Newspaper article The Canadian Press

CMHC Cap on Mortgage-Backed Securities to Hike Home Costs, Cool Market

Newspaper article The Canadian Press

CMHC Cap on Mortgage-Backed Securities to Hike Home Costs, Cool Market

Article excerpt

CMHC limits guarantees for mortgage lenders

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OTTAWA - Canadians may soon be paying more for new home loans as Canada Mortgage and Housing Corp. begins to clamp down on guarantees for mortgage-backed securities.

The government agency has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350 million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

This year, the federal Crown corporation was given authority to guarantee up to $85 billion under the program but by the end of July, $66 billion had already been committed.

"As a result of this unexpected increase in issuance volumes to date and to better manage volumes going forward, 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 sell-off in the bond market... will put a bit of upward pressure on mortgage rates," said CIBC chief economist Avery Shenfeld.

"Overall, 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 anywhere from 20 to 65 basis points, or 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.

The conversion of loans into securities with CMHC backing is a way for lenders to tap funds from a broad range of investors and enable banks to issue more mortgages at a lower cost.

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 overheated housing market could infect the larger economy, and result in defaults which the government must bear, Finance Minister Jim Flaherty has taken a number of steps in recent years to stem the flow of mortgage credit. …

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