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14 Aug

Mortgage Lending: CMHC’s limit to Banks and Lenders

General

Posted by: Cory Kline

When 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.”

If 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.

Source: Rob McLister, CMT

Cory Kline (705-794-1283 or Cory@ndlc.ca)

Mortgage planning since 1998.                                                                                                                                                                                                                             Mortgage Agent at Neighbourhood DLC, FSCO Lic#M09001239, Head Office:1140 Stellar Drive, Newmarket, ON, L3Y7B7, FSCO LIC#11764,Independently Owned and Operated

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