Mortgage Changes from the 2014 Budget

Budget. Business Concept.The just-released 2014 budget has both good and not-so-good news for mortgage consumers and the industry at large.

It contains a variety of new mortgage-related measures, the crux of which are designed — says the Department of Finance (DoF) — to “increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.”

Here’s a snapshot of what’s changing:

The Good:

Golden keyOttawa provides government-backed default insurance and mortgage securitization to, in its words, “ensure that mortgages are readily available to creditworthy Canadians at a reasonable cost.” The new budget proposes:

  • Funding Improvements for Small Lenders: Smaller lenders will be given preferable access to mortgage funding from CMHC. For example, they’ll get a relatively better allocation of portfolio insurance and securitization guarantees (which non-deposit-taking lenders rely on far more than big banks). CMHC will also “consider” additional “flexible funding options” for smaller lenders.
  • Collateral Charge Disclosure: The DoF says it will “continue to raise public awareness about” collateral charge mortgages. Unlike a traditional mortgage, collateral charges usually make it more costly to switch lenders. The benefit is that they let people increase their mortgage without needing a lawyer or notary (albeit you’re stuck with that lender’s rates and terms). “To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages,” says the DoF. Going forward, lenders that sell collateral charges will be made to provide enhanced disclosure.
  • Easier Bank Incorporation: OSFI will try to streamline the approval process for establishing a new bank. It will also “reach out” to small banks and trusts and try to address their regulatory challenges vis-à-vis the major banks. Perhaps these initiatives will encourage the creation of a few more balance-sheet lenders (which typically provide more mortgage options to consumers), but we’d expect no major impact from this change any time soon.

The Bad:

OttawaDespite the DoF’s acknowledgement that Canada’s government-backed housing finance system has been “working well,” it believes further “restraints” are necessary. For example:

  • Less Bulk Insurance: The DoF is reducing CMHC’s ability to issue portfolio insurance by 18% — from $11 billion to $9 billion. This will hike industry-wide mortgage funding costs to some degree.
  • Less CMHC Securitization: The DoF is cutting the amount of new securitization guarantees that CMHC can provide in 2014 — to $120 billion from $135 billion in 2013. That’s split $80 billion for market National Housing Act Mortgage Backed Securities and $40 billion for Canada Mortgage Bonds.
  • Banning Bulk in Private Securitization: The DoF will prohibit the use of government-backed portfolio insurance in any non-CMHC-governed securitization program. This means smaller lenders that can’t fund mortgages through deposits may lose a key future source of mortgage funding — or see its costs rise materially. This applies to asset-backed commercial paper (ABCP) and other non-CMHC-sponsored methods of selling insured mortgages to investors. This comes as both a surprise and a disappointment to the mortgage industry. Lenders rallied against this restriction during the DoF’s discussions with stakeholders, and rightly so. It remains to be seen how much this negatively affects funding costs for lenders who’ve relied on ABCP for part of their funding strategy, like First National and MCAP.

Housing commentator Ian Lee told the Financial Post, “I think they have a plan for CMHC which they haven’t disclosed yet. They are either going to shrink CMHC incrementively [sic] or prepare it for privatization.”

Other mortgage notes in the budget:

  • The DoF recognizes that mortgage credit growth is slowing. It says, “The most recent increase in housing activity and prices has not been accompanied by an acceleration in residential mortgage credit growth. This suggests that homebuyers are purchasing homes with larger down payments and that existing homeowners are taking advantage of low interest rates to pay off their mortgages at a faster rate.”

Mortgage-growth

  • Some may decode that as “The DoF will not add new mortgage rules.” But the budget re-states, “The Government remains vigilant in monitoring the sector and is willing to take further action should the situation warrant.”
  • The government reiterated that CMHC will pay guarantee fees to the Receiver General in 2014. That’s to “compensate the Government for mortgage insurance risks” and “align CMHC with guarantee fees paid by private mortgage insurers.” Those fees include a 10 bps charge on portfolio insurance, which some claim CMHC was notably underpricing prior to 2012.
  • Canadian lenders have issued more than $14 billion in covered bonds in three different currencies. Banks started using the new covered bond framework last summer. The DoF says: “This framework has created a fully private source of funding using only uninsured mortgages as collateral. It has been recognized internationally for its high standards.” Unfortunately only a small number of institutions have the size and creditworthiness to issue covered bonds economically.

Rob McLister, CMT

  1. Dof’s comment below is necessarily true- for example, has it got any idea how much the increase is driven by hot foreign money?
    It says, “The most recent increase in housing activity and prices has not been accompanied by an acceleration in residential mortgage credit growth. This suggests that homebuyers are purchasing homes with larger down payments and that existing homeowners are taking advantage of low interest rates to pay off their mortgages at a faster rate.”

  2. So many changes on both sides of the ledger, that both helps or hurts big and small lenders, at the same time.
    Thing that sticks out for me is that the government seems intent on reducing CMHC’s exposure to risk.
    I tend to agree with Mr. Lee’s comments;
    Housing commentator Ian Lee told the Financial Post, “I think they have a plan for CMHC which they haven’t disclosed yet. They are either going to shrink CMHC incrementively [sic] or prepare it for privatization.”

  3. The idea of the Feds privatizing CMHC has to rank as one of the dumbest ideas of any government anywhere….right up their with privatizing Ontario’s Highway 407.
    I am not the most ardent fan of CMHC. Over the last 12-14 years they have done or not done some terrifically stupid things, like matching the then GE Capital, with removing the cap of a maximum three months interest penalty(no IRD) on early payout of an insured mortgage…or insuring $900k mortgages on houses….or coming up with a building code requiring a water proof membrane under cedar shake shingles, which caused the shingles to rot in less than 10 years,without the membrane they rot in 50 years…..a lot of dumb stuff.
    But they were around in the late 1970’s when the oil boom went bust in Alberta. They had the money (ours) & the foresight to liquidate a foreclosed housing stock in an organized manner so that it rose with the market, it didn’t make the market. At the same time private insurers like MICC & Ensmor folded or closed shop.
    In 1991-92 the whole Canadian economy was in the toilet, high unemployment, especially in the construction trades, real estate values in many areas had dropped by 20% and CMHC came out with the 5% down, use your RRSP, to buy only new construction homes. A stroke of absolute genius at the time.Stimulating a rotten economy towards recovery.
    In early 2009 CMHC bought tens of billions of dollars of Canadian mortgage backed securities that were eft in the hands of Canadian banks because the market place would not buy anything related to MBSs.This act by CMHC also kept Canadian banks liquid.
    CMHC is one wonderful tool to have in a government’s hand, if it is used properly.
    That said, the lack of management oversight by two federal governments, of both political stripes, should take significant responsibility for the over involvement of CMHC in the economy.
    The difference between a master craftsman and an apprentice is the knowledge to know when to use the the appropriate tool at the right time.CMHC is just the tool. Use of the tool & the skill with which it is used is up to CMHC senior management and the governments we elect.
    Any government that would sell a tool as useful to the people of Canada as CMHC, is made up of fools & political opportunists.

  4. While homeownership may not be the dream for some, it is the desire of most, despite what the bears say. As a matter of public policy, CMHC and government support for home ownership in general has and continues to be beneficial to society. And in the case of CMHC, profitable to the taxpayer as well.
    Unfortunately, it is the screams and howls of the vocal minority that often get heard. They are to be ignored.

  5. In 1991-92 the whole Canadian economy was in the toilet, high unemployment, especially in the construction trades, real estate values in many areas had dropped by 20% and CMHC came out with the 5% down, use your RRSP, to buy only new construction homes. A stroke of absolute genius at the time.Stimulating a rotten economy towards recovery.
    Too bad they forgot to remove that stimulus when the market recovered. If you keep stimulating eventually you run out of ways to do it. It’s only in the last few years that they’re trying to reverse that path.

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