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Important CMHC News


Impact of Limits to CMHC MBS - August 7, 2013

Most Canadian mortgage lenders fund some portion of their mortgage lending using CMHC’s National Housing Act Mortgage Backed Securities (NHA MBS). That is, cash flows from mortgages are aggregated into investment securities and then sold to investors through a process called securitization. Payments from these mortgage backed securities are guaranteed by the CMHC, and therefore backed by the federal government,  which allows banks to fund their mortgage business more cheaply than would be possible through other sources of funds such as deposits or uninsured mortgage securitization.   

At the beginning of each year, the Department of Finance and the CMHC set out a maximum volume of mortgages that can be securitized through its NHA MBS. That number for 2013 was $85 billion. It is important to note that the limit on NHA MBS has not changed. However, by the end of July lenders had already issued $66 billion or 78% of this year’s MBS limit. To ensure that the 2013 MBS limit is not reached before the end of the year, and that access to the program is fairly allocated, the CMHC announced yesterday that it has capped each lenders MBS issuance for this month at $350 million until it can formalize a new process to allocate the remaining amount of the 2013 NHA MBS limit. That means that some lenders may need to fund new mortgage issuance through alternatives to NHA MBS and will therefore likely experience higher mortgage funding costs. These higher costs would likely be passed through to mortgage rates. Preliminary estimates put the potential impact on mortgage rates in a range of 20 to 65 basis points (0.25% to 0.65%). 

The market impact of an increase in mortgage rates in the short-term is uncertain. Preliminary modelling by TD Economics suggests that a 1 per cent increase in mortgage rates leads to an initial 6 per cent increase in sales as buyers rush to lock-in existing rate holds, but that those gains are reversed in subsequent months, leading to an ultimate 1% decline in sales. Therefore, the impact of a 20 to 65 basis point increase would, all else equal, likely lead to a minimal decline in overall sales activity.

 

For more information, please contact: 

Cameron Muir

Brendon Ogmundson

Chief Economist

Economist

Direct: 604.742.2780

Direct: 604.742.2796

Mobile: 778.229.1884

Mobile: 604.505.6793

Email: cmuir@bcrea.bc.ca

Email: bogmundson@bcrea.bc.ca

BCREA represents 11 member real estate boards and their approximately 18,000 REALTORS® on all provincial issues, providing an extensive communications network, standard forms, economic research and analysis, government relations, applied practice courses and continuing professional education (cpe).

Real estate boards, real estate associations and REALTORS® may reprint this content, provided that credit is given to BCREA by including the following statement: “Copyright British Columbia Real Estate Association. Reprinted with permission.” BCREA makes no guarantees as to the accuracy or completeness of this information.