Mortgage Market Primer (TD)

Mortgage-Market-Primer If you have any interest in the nitty gritty of Canada’s mortgage industry, TD Securities’ Eric Lascelles has put out this fantastic market overview: Canadian Mortgage Market Primer

Here are some of the more notable points…

  • 70% of Canadian lenders are deposit-taking institutions (Page 1)
  • 5-year GICs and the Interest Rate Act are two reasons Canadian mortgage terms are usually five years or less (Page 5)
  • There is a difference between Adjustable Rate Mortgages (ARMs) and Variable Rate Mortgages (VRMs). Both have variable rates but the former has variable payments while the latter has “fixed” payments. (Page 5)
  • For any term over five years, the pre-payment penalty cannot be greater than three months interest once five years have elapsed. (Page 7)
  • “Given a mortgage delinquency rate of 0.44% and the assumption of a (pessimistic) recovery rate of 80%, this means that expected mortgage portfolio losses for Canadian lenders are less than 10 basis points per year for uninsured mortgages.” (Page 8)
  • About 50% of Canadian mortgages are insured. (Page 8)
  • “Even with an insured mortgage, the lending institution manages the mortgage, directly handling payment collection, foreclosure, and sale of the home, where applicable.” (Page 10)
  • 29% of Canadian mortgages are securitized versus 60% in the U.S. (Page 10)

Mortgage-Securitization

  • $175 billion of the $275 billion in Canadian securitized mortgages (64%) are sold into the Canada Mortgage Bond (CMB) program. (Page 10)
  • Canadian borrowers can usually prepay 10-25% of their mortgage each year without penalty, but the average prepayment is less than 1%. (Page 11)
  • It is estimated that the Insured Mortgage Purchase Program (IMPP), which allowed the government to buy back mortgages during the credit crisis in 2008-2010, netted the government extra profit of roughly $187.5 million. (Page 11)
  • Lenders (or their agents) must continue servicing a mortgage after it’s sold into the CMB program—including assuming all pre-payment and uncovered default-related costs. Mortgage Insurance does not make lenders completely whole in the event of default. (Page 13)
  • Canadian-Mortgage-Bonds The CMB program intentionally operates on a break-even basis (Page 14)
  • Mortgage defaults “would have to increase by three- to four-fold to compromise the profitability” of CMHC’s default insurance program. CMHC should have ~$8.8 billion in insurance retained earnings as a buffer for its insurance business in 2010. (Page 15)
  • Like any insurance business, CMHC’s is not completely without risk. (See Page 16)
  • The CMB program adds very little additional risk for CMHC. The underlying mortgages are already insured. (Page 15)
  • 71% of mortgagors with CMHC insurance have “equity in their homes of more than 20%.” (Page 16)
  • “Over 40% of CMHC's total business in 2008 was in areas, or for housing options, that are less well served or not served at all by the private sector mortgage insurers.” (Page 17)

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Source: TD Securities

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