Canada Housing Agency Caps Mortgage-Securities Guarantees

Canada’s housing agency is rationing the amount of mortgage-backed securities it guarantees, in a move that may lift the cost paid by consumers to buy a home.

Canada Mortgage & Housing Corp. said it will impose a limit of C$350 million ($337 million) this month for each lender on new guarantees, according to a note to financial institutions published Aug. 1 on its website. CMHC said it was facing an “unexpected increase in issuance volumes” that was causing it to approach an C$85-billion ceiling.

Government-owned CMHC guarantees pools of mortgages that financial institutions repackage as securities sold to investors. The guarantee is backed by the Canadian government.

CMHC’s move may increase mortgage rates charged by Canada’s largest banks by between 15 and 45 basis points, National Bank Financial Inc. analyst Peter Routledge said in an Aug. 5 research note. A basis point is 0.01 percentage point. Smaller competitors that don’t see their funding costs increase to the same degree may benefit, he said.

The agency said it will introduce a “formal allocation process” next month after consulting lenders about demand for guarantees over the rest of the year.

The cap is the latest attempt by policy makers to cool the nation’s housing market and contain the exposure of taxpayers to a downturn. Finance Minister Jim Flaherty and the Bank of Canada have warned that high levels of household debt pose a risk to the financial system.

Home Sales

Housing-market data are showing few signs of a hard landing even amid the warnings. Home sales in Toronto and Vancouver, Canada’s two largest real estate markets soared in July, the cities’ real-estate boards reported last week.

Under its mortgage-based securities program, the housing agency guarantees investors will receive principal and interest payments if the asset’s issuer defaults.

CMHC can guarantee as much as C$85 billion this year in mortgage-backed securities. At the end of last month, it had backed C$66 billion this year, compared with C$76 billion for all of 2012, the agency said in its note to lenders.

The agency also insures mortgages, and its insurance is fully backed by the federal government. By law, Canadian mortgages that have less than a 20 percent down payment must be insured. The government has capped the amount of insurance CMHC offers at C$600 billion.

Last year, the agency started rationing the provision of portfolio insurance, which covers mortgages that had a down payment greater than 20 percent.

Flaherty said in his March budget that mortgages carrying portfolio insurance would eventually have to be securitized through CMHC. The government said the change was intended to restore “taxpayer-backed portfolio insurance to its original purpose of allowing access to funding for mortgage assets.”

Flaherty tightened rules on insured mortgages for the fourth time in four years in July 2012 on concern some regional housing markets were overheating.

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