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Changes to Canada’s CMB program could have unintended consequences, experts say

As the federal government considers streamlining its process for funding mortgages, some worry that changes to the Canadian Mortgage Bond (CMB) program could have unintended consequences.

The potential change was hinted at in the latest federal budget, which stated that “the government intends to undertake market consultations on the proposal to consolidate the CMB within the government’s regular borrowing program,” adding that the matter would be addressed in the fall economic and fiscal update.

The budget references a quirk of the current structure that could be leaving billions on the table; money the government says it could invest in affordable housing.

Under the current structure, CMBs are issued by the Canada Mortgage and Housing Corporation (CMHC), a crown corporation that uses the proceeds from sales of CMBs to finance private mortgage lenders.

Despite carrying the exact same credit rating as Government of Canada bonds, however, CMBs have a slightly higher interest rate; a difference or “spread” of about 30 basis points for what is in many ways the same financial product.

Moving CMBs from its current position under CMHC to the federal government directly could eliminate that difference, those familiar with the proposal say. On the roughly $40 billion worth of CMBs issued each year, eliminating that 30-point spread could result in $120 million of annual savings.

Concerns about the proposed change

The two short paragraphs nestled in the federal budget, however, led to some panic on Bay Street, where investors fear the sudden change could carry unintended consequences and have far-reaching economic implications.

“The Canadian market worked quite well during 2008, it worked very well during COVID, you don’t see a lot of volatility in the Canadian market for those pricings and those spreads,” explained Ryan Sims, a mortgage broker with TMG and former financial advisor. “So, if it ain’t broke, why are we trying to fix it?”

Sims argues that Canada has long maintained a strong reputation as a relatively safe and predictable place for investment, especially in its housing sector. He fears that more direct government involvement in the financing of mortgages could open the door to political interference, red tape and market volatility.

He explains that if the government goes through with the change, there is a risk that the market will still demand that premium of 30 basis points on federally issued bonds, only now the extra cost moves to the taxpayers’ books. That could also adversely affect the country’s credit rating and increase the national debt.

“If it doesn’t have the intended effect of lowering funding costs, the average Canadian is still going to pay the same money they’re paying now, but now this debt is sitting on the taxpayers’ balance sheet,” he says. “It seems like very little reward for taking on a good chunk of risk.”

Few details on what to expect

Sims and others fear the CMB program could be eliminated altogether, and instead get rolled into the Government of Canada Bonds program, but others believe the government is only planning a change in where the CMB program is housed. Given the lack of detail offered by the federal budget, however, it’s hard to determine what changes are on the table.

“If it really is just a change of funding source, there really shouldn’t be a lot of implications for the way the program operates,” explained Kevin Fettig, president of CMI Financial Group. “It should really be very much a continuation of the current program.”

Fettig, who helped design the CMB program as director of securitization for CMHC when it was introduced in 2001, speculated in an April report that much of the objections stem from Bay Street traders who fear a profitable financial product being taken off the market.

“My rough estimate at the time was the financial institutions are probably earning $60 million a year from their fees,” he says. “If I’m an investment manager, I’m losing CMBs as an investment, so it’s going to be harder for me to hit my targets; but that shouldn’t be a public policy concern.”

Fettig says he would fear potential fallout if the structure of the CMB program is adjusted from one where the government sets prices based on need, demand and market conditions to an auction structure where prices are set by the market.

“As long as they keep the funding allocation process the same, there shouldn’t be any impact for the [mortgage] brokers,” he says. “If it comes to a pure auction for the funding, that would be a big issue.”

Assuming the management of the CMB program is simply moved from the crown corporation to the federal government’s regular borrowing program without any further changes, Fettig says the size and scope of the program should remain the same.

“If they think they can make this more efficient, great. The main thing is to ensure the program continues,” he says. “There will be some cost savings we can use to help [fund affordable] housing, but really as far as the predominant participants in the program are concerned, nothing has changed.”