This is a big issue because the ratio of uninsured mortgages, as a percentage of new mortgages, in Canada is going up. On it's own, that's not a problem as most people think it simply means that everyone has 20% down so it's all good. The problem is that many new homeowners don't have a true 20% down like a responsible Mustachian would.
Where this fails is the reasons why these new mortgages are not insured. CMHC has limits on which types of mortgages it will insure. First, the value of the property has to be less than $1,000,000. Second, you need 5% down on the first $500,000 and 10% down on the remainder. Third, your monthly housing costs must be less than 32% of income. And finally, your total debt plus housing costs should be less than 40%.
Brokers can fudge the numbers quite easily by underestimating some housing costs and somewhat over-inflating some income. But they can't fudge the $1,000,000 house value limit.
The end result is thousands of new home owners in pricey markets are borrowing their downpayments from secondary lenders or private loans. This also lets them get away with having housing costs well above 32% of income. If you're interested, just take a peek at the number of high loan-to-income mortgages being issued. In Toronto, Vancouver, Victoria, and Calgary between a quarter and a half of all new mortgages are being issued at more than 4.5x household income.
Ultimately, mortgage insurance provided by CMHC is very important to maintaining ridiculously high house values in Canada. Without it, our housing market would certainly collapse. Right now, our banks can place a loan with fractional reserve money, collect all the leveraged interest, and pass on 100% of the risk to taxpayers with CMHC. Without CMHC to take all the risk, no major bank would issue loans with 5% down, no major bank would allow a high loan-to-income mortgage, and our effective mortgage rates would go up substantially relative to government bonds as the banks demand more of a risk spread.
With a growing number of these monster, uninsured mortgages it destabilizes our financial sector. There's a reason why short sellers have been jumping all over companies like MCAN, Home Trust, and Equitable; the value of their assets could easy go down to 0, even with a moderate housing correction.