The Latest Constraint on Insured Mortgages

securitizationAs reported here, the Conservative budget proposes to limit private securitization of insured mortgages. It’s a move that one industry CEO we spoke with calls a potential “dagger through the heart of small lenders.”

That may be an overstatement, but if this measure passes as proposed it will become more expensive for non-banks to compete with the majors. The resulting impact on mortgage rates would be adverse, but modest. On the other hand, even a five basis points rate increase is a $413 interest boost on the typical 5-year mortgage.*

The questions are, how big is the actual risk being addressed by this rule, and does it warrant limiting lending competition, product innovation and consumer savings? That is the topic of this week’s Globe column.

* Assumes the average mortgage of $175,000, a typical five-year fixed term and a 25-year amortization.

Rob McLister, CMT

  1. What will the impact to monoline lenders First Nat & MCAP actually be? How reliant are they on this type of funding?

  2. Hi Jim: Monolines rely heavily on NHA-MBS and the CMB, but they also sell mortgages to investors/aggregators in a variety of other ways.
    Hi D: Both use ABCP for a minority of their funding, but it’s an important way for them to diversify that funding.
    It’s worth noting that this is more of a future problem than a present problem. ABCP still has a long way to bounce back from its heydays pre-August 2007. It will, however, and as private mortgage securitization channels mature, this rule could eliminate (or make more costly) a key source future liquidity for lenders.
    All that said, there may be a workaround. I heard one option in a National Bank Financial analyst meeting a few weeks ago. The idea was to put an NHA-MBS “wrapper” on an insured mortgage before securitizing it via ABCP. But there would be a cost for that, reportedly 5+ bps. Any such costs would filter down to consumers, one way or another.

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