Last Friday, the Canada Mortgage and Housing Corporation issued a statement announcing another round of mortgage restrictions, this time concerning limits on new National Housing Act Mortgage-Backed Securities (NHA MBS). The statement, which was sent to banks, credit unions, and other mortgage lenders, outlined new restrictions that would limit lenders to a maximum of $350-million new guarantees, the amount of “market NHA MBS”, that can be guarenteed by CMHC for the month of August. The restrictions come at a time when housing prices are still near record highs.
What is the NHA MBS Program?
Traditionally, investing in mortgages was limited to investors with access to large financial resources. Government guaranteed mortgage-backed securities made this investment opportunity accessible to all Canadians. Pools of mortgages that lenders sell to investors, MBS programs help raise money to lend out to Canadians hoping to purchase a home. Designed to provide a timely payment to the investor, the government guarantee lowers the return demanded by these investors, which enables the lender to offer better rates and terms. This process of “securitization” is what creates demand for the mortgages.
A Look at the Limit
Friday’s restriction came about “as a result of [the] unexpected increase in issuance volumes to date and to better manage volumes going forward,” according to the CMHC statement.
Early this year, Ottawa gave the CMHC authority to gaurantee up to $85 billion under the NHA MBS program. As of July, roughly $66 billion had already been committed. Under the new limit, the monthly rate of NHA MBS issuances will need to drop from $9.4 billion to $3.8 billion, roughly a 60 percent decrease.
Reasons for the limit are simple: curtail the government’s risk to the real estate market and ensure proper usage of the remaining guarantees. Ultimately, Ottawa would like to limit its role in mortgage securities, with private insurance replacing taxpayers’ backing of mortgage lending in the nation.
What This Means For Home Buyers
The move to restrict lenders’ reliance on government guarantees will likely mean a hike in mortgage rates. This based on the fact that lenders will need to seek more costly sources for mortgage funding. This increase will be most prevalent at smaller lenders as they won’t have access to the capital markets available to larger banks.
How High Will Rates Rise?
Robb Nelson, CEO of the online Canadian mortgage brokerage, FamilyLending.ca says it’s hard to tell. Mortgage brokers and lenders alike will have a better idea once CMHC announces their remaining 2013 MBS gaurantee limits later this month. With that being said, statements from financial analysts and economists all point to imminet increases.
Should you lock in your variable rate mortgage today in order to avoid increases? Potentially, but that might be a bit premature. According to Canadian Mortgage Trends, a rate jump of roughly 20 basis points would increase consumer costs by $1,900 in interest on a typical five-year fixed term.
This latest round of changes is in line with additional underwriting restrictions implemented last summer. Reductions in amortization terms for loans were put into place 12 months ago to tighten ballooning mortgage credit. Even so, house prices have continued to climb since then, causing federal finance minister Jim Flaherty to keep a close eye on market changes. Even with this most recent round of restrictions, it’s unlikely that housing prices will see a dramatic change.
Concerned about how this latest round of mortgage changes might impact your ability to buy a home? Then contact the mortgage brokers at FamilyLending.ca for personal assistance and expert advice.