Magazine article Mortgage Banking

Canada's Rising Star

Magazine article Mortgage Banking

Canada's Rising Star

Article excerpt


In little more than four years, the mortgage-backed securities (MBS) market in Canada has achieved growing stature in a way that seems impervious to the jarring shifts of the investment playing field.

MBS issues backed by the federal government of Canada have racked up sales of $5 billion from the time they were introduced in 1983 to the end of last year, according to Doug Hughes, a Canadian MBS expert. Despite 1991's lackluster market, sales as of May had already topped $6 billion.

Hughes is formerly the general manager of the Canada's Mortgage-Backed Securities Center operated by the Canada Mortgage and Housing Corporation (Cannie Mae), the federal government's housing agency located in Toronto. Cannie Mae is also the administrator for the Canadian mortgage-backed securities program. Thus, the agency may be described as a kind of Canadian hybrid of both FHA and GNMA in the United States.

Securitized, residential first-mortgage loans are insured by Cannie Mae and are originated by banks, trust companies, credit unions and mortgage brokers and are then combined into pools for sale to investors. Cannie Mae guarantees full and timely payment of principal and interest to the MBS investor. When MBS are issued, the mortgages are converted into fully guaranteed, flexible and liquid instruments. Each MBS represents an undivided interest in a pool of mortgages. Although U.S. and Canadian mortgage-backed securities are structured in much the same way, there are differences in the standard mortgage terms and prepayment penalties (see Table 1).

Table : TABLE 1

Comparison of U.S. and Canadian MB

Ginnie Mae Canadian MBS

Standard Mortgage Terms

Standard term               30 years   5 years
Standard amortization       30 years   25 years
Principal due at maturity   0          94% of orig. balance
First prepayment date       Immediate  After 3 years

Prepayment Penalties

Full prepayment None 3 months interest

Partial prepayment:

   Amount allowed           Unlimited  10% minimum
   Penalty                  None       None

Given the total $225 billion in Canadian residential mortgage loan debt, $6 billion in securitized debt is, comparatively speaking, insignificant. But at the rate MBS issued in Canada have skyrocketed - the growth curve practically forms a 45-degree angle - some industry sources' predictions that they will become the largest single source of residential loan funding by the year 2000 doesn't seem the least bit fanciful.

Meeting housing's need

In the early 1980s, the Canadian federal government saw that there was a pressing need to lower interest rates and help provide affordable housing for its citizens. During that period's 22 percent interest rate environment, Cannie Mae's role was expanded through an amendment of the National Housing Act (NHA) to provide the unconditional guarantee of timely payment when pools of government-insured mortgages were created. In taking this step, Cannie Mae looked to accomplish three broad objectives: to lower interest rates in general, to accomplish the return of long-term mortgage financing and to facilitate the smooth functioning of a secondary mortgage market.

In 1987, Cannie Mae began its guarantee program on MBS pools of residential, government-insured, first mortgage loans. Later the guarantee was expanded to include guarantees on MBS of two types of mortgages: regular and social housing pools. MBS on social housing pools were first issued in 1988, and they consist of mortgages of government-subsidized social housing projects. The key feature of these mortgages is the elimination of prepayment - making them an attractive security for investors.

Other parties had joined the MBS market as well. In 1985, GMC Investors Corporation in Toronto began issuing securities called Guaranteed Mortgage Certificates (GMC) that were guaranteed by Citibank Canada, a subsidiary of Citicorp. …

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