CMHC caps lenders’ Mortgage Backed Securities limit at $350mil per month
What is a MBS and how does this news affect you?
The government is taking another bite from the housing market, by announcing Aug 1st that CMHC will be imposing limits to the amount of MBS mortgages that a lender can sell to investors or hold on their balance sheet. The cap set in place is for no more than $350 million per month per lender.
What is an MBS?
To those who are unfamiliar, an MBS is a pool of mortgages that lenders bundle up and sell to investors to raise money to lend out. The government guarantees these bundles as a way to lower the return demanded by buyers of MBS bundles (investors), which in turn results in a lower rate to the borrower. MBS’ have become much more important in the last 5 years, especially as lenders now need to hold more funds in reserves for every mortgage lent out. If the lender can sell them, however, they no longer need these funds sitting in reserves earning them nothing. An MBS as essentially a way for lenders to lend money they don’t have and stay profitable and within regulatory requirements.
What will this mean for borrowers?
The move is expected to lead to a 60% drop in NHA MBS insurance through year-end, forcing banks to find more expensive ways to fund large numbers of their mortgages. This cost is, unfortunately, unlikely to be eaten by the bank.
Although it is unclear what the cost to the consumer will be, analysts and economists so far have predicted anywhere from .2% (the majority of them) all the way to .65% of an increase to the cost of funding mortgages.
Roughly 30% of all residential mortgages are securitized, and about 65% of these fall under the effected “NHA MBS” category. Right now 81 lenders use NHA MBS, but only a few will exceed the new cap of $350 million per month, so primarily the big banks will feel the effects.
Why is CMHC doing this now?
So why is CMHC doing this? Apparently, CMHC had set a cap for this funding method for 2013 of $85 Billion. So far, lenders have already gone through $66 Billion only just over halfway through the year, so the government stepped in to take action. The problem is, no lenders seemed to know about it. “It came out of left field,” said one capital markets professional. No public discussion of this cap can be found aside from their general $600 Billion cap on ALL insured mortgage products.
On a whole, we are likely to see mortgage rates increase across the board. However, this is one of the few changes that will actually be less favourable to big banks and won’t effect smaller lenders. Non-bank lenders who don’t get a lot of their funding from large banks like CMLS, Merix, Canadiana, etc will likely escape relatively unscathed. We may see smaller non-bank lenders become more competitive (slightly) on their rates than big banks as a result.
Kyle Green is our mortgage expert, you can reach him through his website www.kylegreen.ca