This Change Will Have a Direct Impact on Rates

risk-and-securitization-guaranteesOttawa has been trying to de-risk the housing market since 2008. But all of the mortgage rule tightening since then has only slowed the market for a few quarters at a time. Home prices are still near record highs and sales have rebounded.

It’s not surprising then that officials are taking another step that slows mortgage growth. On Thursday, CMHC imposed limits to the amount of government-guaranteed mortgage-backed securities (MBS) that a lender can sell to investors or hold on its balance sheet.

Terminology: “MBS” are pools of mortgages that lenders sell to investors to raise money to lend out. The government guarantee lowers the return demanded by these investors, allowing the lender to offer better rates and terms.

This move could lead to a 60% drop in NHA MBS issuance through year-end. That will force banks to find other more expensive ways of funding a significant portion of their mortgages. And since banks rarely eat material cost increases, consumers will pay higher rates than they otherwise would.

How High Can Mortgage Rates Go?

At this point, it’s impossible to say how much rates could rise because of this policy change. The reason: CMHC won’t announce its remaining 2013 MBS guarantee limits until later this month. Moreover, few have any idea what those limits will be for 2014.

interest-rate-newsBut this opacity hasn’t prevented speculation…

  • “We expect that lenders will increase mortgage lending rates accordingly”—Desjardins Securities analyst Michael Goldberg (via Global News)
  • “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.”— Central 1 Credit Union economist Bryan Yu (via Vancouver Sun)
  • “Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.”—CIBC chief economist Avery Shenfeld (via Maclean’s)
  • “Given the differentials in funding costs via NHA MBS or unsecured long-term funding, I could see [an additional] 20 to 65 basis points in the cost of funding mortgages for the larger banks…All else equal, we could see mortgage rates start to move up in unison.”—National Bank analyst Peter Routledge (via The Globe and Mail)
  • “TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise anywhere from 20 to 65 basis points” (via Maclean’s)

Some commentators are warning people to lock in their variable rates because of the impending rate increase. This seems premature given the questions that remain, among other things.

The capital markets professionals we spoke with today project small rate increases as a result of this news (i.e., less than 20 basis points). And few expect any significant slowdown in home sales/prices from this change alone.

For reference: If rates were to jump by 20 basis points, a consumer would pay $1,900 more in interest on a typical five-year fixed term.

The Mystery Limit

CMHCCMHC says that NHA MBS rationing is occurring, in part, because lenders have “unexpected(ly)” requested too much in MBS guarantees this year. The insurer adds that the Minister of Finance set an $85-billion guarantee cap for 2013. (That was apparently established at the beginning of the year “in consultation between CMHC and the Department of Finance…”) Lenders have already blown through $66 billion of this limit and there are still five months to go until year-end.

All of the lender executives we spoke with today, however, were unaware that the $85-billion ceiling even existed. “It came out of left field,” said one capital markets professional who wished to be unnamed.

In its latest corporate plan and annual/quarterly reports, CMHC only references its overall statutory $600-billion limit. And a Google search shows no other discussion of an $85-billion limit. As such, many will wonder why this important number was not disclosed more publicly before now. We don’t have the answer, but we’ll keep digging.

Lender Effects

profitabilityAbout 3 in 10 residential mortgages are securitized. Two-thirds of that volume is guaranteed in the “market” NHA MBS program (as of 2012).

Terminology: “Market MBS” means MBS that is sold to investors or held on a lender’s balance sheet, versus MBS used in the Canada Mortgage Bond (CMB) program. That’s a key point because this news thankfully does not affect CMB funding, which is the most economical way to fund a mortgage besides deposits.

There are 81 lenders that use NHA MBS. Only a small number of them will be directly affected by the $350-million limit, for two reasons:

  1. Most approved issuers do most of their funding through the CMB program.
  2. Few of them issue market NHA MBS pools over $350 million in a single month.

Among the lenders affected:

  • The big banks will be hardest hit because they have the biggest NHA MBS pools.
  • Lenders who rely—partly or in whole—on bank funding sources might see a negative trickle-down effect (e.g., First National [which is also a big NHA MBS issuer], Street Capital, etc.)
  • Smaller lenders who don’t rely on banks for funding, or primarily use the CMB program, won’t be as affected.

We’ll delve more into the “why” behind this policy change in a separate post to follow…

Rob McLister, CMT

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  1. Comment avatar

    Dave Larock    

    Hi Rob,
    Thanks for the well-written summary.
    I watched the “warning” link you referred to in the post and was surprised by Kevin O’Leary’s conclusion that variable-rate borrowers should run to their lender and lock-in now before fixed rates begin to rise.
    I disagree with that view.
    In fact, I have long argued that our federal government and the Bank of Canada would use increased regulations, rather than tighter monetary policy (i.e. higher short-term rates), to reign in household debt levels.
    This latest change to the securitization rules provides further confirmation of that view and in my opinion, makes it even more unlikely that the BoC will raise its overnight rate for any other reason than because our economic fundamentals demand it. (For example, when we have with 2%+ GDP growth, 2%+ inflation, consistent and healthy job creation etc.)
    Given the current state of our economy, that day still appears to be a very long way off.
    I think borrowers should be running to their lender, but to lock in today’s best variable-rate discounts, not to concede their cheaper borrowing costs and be penned in to a more expensive fixed rate.

  2. Comment avatar


    As usual a thorough, balanced, informative and insightful post. Thanks Rob,

  3. Comment avatar

    Ron Butler    

    Dave offers great insights, when many experts peg the likely increase in Prime at only 50 bps in the next 24 months why would a short term mortgage customer lock in 2.79% for a two year if Variable 2.40% exists now? What if the 50 bps increase only happens in the last 3 months of the next 2 years? Admittedly there is a 3 month penalty at the 2 year mark to change lenders but what if 3.1% was still a great rate compared with fixed options in 2 years time? There is a strong upside to Variable based on current trends.
    We need to wait and assess how the securitization changes may effect the Variable discount but right now Variable looks like a strong option.
    PS: another concise, timely, insightful article from Rob.

  4. Comment avatar


    Kevin O’Leary invests in fixed mortgages business. And as far as I have observed him, he only suggests people to do things that would benefit him in some way or the other.

  5. Comment avatar


    Another ground of “un-loosening”, not tightening, policy by the fed govt

  6. Comment avatar

    walid Hammami    

    We will have another problem.
    People renewing their mortgage when the initially got 2.79% 5 years fixed, may no longer afford to pay their mortgages.
    Defaults will be very common and we will have the same thing that happened in the US in 2008.
    Actually this action might trigger exactly what the government is trying to avoid.
    They should think this over. There are better options.
    For instance we can lower the TDS and GDS to 40/32.
    Increase minimum downpmt to 6.5%-8%
    Qualify on posted negotiated rate+1.5%(like industrial alliance)
    Also they will need to stop having a blind eye to the elephant in the room… Credit card debts. Someone will need to do something about this.

  7. Comment avatar

    A mortgage holder    

    I agree with your suggestions. However, I doubt the government will do anything to prevent people from maxing out their credit cards since credit cards are directly tied to consumerism. The solution to the credit card spending problem is education and restraint. People need to learn how to manage debt and how to control impulse buying.

  8. Comment avatar


    I disagree with your suggestions. Most people getting approved today have TDS ratios under 35% if CAAMP numbers are right. That gives all but a small % of people ample room for higher payments.

  9. Comment avatar

    Robert McLister    

    Thanks Dave, Ron and Appraiser.
    Regarding Kevin O’s prediction, he’s been calling for higher rates for as long as I can remember. His fixed-rate leanings stem largely from that view. It’s a view that (objectively speaking) has proven ill-timed thus far.
    I used to wonder if he was talking his book by pushing fixed rates (since 5-year fixeds were O’Leary Mortgage’s only competitive product in the beginning). But now he’s got a variable that pays him roughly the same, and he’s still bullish on rates. So the benefit of the doubt seems appropriate.


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