- CMHC nearing $600 billion mortgage limit
Ottawa moved today to bring the Canada Mortgage and Housing Corporation under the purview of the country's top financial regulator.
Finance Minister Jim Flaherty outlined the proposed changes to Canada's national housing agency in a wide-ranging bill tabled in parliament on Thursday.
The CMHC insures the vast majority of Canadian mortgages, as well as guaranteeing mortgage-backed securities issued by Canadian banks. It is backed by taxpayer dollars and under current rules, is governed by the Department of Human Resources and Skills Development Canada.
'I've been concerned about the CMHC for some time.' —Jim Flaherty, finance minister
But the changes outlined Thursday will give the Office of the Superintendent of Financial Institutions — the top financial regulator in Canada — and the Department of Finance authority over CMHC's actions.
"I've been concerned about the CMHC for some time," Flaherty told reporters Thursday.
OSFI is the regulator ultimately responsible for all federally-regulated financial institutions in Canada, including 149 deposit-taking institutions such as banks, 308 insurance companies and 1,200 pension plans across the country.
To this point, CMHC didn't fall under its supervision. But because it has grown exponentially over the years (CMHC's assets have grown by more than 12-fold between 2000 and 2010) Flaherty says an update to the agency's oversight was in order.
"It is a recognition that CMHC has become a significant financial institution," Flaherty said. "CMHC was created to assist in social housing [but] it’s become much more than that."
The housing agency will have to report to OSFI, but the departments of Finance and Human Resources and Skills Development Canada will also play a role, Flaherty said.
"After having read the bill, it's unclear to me whether OSFI is the top gun or whether they're just a consultant that comments on practices," housing market analyst Ben Rabidoux with M Hanson Advisors said. "It certainly sounds like OSFI isbeing given a leading role but my question would be what happens if the different bodies disagree," Rabidoux asked. "How would that resolve?"
That answer isn't immediately clear. But in taking the steps Thursday, the finance minister sent a clear message that the federal government isn't interested in getting further involved in Canada's real estate market than it already is.
"The government doesn't want to be the one left holding all this paper," Rabidoux said.
Mortgage-backed security oversight
The bill also calls for the establishment of a registry to monitor how many mortgage-backed securities known as covered bonds that Canadian lenders have outstanding.
When banks give out mortgages to customers, they often get them off their balance sheets by bundling them together and selling them off. That gets their capital ratios — the amount they are allowed to loan out compared to how much cash they have on hand — back to allowable levels, which in turn lets the banks issue even more mortgages to customers.
"There’s some debate about what should be allowed to be in that envelope," Flaherty said.
There has been concern in recent months that the securitization of mortgages is exacerbating a growing debt problem in Canada.
CMHC has been bumping up against its $600-billion limit of how many mortgages it is legally allowed to insure in part because the CMHC has taken on an increasing amount of mortgage-backed securities from Canada's big banks.
"The issue that pushes them near the lending limit is the desire of some financial institutions to purchase portfolio insurance for their low-ratio mortgages," Flaherty said, referring to mortgages where the borrowers put down a very small amount in terms of downpayment.
"That is not the way most people usually think of CMHC."
Changes called 'appropriate'
TD Bank chief economist Craig Alexander called the changes "appropriate" and minor "tweaks" to Canada's financial regulations, particularly compared to the major overhaul occurring in the United States.
"This isn't going to make a big difference to either the real estate market or Canadians," he said. "Banks will continue to offer covered bonds, but they just won't be able to use CMHC-insured products in those bonds."
By forcing the banks to put up only uninsured loans as collateral, the move will force banks to pay a slightly higher fee to investors to make them accept them.
"The story here is that for the banks to raise capital it's going to be slightly more expensive from that one particular pool, which ultimately will filter out to the consumer market," Rabidoux said.
In a statement, the Canadian Bankers Association said that the statutory protection puts them in a "better position to diversify their sources of funding because this legislative framework will increase investor interest in Canadian covered bonds."
Alexander said the changes in covered bonds will likely raise the cost of funding to the banks modestly and, "all else equal that will help to temper lending a bit."
The federal government has already moved to tighten the rules for who can obtain a CMHC-insured mortgage three times since 2008.