Mortgages by Candice strives to keep you informed on issues that have the potential to affect Calgary mortgage rates. Although the 2013 federal budget contained little on mortgages overall, one new proposal is of interest for consumers. This proposal seeks to begin restrictions on, and will eventually prohibit, the use of default insurance for mortgages with 20 per cent or more equity — also known as low-ratio mortgages.
According to the Department of Finance, the changes will result in the prevention of lenders from bulk insuring low-ratio mortgages unless those mortgages are part of the Canada Mortgage and Housing Corporation(CMHC) Securitization Program.
If approved, these alterations will be phased in gradually, but could lead to government prevention of all insured mortgages from being used for any non-CMHC sponsored securitization program.
The Department of Finance seeks to achieve the following goals:
- To encourage financial institutions to maintain more capital. From a regulatory and capital ratio point-of-view, bulk mortgage insurance made low-ratio mortgages nearly risk free for lenders by allowing them to simply decrease the amount of capital they held against these mortgages by purchasing bulk insurance. By restricting their ability to insure a larger number of mortgages as low-cost portfolios, banks and other financial institutions are more likely to hold on to more capital.
- To have financial institutions assume more of the risk when they extend credit. Rather than depending on mortgage insurance, banks will need to assume more of the risk and make more responsible financial decisions.
- To make more insurance available. The CMHC placed a cap of $600 billion on the total available capacity and is rapidly reaching that limit. Bulk insurance is deemed less essential to the housing market than regular, “flow insurance” while also using up the available capacity.
To lower the exposure of Ottawa to the risks associated with bulk mortgage insurance, which is guaranteed by taxpayer funds.
One of the possible effects of the proposal could mean rising costs for lenders. Eventually, since financial institutions will no longer be able to utilize bulk insurance, at least not as frequently, they will need to raise additional capital to hold low-ratio mortgages on their balance sheets and/or securitize a greater percentage of their low-ratio mortgages.
Securitizing a greater percentage of their low-ratio mortgages will require lenders to:
- Pay more government application fees as well as guarantee fees. On a five-year fixed rate mortgage, the additional costs will likely equal two points on the basis (actual home cost) plus approximately 0.2 percent of the total mortgage.
- Transfer low-ratio mortgages to the higher cost mortgage-backed securities market. Since other financial institutions will likely be doing the same, securitizing through mortgage-backed securities will likely become more expensive. Thus, the cost of liquidity will rise.
- Small non-bank lenders will have fewer options for securitizing since insured mortgages won’t be allowed as collateral for non-CMHC sponsored securitization instruments such as asset-backed commercial paper.
- These increased funding costs may lead to a slight increase in mortgage rates as Calgary lenders pass these costs on to borrowers.
These new restrictions will apply to mortgage insurance from all three major insurers. As the government seeks to increase discipline in home mortgage lending and to decrease taxpayers’ exposure to risks in the housing sector, a Department of Finance official recently explained to Canadian Mortgage Trends that funding channels using insured mortgages backed by taxpayers are subject to minimum standards and oversight to ensure economic stability.
While the chance of a mass default on low-ratio mortgages is extremely low, as a result of the proposal taxpayer exposure to risk will certainly decrease. Ottawa is already promoting covered bonds as a mechanism to fund uninsured mortgages and the new restrictions may cause more covered bonds to be used for securitization in the future.
Various top-level leaders in the industry made comments under the condition of remaining anonymous. One expert on capital markets suggested that a wider spread appears the most obvious effect of the new restrictions, since the market has already reached bottom. Referring to the use of covered bonds as evidence of a first step, another executive in the industry suggested the Department of Finance doesn’t trust the banking industry. Another industry executive felt the impact on insurers may not be significant because many portfolio insured mortgages have already been utilized by CMHC securitization programs and indicated the effects on small, specialized lenders will be addressed.
It’s important to remember that the expected changes will occur gradually and that the government plans to hear comments from various stakeholders.
As your Calgary mortgage broker, Candice Light will keep you informed on this issue and how it could affect your Calgary mortgages rates as updates are available. At Mortgages by Candice , we shine a light on your financial future!
Please contact us today if you have any questions about your Calgary mortgage rates.