Canada Housing Agency Skeptical of Private Mortgage-Bond Market

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Efforts to create a private mortgage bond market in Canada won’t work under current conditions because there’s weak demand to buy the securities even with state guarantees, said the head of the country’s national housing agency.

Canada Mortgage & Housing Corporation, which backs more than C$422 billion ($340 billion) of mortgage bonds that are packaged and sold to investors, is looking for ways to limit taxpayer exposure to the housing market. While the Ottawa-based agency has pulled back on mortgage insurance, the residential mortgage-backed security market is less likely to attract the private sector, said CMHC Chief Executive Officer Evan Siddall.

“We are skeptical about, based on Canadian experience and the experience of most other countries in the world, that private mortgage securitization will have much support to it,” he said in a May 22 interview at Bloomberg’s Toronto office. “It just hasn’t emerged and we don’t think the conditions exist to have it emerge.”

The Bank of Canada in February made mortgage-backed securities issued by private entities eligible collateral for central bank loans, saying the move might help create a market for financing mortgages free of government guarantees. The central bank has said Canada’s housing market is as much as 30 percent overvalued and constitutes the greatest domestic risk to its financial system.

The government has been looking to shrink taxpayers’ exposure to the housing market after a real estate boom turned CMHC into Canada’s largest bond issuer and saw the amount of mortgages it insures swell to C$567 billion in 2011. CMHC currently insures C$543 billion in home loans.

Higher Fees

To restrain growth of government-backed securitization, CMHC raised program fees and capped annual issuance, said David Barnabe, a spokesman for the department of finance.

“CMHC has an important role” in reducing exposure to the housing sector and to “encourage the development of non-government-guaranteed sources of mortgage funding,” he said in an e-mail. The government’s policy encourages lenders and investors to develop private funding vehicles like residential mortgage-backed securities, Barnabe said.

Louise Egan, a spokeswoman for the Bank of Canada, declined to comment on Siddall’s assessment of prospects for the private mortgage-backed bond market.

Siddall, a former adviser to Bank of Canada Governor Mark Carney and former banker at Goldman Sachs Group Inc., said CMHC is looking at alternatives to mortgage-backed securities that are guaranteed by the government.

Government Support

He wasn’t specific on the alternatives, adding that weak demand for CMHC’s securities suggest investors would be unwilling to buy bonds without government support. He said it would take several years to determine what alternatives would work and ultimately the demand has to come from investors.

“There’s some mythologizing I think, my word, about the demand for private MBS,” he said. “We just don’t see it happening,” in current market conditions. He added that once the changing regulatory landscape around the world shakes out there may be demand for these new products.

“Ultimately you want something that’s going to be investor driven,” Siddall said. “You can issue any kind of security but if no one wants to buy it it’s not going to be effective.”

Larger banks are already able to privately finance residential mortgages through covered bonds, though those are limited to uninsured mortgages. The expense of setting up such programs closes them to smaller institutions, Siddall said.

For mortgages insured by CMHC or one of its private competitors, the main avenue of financing in the public markets is CMHC’s own securitization program.

“On the one hand I don’t think they’d want to harm their own market, so they could have differing agendas here,” said Benjamin Reitzes, a senior economist at the Bank of Montreal. “On the other hand, there’s the general government directive to shrink themselves over time.”

Lone Issuer

The government-backed program saw C$118 billion worth of issuance last year by lenders ranging from Canada’s largest banks to local credit unions, bringing the total of mortgage-backed securities with government guarantees to more than C$422 billion, according to CMHC spokeswoman Karine LeBlanc.

In contrast, there’s only one privately issued bond outstanding of residential mortgages, according to data from DBRS Ltd.

In the U.S., there was $2.3 trillion of privately issued mortgage bonds before the credit crisis, but issuance has slowed due to lingering mistrust of the securities that helped cause the crisis, along with the expansion of government-backed bonds.

For Paul Bretzlaff, Canadian structured-finance analyst at DBRS, the main impediment to the development of a private market is the ready availability of government support from CMHC, which provides lenders with a cheaper cost of funding.

Funding Options

“If these other funding options went away, that’s when you might think of developing another market,” he said by phone from Toronto. “So it sounds like they’re not thinking of taking them away.”

The government-backed securitization program is critical for smaller non-bank mortgage lenders like First National Financial Corp., which wouldn’t be able to compete with the larger firms without it, according to Jason Ellis, director of capital markets at First National.

“As long as mortgage spreads are as competitive as they are now, and as long as the investor landscape is as it is now, private-label RMBS doesn’t work,” he said by phone from Toronto.

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