For decades, most home mortgage loans made in Canada were made by the big banks and other “A” lenders and guaranteed through mortgage default insurance backed by the government’s housing agency, CMHC. In late 2016, government regulators tightened the requirements for borrowers qualifying for that insurance, resulting in more people doing without it.
Approximately three-quarters of the mortgages made by federally regulated banks last year didn’t have government backed mortgage default Insurance. Nearly half the nation’s $1.5 trillion CDN home loans are now uninsured against default according to Bloomberg News. For lenders, consumers’ growing demand for loans with no government backed insurance creates a problem .... mortgage funding.
“The market has to come up with a solution. Otherwise there will be no financing available for mortgages.” says Moti Jungreis, head of global markets at Toronto-Dominion Bank’s TD Securities
Under the new Canadian mortgage rules, it could make sense for more lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding while giving a boost to the Mortgage bond market.
Without that backing, banks and other lenders will have to rely on deposits, asset-backed commercial paper, and other forms of funding that can be more expensive and less accessible, particularly for smaller, non-bank lenders. That’s why it could make more sense for lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding.
Is this an immediate Fix? “NO”. This solution will take time for both lenders and investors to learn and adapt. But there is a light at the end of the tunnel.
Adapted by Steven Porter, Mortgage Agent with Mortgage Architects.
Steven can be reached through his website at www.1800Mortgages.ca
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