The government’s mortgage securitization programs helped Canada sidestep a major mortgage crisis last fall.
Those programs, which include the Finance Department’s $125 billion IMPP initiative, led to $1 billion of bank profits last quarter, according to the Globe. That’s roughly 15% of their total profits, says the newspaper.
While securitization has taken more prominence, BMO analyst, Ian de Verteuil, told the Globe: "there are negative macro policy implications of the extremely high level of securitization of Canadian residential mortgages.” He says the residual mortgages being left on banks’ balance sheets are now of lower quality.
That was an interesting point, and one we hadn’t heard before.
On the other hand, Verteuil didn’t quantify the “problem,” so it’s hard to say if there’s anything to be concerned about. Our gut feel is that there’s not.
For one thing, banks securitize only a minority of their mortgages and have billions of excess capital. Moreover, most of the mortgages left on banks’ books are very low risk, as evidenced by CBA’s arrears data.
Just as importantly, securitization has allowed banks to be more liquid—and that’s a very good thing for consumers, as we’ve seen in the past year. Securitization lets lenders sell off mortgages, generate more immediate revenue, free up their capital, and relend it at lower rates.
The Globe’s story goes on to imply that greater degrees of securitization may not be prudent because of the U.S. debacle. In the U.S., however, it was not the mere act of securitization that caused problems, it was the low-quality mortgages going into U.S. securitization programs (as well as unsupervised mass leveraging) that caused problems.
By comparison, U of T finance professor, Laurence Booth, calls Canadian mortgages “incredibly low-risk” and “incredibly good-quality assets."
It will be interesting to see if lower funding costs reduce lenders’ desire to securitize mortgages in Canada. The Globe story speculates that securitization will decrease. However, a lot of lenders rely on these programs and they generate significant profits from them.
Canada has $267 billion of securitized mortgages (IMF)
Only 29% of Canadian mortgages are securitized, versus 60% in the U.S. (IMF)
Bank leverage ratios (assets to capital) are far more conservative in Canada: ~18:1 versus 25:1 in the U.S. (Brookings)
Canada has “circuit breakers” that help prevent losses on mortgage-back securities from impacting bank balance sheets. Canadian lending restrictions and Canada’s default insurance system are two such protections. Here’s a report on the topic from BMO.
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