Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Portfolio insurance is not a new concept in Canadian banking industry. A pool of mortgages with less than 80% loan to value ratio can be insured by a mortgage default insurer is known as a portfolio insurance.

That insured pool then can be used for various purposes. A bank can put those insured assets in their balance sheet as asset to boost their capital ratio. They can also sell those mortgages in the market to raise further funds.

Before the start of the housing crunch in 2008 the volume of portfolio insurance of CMHC was $103 billion. By the end of third quarter 2012 it grew to become $238 billion. It was a part of government’s initiative to push liquidity in the market.

According to CMHC’ last financial report

Approximately 41% of CMHC’s current insurance in-force results from low ratio portfolio activity consisting of loans with an original loan-to-value of 80% or less.

During the liquidity crisis, CMHC received a number of requests for large amounts of portfolio insurance.

Given the fact that the banks are getting into fearless lending and Canadians are borrowing like there is no tomorrow – the government has decided to pull some money juice out of the market. Now we have to see who gives in first – to thirst – the lenders or the public.

In the latest budget bill tabled on March 21st, 2013 Ottawa has announced that it is bringing in new restrictions on how the portfolio insurances are done and the way they are used. The proposed possible changes are –

  1. Government will eventually allow only those low ratio portfolios to be insured that will be used in CMHCs securitization program.
  2. Government will also limit the use of insured portfolios to be used as a as collateral in securitization process which is not done by CMHC.
  3. Insurance of low-ratio mortgages to boost balance sheet will eventually be prohibited.

These changes should not have any immediate impact on the mortgage rates but the speed and volume of the implementation will determine whether the lenders will show any negative reaction to these changes.

Apart from those changes Ottawa is also looking to create a bail-in program for big banks which will enable Ottawa to recapitalize a bank if one goes under.

Word of caution:

Once all the securities start to mature – that were bought by the federal government in 2008–09 under the Insured Mortgage Purchase Program – in and around 2014-15 – there will be a shortage of funds in the market.