downward pressure on the price of that risk. Someone else might view the risk to be greater and put upward pressure on that risk, just like any market.
If a government arbitrarily prices that risk at a number that is below the market consensus, you will see them crowd out market based pricing and you have a subsidy. This is what has happened. The gov't has ensured that riskier borrowers aren't exposed to the market and won't see rates which compensate for their elevated risk. Not only is this implied by CMHC, it's explicit.