Canada’s national housing agency is getting so big and so important to the financial system that the government wants to keep a sharper eye on it.
As a result, CMHC, which is also the nation’s largest default insurer and guarantor of mortgage-backed securities, is being moved under the supervision of OSFI – the country’s top financial regulator.
This will “contribute to the stability of the housing market and benefit all Canadians,” Finance Minister Jim Flaherty said Thursday.
Here’s a look at some of the potential effects.
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First off, if this new legislation passes, the Department of Finance gains direct control (through OSFI) over the “safety and soundness” of CMHC’s commercial activities, securitization program and any new mortgage-related programs that CMHC wants to launch. CMHC is currently overseen by Human Resources Minister Diane Finley which, to some, has never made a whole lot of sense due to the specialized financial nature of CMHC’s business.
Today’s news may subject CMHC to more micro-management of its commercial activities than it has ever had to deal with. Some expect today’s announcement to also result in even greater public disclosure of CMHC’s insurance activities. Both are a good thing from a systemic risk control standpoint.
Another potential impact – and this is just a guess – is that OSFI puts CMHC’s “higher-risk” mortgage insurance under further scrutiny. In time, that could potentially affect programs like self-employed stated income insurance, for example.
Flaherty told reporters today that reorganization of CMHC’s governance is justified: “I’ve been concerned about the CMHC for some time in the sense that it’s become an important financial institution in Canada, and it was not subject to the same supervision by the Office of the Superintendent of Financial Institutions.”
Indeed, this legislation comes in an environment of growing uneasiness over Canada’s housing and mortgage exposure, especially with CMHC nearing its $600-billion government-imposed insurance limit.
“The issue that pushes them near the lending limit is the desire of some financial institutions to purchase portfolio insurance for their low-ratio mortgages. That is not the way most people usually think of CMHC,” Flaherty said.
This announcement is “a recognition that CMHC has become a significant financial institution,” Flaherty added. “CMHC was created to assist in social housing [but] it’s become much more than that.”
The Privates
The Wall Street Journal reports that CMHC has a two-thirds market share of the default insurance business, a figure that has reportedly been dropping due to the agency’s pullback from portfolio insurance a few months ago.
CMHC’s share may now slide a bit more if OSFI further tightens the reins on its programs. That could be a pleasant development for shareholders/owners of competing private insurers Genworth and Canada Guaranty.
For the record, however, few lenders we’ve talked to think CMHC’s insurance policies will change significantly in the near-term as a result of this news.DBRS
Covered Bonds
To reduce financial system risk, insured mortgages will no longer be allowed as collateral for newly issued covered bonds. Reuters reports that this change “could potentially become law by the end of June.”
(Covered bonds are a way for banks to raise money to lend out as mortgages. They are a $63-billion market in Canada, according to DBRS.)
This curtailment would immediately raise the cost of funding conventional mortgages through covered bonds. Fortunately, however, it shouldn’t dampen the market significantly over the long-run. “There is no reason why covered bond issuance should fall,” one dealer told us following the announcement.
It’ll be interesting to see how much more expensive it will be to issue covered bonds under this new framework. As usual, consumers will probably be on the receiving end of any such cost increases, says David Tulk of TD Securities. “You might find the banks will pass on the impact of the higher cost of financing onto consumers through higher mortgage rates,” he explained to Reuters.
But TD Bank chief economist Craig Alexander told Canadian Business, “This isn’t going to make a big difference to either the real estate market or Canadians. Banks will continue to offer covered bonds, but they just won’t be able to use CMHC-insured products in those bonds.”
That said, it will certainly have some competitive effects, at least until the covered bond market gets used to not having the government as a guarantor of last resort. “The relative funding advantage that the Canadian banks have had in the past is going to compress now,” said BMO Capital Markets analyst George Lazarevski to the Wall Street Journal.
Analysts seem to think the net effect will be about a 10-20 basis points yield increase on mortgages funded through covered bonds. It’s also worth noting that today’s policy change virtually eliminates covered bonds as a funding source for high-ratio mortgages.
All-in-all, Alexander says that any funding cost increase “will help to temper lending a bit (all else equal).”
On a positive note, “…This legislative framework will increase investor interest in Canadian covered bonds,” according to the Canadian Bankers Association. That’s because the new regulations should “better [define] who can issue covered bonds (banks and co-operative credit societies), and [specify] bankruptcy and insolvency protection for covered bonds,” says DBRS.
There will also be a new registry to track covered bond issuance from approved issuers.
One glaring omission of today’s legislation is word on whether banks will be able to sell more covered bonds than they do today. Currently, institutions are capped at issuing the equivalent of 4% of their assets in the securities. Many had hoped that limit would be bumped up to help lenders better diversify their funding sources.
Sources: CBC, Financial Post, WSJ, WSJ #2, Reuters, Bloomberg, Covered Bond Report, Canadian Business, DBRS
Rob McLister, CMT
Last modified: May 24, 2022
Pretty much what I stated on March 21st on this blog, except that covered bond legislation has already been ruled out by the Supreme Court. Flaherty et al are just posturing with the public.
Next watch for the proposal of PCS (Prime Collateralized Securities) as every bank lobbies Ottawa to have an independent entity rate certain high-quality ABS, but of course, this will be some agency they control.
Despite today’s announcement, the big five got what they wanted, and with the Volcker Rule kicked down the road, anything is possible in the shadow OTC derivatives market.
I don’t get Flaherty’s logic. What purpose does it serve if insured mortgages are banned from covered bonds? The mortgages are already insured so there is no new risk to the government. Who cares how the banks securitize them?
The government looks a little silly if the market is willing to pay x more (10-20 bps?) for bonds covered by insured mortgages which the banks pay less than x for insurance on. The banks are essentially reselling CMHC insurance at a profit, indicating CMHC was underpricing it in the first place.
This is a sneaky, underhanded way for Flaherty selectively influence lending. Unfortunately, decisions to offer insurance will no longer be made in a rules based system.
Along with the other impacts mentioned in this post i would speculate CMHC is going to step back from insuring construction loans.
Given their disappointments in the US and Australia, it will be interesting to see if Genworth proceeds status quo or hunkers down here in Canuck land.
CMHC’s mandate is to facilitate social housing and insure individual’s home purchases.
Portfolio insurance is outside the playbook.
does this mean collateral mortgages from td and ING can no longer be insured?
I don’t know if I agree with CMHC’s mandate being to facilitate “social housing”. I always thought the latter referred to geared-to-income and the like.
But if it is, why is CMHC bad for facilitating this social program for Canadians, while the huge health care beaurocracy is praised and untouchable?
This is a good move. Portfolio insurance was never the purpose of CMHC, and they never should have been bulk-selling to the banks to begin with. That the banks are able to turn around and sell those covered bonds at a premium to what they paid in insurance is nothing more than a stealth subsidy going straight to the banks’ bottom lines.
Also, OSFI is extremely concerned about CMHC exposure to risk, and the size of its portfolio, and will take action to limit the growh of the overall pool of insured mortgages. This should have been done at least 6 years ago. The government instead did the opposite. Better late than never.
Social housing is boiler plate in their annual report.
Seniors homes, group housing outside of population centres, basically anything commercial builders won’t touch straight up, because they can’t make any $$$…that sort of thing.
I have no beef with healthcare.
PS. I believe this Flaherty supervision move makes it 99.99% that the OFSI guidelines will become regulations.
Totally agree! Why should CMHC (read: The taxpayer!) help push up returns for the banks? Easy profit for them, so its about time that door was closed…
To be more accurate, CMHC has a mandate to provide
qualified Canadians with improved access to all forms of housing – homeownership, rental, individual homes, apartments, detached, condo, low income, high income, low down payment, high down payment, housing in big cities, and housing in rural areas and smaller markets.
Portfolio insurance is pivotal to providing conventional home buyers with more choice and lower borrowing costs. That is very much in keeping with CMHC’s stated mandate. Whether Flaherty wants to admit it or not is another matter.
It appears Flaherty has changed his tune on portfolio insurance for political reasons. It’s just not fashionable anymore to back initiatives that support housing when purported housing risk makes newscasts daily. Unfortunately media accounts and anecdotal opinions drown out rational data which confirms housing risk is completely in check.
JD
CW – Can you elaborate somewhat on this statement please. “Pretty much what I stated on March 21st on this blog, except that covered bond legislation has already been ruled out by the Supreme Court. Flaherty et al are just posturing with the public.”
Portfolio insurance is pivotal to providing conventional home buyers with more choice and lower borrowing costs.
Yeah, so? Maybe you’ve noticed: Borrowing costs are already bumping along at record lows, conventional prime borrowers have plenty of choice, and estimates of portfolio insurance’s influence on bond yields are 10-20 beeps. You’re saying prime borrowers with fat downpayments need what, exactly?
From their website:
We are committed to helping Canadians access a wide choice of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country. CMHC works to enhance Canada’s housing finance options, assist Canadians who cannot afford housing in the private market, improve building standards and housing construction, and provide policymakers with the information and analysis they need to sustain a vibrant housing market in Canada”
It is just a start, though too late. I expect that OSFI’s proposed HELOC changes will apply to existed outstanding balance, which will cast big, big impacts to borrowers.
I will not be surprised if CMHC set ceiling for clients. That says, CMHC is only for reasonable home purchase needs (ie: first home buyer, etc.). If you only have 50K and you want to buy a 300K home, CMHC is here to help you. But if you have 500K and want to buy a 3 million home. Sorry.
Hardly doubt changes will go for existing borrowers. Just like when mortgage rules changed in the past, existing borrowers were not affected.
What if you make $450,000 and want to borrow $2M and have $500K? you can’t tell me that there should be a cut-off like that.
Covered bond legislation would require an amendment to the Trade and Commerce Act, which in December, the feds try to pass a similar legislation to unify provincial securities regulators into one body. The Supreme Court ruled it as unconstitutional and not in the interest of Canada. http://www.businessweek.com/news/2011-12-23/canadian-court-says-single-regulator-unconstitutional.html
Full transcript here http://scc.lexum.org/en/2011/2011scc66/2011scc66.html
It would cost our government more money to implement and must be agreed upon by all provinces. Not happening, and we don’t need our banks to grow bigger then they already are.
For the moment, they will offload risk on the OTC derivatives market.
Given Carney’s comments in Ottawa today (the Reuters link is on this page) a reduction in CMB issuance is on the table?
Flaherty has mentioned “commercial activities” repeatedly, CMB is a significant commercial activity.
Any CMB reduction would tilt the field in favour of trusts, credit unions and (gasp!) banks.
This is getting interesting.
Who knows? Credit card companies can raise their rate anytime, can’t they?
“if you make $450,000 and want to borrow $2M and have $500K? ”
Then you are not a typical working Canadian. CMHC is not for you.
CMHC could be pulled out of mortgage insurance business, Flaherty says
Apr 27, 2012 – 6:33 PM ET
Finance Minister Jim Flaherty would consider taking Canada Mortgage Housing Corp. out of the mortgage default insurance business he told the National Post’s editorial board.
“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”
He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.
http://business.financialpost.com/2012/04/27/cmhc-could-be-pulled-out-of-mortgage-insurance-business-flaherty-says/
The silence is deafening.
A moment of silence, while we catch our breath.
So what typical or not? Youre telling me they should not lend to those who make inexcess of a certain dollar amount?
Holy crap.
I guess Flaherty isn’t as smart as we thought.
This just in at G&M: Flaherty sets one-year goal for national regulator plan http://www.theglobeandmail.com/globe-investor/flaherty-sets-one-year-goal-for-national-regulator-plan/article2416477/
That’s what I meant by posturing, he knows he doesn’t have a chance…Covered bond legislation will be dead on arrival.
So to be clear: Is CMHC involved in traditional “social housing.” Do they insure for munis and social housing agencies to build geared-to-income rentals?
In my mind, housing takes a higher priority than healthcare. Everyone needs a roof and place to sleep, whether they’re sick or not. So it doesn’t seem bad to me that the GoC would have a role in facilitating that, as they do other important national programs.
Owning a home is a privelidge…not a right. You have to earn it. Welcome to the new normal. That means turning back the clock aboout 30 years or do. That means a lot less non deserving individuals and entities owning homes. About time!
Yes CMHC is in that area of endeavour. It’s a moot point now given the public remarks made by Carney and Flaherty on Friday.
Everyone has bigger fish to fry now.
The official canadianmortgagetrend.com blog on this will be interesting.
Hopefully, it focuses on the future rather than a critique of what’s been said.
Why is anybody surprised? On the macro level, the Canadian economy’s reliance on housing is absolutely frightening. When a fifth to a quarter of all jobs in this country are in the FIRE sectors, what exactly is this country producing?
I fully support the drawdown. Most Canadians have long seen CMHC as a way to help first-time home buyers get into the market. I doubt many Canadians support CMHC insurance on million dollar homes though or the back-door subsidy to the banks via covered bonds. Hopefully, this brings some sanity to the market
CMHC has been a huge cash cow for the Federal government over the years, and continues to contribute to a reduction in our deficit. If Flaherty is serious about deficit reduction over the next few years he will leave CMHC the hell alone.
What future? The destruction of housing wealth in Canada?
Amendments to the National Housing Act:
i) CMHC is to create and maintain a bond registry to identify issuers and bond programs.
ii) covered bond collateral is limited to ‘uninsured’ loans made in Canada only.
iii) insured mortgage loans by CMHC or any private insurer will ‘not’ be eligible as covered bond collateral
iv) loans over 80% LTV are ‘not’ eligible as covered bond collateral
v) statutory protection for bondholders in the event of an issuers insolvency.
The future of the lending landscape.
CW at the risk of coming across as dense, in reading the links you sent me I understood the reasoning on the securities regulator decision; but this was very much one based on trying to create a new cross provincial entity. In this instance you have a federal/crown entity that already has responsibility for pretty much all things to do with mortgages also I am having difficulty making the connection from the decision last year, which seemed to center on provincial authority, to this current situation. I appreciate your response and thanks in advance.
That was the whole point of CMHC when it was set up to help people buy a house now buy their dream house
Covered bond legislation is a federal issue primarily affecting federally regulated institutions. It will have absolutely no problem passing.
What else do you propose we rely on? Manufacturing? Get back to reality buddy. We’re lucky to have a strong real estate market that supports jobs and growth.
As far as CMHC insuring million dollar homes, what percentage of CMHC’s business is million dollar homes??? Huh? Exactly. You have no god-dang clue.
Who cares what the home price is anyway. You’re saying CMHC should not insure professions like doctors and lawyers who only have 5% down? You’d rather we reward lower income people with government insurance? How completely stupid.
The only thing that matters is whether the buyer can pay the mortgage. I’d take ten homeowners buying million dollar houses over 100 less qualified $100k homeowners any day.
Who are you to say who CMHC is for? Where does it say in its mandate that it must only serve lower income Canadians. As a taxpayer who supports CMHC I say insurance should be available to anyone who is qualified to buy a home. It’s irrelevant how much the house costs as long as the person can pay the mortgage. The more expensive the house the more money CMHC makes.
If it’s real wealth, why is there a big fat debt number on the other side of the balance sheet?
Socialism for the rich? Bold platform.
How about taxpayers backstopping insurance for 10 foreigners buying million dollar houses with 5% down who can leave at the drop of a hat when the cash portion of their investment is a 100% loss?
‘Dog…i got one for you to chew on.
Banks will not be able to use insured mortgages to collateralize covered bonds.
BUT…
The banks can still funnel their insured mortgages into Canada Housing Trust Canadian Mortgage Bonds (Ie. CMB).
Carney clearly said otherwise. You read the Reuters link on this blog page right?
I was asking Vlad if he wanted to keep the status quo across the board. Clearly change is scaring him.
[Btw, the Reuters link has nothing about Carney and nothing about foreign ownership, unless you are referring to letting foreigners buy a larger stake in Canadian Telecom.]
It makes no difference how they reshuffle risk because in the end, the government backs everything.
Personally, I think the doctors and lawyers you speak of have been well-rewarded by the Gov (and taxpayers) in the form of highly subsidized educations and more than generous compensation (especially the former).
Moreover, from a risk diversification stance, I think it would be better to insure 10 properties @ $100k each opposed to one @ $1M. Just because someone is not on the public dole, doesn’t make them “less qualified” than those in the private sector (just look at Greece, the UK, California, etc.). Moreover, the law profession is not as opportune as it used to be.
‘Dog…it does make a difference. Think through which entities fund their activity via CMB.
I’m trying to lead you down a path.
This comment proves you don’t know what you’re talking about emmi.
CMHC doesn’t finance non-permanent residents to 95%. I would also add that CMHC’s New to Canada program is a tiny fraction of its business. Most people who get financing under this program are immigrants who aren’t going anywhere.
Open your eyes and read.
I said: “The only thing that matters is whether the buyer can pay the mortgage. I’d take ten homeowners buying million dollar houses over 100 less qualified $100k homeowners any day.”
Focus on the word QUALIFIED.
CMHC does not discriminate by income level.
This link: http://ca.reuters.com/article/domesticNews/idCABRE83Q0SQ20120427
Personally, i find these comments more inflammatory than Flaherty musing about taking CHMC out of the mortgage insurance business.
Last I looked an overwhelming majority of homeowners had a positive net worth, including the 40% who don’t have a mortgage.
What about HELOC borrowing? It’s counted in the non-mortgage debt, which has been growing significantly over the last several years as well.
What else do we rely on? Umm..how about actually reinvigorating the manufacturing sector or developing a real service sector (not mcjobs), instead of unssustainable asset price inflation to get us through?
What percentage of CMHC is million dollar homes? I don’t know. But I’m sure, it’s quite high in Vancouver. And I’m sure the GTA isn’t all that far behind either. And this is all driven by easy lending? That’s my point. How much would housing prices have gone up in those areas if the old CMHC caps have stayed in place (or adjusted with inflation)?
And what does a person’s profession have to do with anything? I don’t care whether they are a plumber or a CEO. What matters is that CMHC’s original mandate was to help those who couldn’t afford it, enter the housing market. It never had, as its mandate, a requirement for the housing quality and size to be commisserate with a person’s profession or station in life. If I had my way, I don’t think CMHC should help out with anything more than a condo or town house. Want something bigger? You shouldn’t have to rely on taxpayer subsidized mortgage insurance to get it.
See Carney’s comments. He gets it. Capital should be directed at building a diversified economy, not at inflating housing prices and proppping up jobs that offer little to no potential for exports. The housing sector is sucking up all the loose change out there, and competing with businesses for capital. That is perverse.
This is not to say that the FIRE sector is not relevant. But when the sector grows so massively disproportionate to other portions of the economy, with CMHC carrying around 50% of GDP in liabilities on its books, when Canadians are overleveraged to historically unforeseen levels, while our manufacturing sector is ravaged, something is clearly wrong. I will flat out say it. When the average real estate agent (whose job requires no university education or lengthy specialized training) makes more from a single sale than a trained engineer or production worker makes in a month, there is something clearly wrong and government has a responsibility to rebalance the economy. This country will not survive selling houses to each other.
Ok I’ll try and open them a little wider this time. Maybe you should try shouting a little louder.
So from your reposted quote in its original context, you’re implying that people buying $100k homes are somehow “less qualified” than those buying million dollar homes. I hate to be the one to break it to you, but not everyone in a $100k home is “less qualified” than someone in a $1M home, some actually choose to do so.
Just read the first paragraph, but I think you’re bang on. We can all go become service providers or work for the government, but without real value creation and the import of $ in exchange for our goods, we will be lucky to ever see 3%+ growth again.
The world is growing more inter-connected everyday and nations who only provide domestic services to one another will see their quality of life deteriorate.
“reinvigorating the manufacturing sector”
Hahahaha. Stop. You’re killing me. Hahahaha.
You. You’re good, you.
You can’t base long-term policy on today’s conditions alone. Future liquidity and lending constraints should be weighted more heavily.
The 10-20 basis point premium you cite is only for covered bonds issued by a AAA lender like RBC. Do you seriously think the Merix Financial or Street Capitals of the world would only pay 10-20 bps more to fund uninsured mortgages?
As I said, portfolio insurance is essential to a competitive mortgage market, not just today but well into the future.
Where did I say that everyone in a $100k home is “less qualified” than someone in a $1M home?
To correct you, what I suggested was that home price is irrelevant. What’s relevant is the applicant’s ability to pay.
Too bad…US funding won’t be playing saviour:
“The US covered bond market is heading into a dismal second half, with new Canadian legislation holding up deals in the months ahead, and possibly making issuance of the collateralized bonds less attractive to Canadian banks.”
http://in.reuters.com/article/2012/07/05/markets-credit-idINL2E8I57DN20120705
Hi Tomas,
Thanks for the link.
The new Canadian regulatory framework and recent SEC no-action will be positive for Canadian covered bond issuance in the U.S.
Moreover, as RBC has illustrated, spreads are expected to be at least semi-reasonable for CBs backed by uninsured conventional mortgages. Then again, Canadian housing performance is a big wildcard in all this.
Cheers…