Ottawa has been trying to de-risk the housing market since 2008. But all of the mortgage rule tightening since then has only slowed the market for a few quarters at a time. Home prices are still near record highs and sales have rebounded.
It’s not surprising then that officials are taking another step that slows mortgage growth. On Thursday, CMHC imposed limits to the amount of government-guaranteed mortgage-backed securities (MBS) that a lender can sell to investors or hold on its balance sheet.
Terminology: “MBS” are pools of mortgages that lenders sell to investors to raise money to lend out. The government guarantee lowers the return demanded by these investors, allowing the lender to offer better rates and terms.
This move could lead to a 60% drop in NHA MBS issuance through year-end. That will force banks to find other more expensive ways of funding a significant portion of their mortgages. And since banks rarely eat material cost increases, consumers will pay higher rates than they otherwise would.
How High Can Mortgage Rates Go?
At this point, it’s impossible to say how much rates could rise because of this policy change. The reason: CMHC won’t announce its remaining 2013 MBS guarantee limits until later this month. Moreover, few have any idea what those limits will be for 2014.
But this opacity hasn’t prevented speculation…
“We expect that lenders will increase mortgage lending rates accordingly”—Desjardins Securities analyst Michael Goldberg (via Global News)
“The question for consumers is if they will be able to get low or lower mortgage rates. It seems this would be a constraint on that.”— Central 1 Credit Union economist Bryan Yu (via Vancouver Sun)
“Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.”—CIBC chief economist Avery Shenfeld (via Maclean’s)
“Given the differentials in funding costs via NHA MBS or unsecured long-term funding, I could see [an additional] 20 to 65 basis points in the cost of funding mortgages for the larger banks…All else equal, we could see mortgage rates start to move up in unison.”—National Bank analyst Peter Routledge (via The Globe and Mail)
“TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise anywhere from 20 to 65 basis points” (via Maclean’s)
Some commentators are warning people to lock in their variable rates because of the impending rate increase. This seems premature given the questions that remain, among other things.
The capital markets professionals we spoke with today project small rate increases as a result of this news (i.e., less than 20 basis points). And few expect any significant slowdown in home sales/prices from this change alone.
For reference: If rates were to jump by 20 basis points, a consumer would pay $1,900 more in interest on a typical five-year fixed term.
The Mystery Limit
CMHC says that NHA MBS rationing is occurring, in part, because lenders have “unexpected(ly)” requested too much in MBS guarantees this year. The insurer adds that the Minister of Finance set an $85-billion guarantee cap for 2013. (That was apparently established at the beginning of the year “in consultation between CMHC and the Department of Finance…”) Lenders have already blown through $66 billion of this limit and there are still five months to go until year-end.
All of the lender executives we spoke with today, however, were unaware that the $85-billion ceiling even existed. “It came out of left field,” said one capital markets professional who wished to be unnamed.
In its latest corporate plan and annual/quarterly reports, CMHC only references its overall statutory $600-billion limit. And a Google search shows no other discussion of an $85-billion limit. As such, many will wonder why this important number was not disclosed more publicly before now. We don’t have the answer, but we’ll keep digging.
About 3 in 10 residential mortgages are securitized. Two-thirds of that volume is guaranteed in the “market” NHA MBS program (as of 2012).
Terminology: “Market MBS” means MBS that is sold to investors or held on a lender’s balance sheet, versus MBS used in the Canada Mortgage Bond (CMB) program. That’s a key point because this news thankfully does not affect CMB funding, which is the most economical way to fund a mortgage besides deposits.
There are 81 lenders that use NHA MBS. Only a small number of them will be directly affected by the $350-million limit, for two reasons:
Most approved issuers do most of their funding through the CMB program.
Few of them issue market NHA MBS pools over $350 million in a single month.
Among the lenders affected:
The big banks will be hardest hit because they have the biggest NHA MBS pools.
Lenders who rely—partly or in whole—on bank funding sources might see a negative trickle-down effect (e.g., First National [which is also a big NHA MBS issuer], Street Capital, etc.)
Smaller lenders who don’t rely on banks for funding, or primarily use the CMB program, won’t be as affected.
We’ll delve more into the “why” behind this policy change in a separate post to follow…