More on CMHC’s MBS Ceiling

CMHCWhen news broke last week about CMHC limiting securitization guarantees, it was commonly viewed as a new attempt by Ottawa to clamp down on mortgages. In fact, it was an old attempt.

The $85-billion MBS guarantee limit (the one that made headlines on Tuesday) was actually established earlier this year by CMHC and the Department of Finance. CMHC says it chose that number ($85B) based on “past issuance activity and projected funding needs of issuers (i.e., lenders).”

In calling around, we finally found a few industry insiders who had actually heard about this $85-billion cap before last week. It is probably the least publicized significant mortgage policy in the nation. Here’s some background on it, and why it matters…


CMHC says that, as of January 1, 2013, “Pursuant to legislative amendments to the National Housing Act introduced in Budget 2012, approval of the Minister of Finance is required for securitization guarantees…Therefore limits set by the Minister were applied starting this year.”

But why is a 2013 $85-billion limit needed when the government already imposes a $600-billion overall guarantee limit?

“The $85 billion limit applies to NHA MBS issued in the year and is an important oversight mechanism to manage housing market risks and the Government’s exposure to the housing sector,” CMHC states. “The $600 billion guarantee limit is set in statute and is an aggregate limit that applies to all outstanding securitization guarantees.”

Mortgage-LendingIf you recall from last week, it was unexpected growth in demand for market NHA MBS which led to its rationing (of $350 million per issuer). Or as analyst John Reucassel put it in a BMO report last week: “While there has been some speculation that this change was designed to influence the housing market and mortgage funding, we believe this change is more related to capacity.”

He adds, “These changes are unlikely to have a material impact on the banks’ financial performance; however, they may modestly alter funding, liquidity, capital and leverage decisions.”

In addition, mortgage rates may go up…a little.

But those rate increases are more linked to regulatory constraints (like liquidity requirements) than to investors demanding higher spreads in the open market. The reason: Many banks are using the government’s NHA MBS guarantee simply as a “wrapper – but not actually selling the mortgages,” said Darko Mihelic in a Cormark Securities report last week.

“…Because they are not selling the newly wrapped pool(s) [the wrappers have] not directly helped via lower funding costs.” In other words, some banks are using these NHA MBS guarantees (wrappers) primarily for capital and liquidity reasons.

TD is a prime example, having securitized $41.2 billion of mortgages and kept them on its balance sheet (Source: Cormark). That’s a 55% increase in two years.

TD is just one of the big banks doing this, so you can see how demand for these government guarantees might have “snuck up” on regulators, leading to last week’s announcement. In short, this is not a new move by Finance Minister Jim Flaherty & Co. to derail housing.


Rob McLister, CMT

  1. Great follow-up Rob. Sure helps to explain why rates made no move whatsoever after the MSM splashed this ‘old news’ all over the headlines last week. Much ado about nothing, I’m afraid.

  2. Rabidoux is a perma bear with one view of the world. If you want to be scared by the housing market, read his stuff. For a balanced perspective, look elsewhere.

  3. Which Rabidoux tweet exactly are you and Ace referring to?
    Unfortunately Rabidoux has been “warning” of a real estate meltdown for almost three solid years now.
    To wit, the following exerpt from Sept. 10, 2010:
    “1) Canada will see a real estate decline of at least 25% peak-to-trough. Vancouver and Toronto condos will see 50% drops.”
    Source:http://theeconomicanalyst.com/content/purpose-blog…

  4. The predictions in the media that this would cause a half point rate increase were laughable. The analysts making those calls should be fired.

  5. Rob, I thought the $600B related to the amount of mortgage insurance in-force, not the amount of securitization…isn’t comparing the $85B to the $600B apples to oranges?

  6. Hi Jim,
    CMHC has two $600 billion limits imposed on it by the federal government:
    a) The $600B insurance in force limit you’re referencing
    b) The $600B securitization guarantees-in-force limit referenced in this story.
    Cheers

  7. “…Many banks are using the government’s NHA MBS guarantee simply as a “wrapper – but not actually selling the mortgages,” said Darko Mihelic in a Cormark Securities report last week.”
    “…Because they are not selling the newly wrapped pool(s) [the wrappers have] not directly helped via lower funding costs.” In other words, some banks are using these NHA MBS guarantees (wrappers) primarily for capital and liquidity reasons.
    OK…so can someone kindly clarify… a lender can securitize mortgages AND keep them on the balance sheet? Is this in essence then a 2-step process? I always connected securitization with ‘insuring AND selling’, ie the purpose of securitization was to free up capital and improve liquidity to meet regulatory requirements and realize a cheaper source of funds. Therefore once a mortgage was securitized it was in effect sold and removed from the balance sheet?
    Am I understanding correctly that a lender can securitize (ie. insure…for the purpose of obtaining cheaper funds?) but not actually sell? So what is the benefit to the lender in not selling?
    Thx.

  8. Can you clarify why exactly an Issuer would pay guarantee fees and not sell the MBS? If they do sell the MBS though, do they need to recognize anything on balance sheet because they retain an interest in the pool as servicer or has all the risk essential been transferred after the sale?
    Also, is it safe to say that a significant portion of the market MBS creation year-to-date could be to satisfy the IMPP repo requirements for the upcoming loan maturities?

  9. Here is a dumbed down answer. Banks purchase NHA guarantees to make pools of their insured mortgages more liquid and less risky in the eyes of regulators. The lower the risk, the less capital they have to hold against those mortgages. They can then keep more mortgages on their balance sheet and lend more cheaply.

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