CMHC Cap on Mortgage-Backed Securities to Raise Home Costs, Cool Market
Mortgages for Metro Vancouver’s prospective homebuyers could become more expensive to obtain as Canada’s national housing agency moves to limit the amount of mortgage-backed financing it is prepared to guarantee for mortgage lenders.
Canada Mortgage and Housing Corp. has notified mortgage lenders, including banks and credit unions, it will restrict each of them to a maximum of $350 million of new guarantees in August under its National Housing Act Mortgage-Backed Securities program.
For lenders who package their mortgage loans and sell them as securities to investors, the CMHC program takes out the risk by guaranteeing payments on the investments, and allows the lenders to use the proceeds as capital for new loans and offer them more cheaply.
The federal Crown corporation has given authority to guarantee up to $85 billion under the program, but by the end of July, $66 billion had been committed.
“As a result of this unexpected increase in issuance volumes and to better manage volumes, CMHC will be introducing a formal allocation process in late August,” CMHC said in an Aug. 1 note to lenders.
Analysts say the cap will make it harder and more expensive for banks to obtain funds to lend to their customers, which would likely be passed on by way of a bump in mortgage rates.
“The combination of steps the government has taken in the last year, coupled with the beginnings of a selloff in the bond market will put a bit of upward pressure on mortgage rates,” said CIBC chief economist Avery Shenfeld.
“Over-all, the days of very cheap mortgages are going to be replaced by cheap mortgages.”
TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise from 20 to 65 basis points, the equivalent of 0.2 to 0.65 of a percentage point.
She noted that historically, this is a minor increase.
“Affordability will still remain in the housing market,” she said.
At the very least, the restriction takes away banks’ leverage to lower mortgage rates, according to Bryan Yu, an economist with Central 1 Credit Union in Vancouver.
“Essentially, if they are limiting the amount (of guarantees) available, I suspect it will be a little bit more costly in terms of (raising) capital,” Yu said.
“The question for consumers is if they will be able to get low or lower mortgage rates. It seems this would be a constraint on that.”
Analysts said Canadian banks should have no difficulties securing international markets for funding, but it will come at a higher cost. CMHC-backed securities are attractive for both banks and investors since they are largely default-proof.
Fearing an over-heated housing market could infect the larger economy and result in defaults the government must bear, Finance Minister Jim Flaherty has taken a number of steps in recent years to stem the flow of mortgage credit.
He introduced tighter rules last summer for mortgage lenders and borrowers, a change the real estate and lending industries say was the main reason for a slowdown in residential property sales that began in August 2012 and continued through the first part of 2013.
As well, the finance minister acted to limit taxpayer exposure to a housing crash by setting limits on banks’ ability to buy bulk insurance from CMHC.
Still, Flaherty has been frustrated that banks were priming the house mortgage pump too aggressively, oblivious to the fact Canadian household debt continued to climb. At 165 per cent of annual income this spring, household debt reached heights similar to the peak in the United States before the 2007 crash that literally broke several banks.
Flaherty went so far this spring as to publicly chastise some banks for dropping mortgage rates too low.
The moves worked for a while, but in the past few months, housing has been on an upswing, with starts again reaching unsustainable levels near 200,000 annually, sales increasing and prices continuing to record new highs.
“We are starting to see the impact of the changes wearing off. Prices in most markets are now rising faster than income,” Petramala said. “So it makes sense the federal government, CMHC, may want to limit some of the risk-taking in the housing market.”
In July’s monetary policy report, the Bank of Canada cited the recent developments in the housing market as the top made-in-Canada risk to the economy.
“This renewed momentum would produce a temporary boost to economic activity and inflation, but more important, it would exacerbate existing imbalances and therefore increase the probability of a more severe correction later on. Such a correction could have sizable spillover effects to other parts of the economy,” the central bank concluded.