The New 10-year Canadian Mortgage Bond

Canadian-Mortgage-Bonds The Canadian Mortgage Bond (CMB) program has been a saviour for many Canadian lenders.  When the subprime debacle jacked the price of funding this past year, lenders turned to CMBs as a reliable source of mortgage capital.  It’s safe to say a few Canadian lenders might not have even survived without the CMB program.

Now CMHC, who runs the program, has announced the addition of a brand new 10-year Canadian Mortgage Bond.  It’s great news because a 10-year maturity will attract more investors, which in turn will (as the government puts it) “increase the amount of money available to Canadians for mortgages” and make mortgage insurance “more affordable.”

Interestingly, the big banks have been pushing the government to allow more bonds in the CMB program for a while now.  That’s because CMB’s are a comparatively inexpensive means of raising mortgage capital.  The problem is, banks can only tap so much of it.  As a result, the banks are probably thrilled to bits with this announcement.

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What is a CMB?

Canadian Mortgage Bonds (CMBs) are issued by the Canada Housing Trust (CHT), a part of CMHC.  CMBs offer investors regular interest payments every six months and a single repayment of principal at maturity. 

CMBs are fully guaranteed by CMHC (and hence, the government of Canada).  Despite this guarantee, however, they pay investors higher interest rates than government bonds–which is why they’re so popular.

From a lender’s viewpoint, the CMB program works basically like this.  Canada Housing Trust sells CMBs to investors.  CHT then uses these proceeds to purchase mortgages (technically, mortgage backed securities) from “approved” lenders.  These lenders then take these proceeds and lend them out as new mortgages all over again.

The Canadian Mortgage Bond program started in 2001.  it was meant to complement the National Housing Act Mortgage-Backed Securities (NHA MBS) Program, which started in 1987.  The idea was basically to lower borrowing costs for homeowners, which they’ve done tremendously well. 

In a nutshell, CMBs have allowed more lenders to compete in the marketplace and brought down interest rates in the process.

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