[ CMHC ]
CMHC reforms likely to raise some interest rates By John Dickie, President, CFAA
Finance Minister Flaherty has said he wants CMHC “to focus on highratio insured lending for home ownership and rental construction and acquisition ….” How will the government’s reforms to CMHC mortgage insurance affect rental housing providers? What will happen to interest rates? Will CMHC mortgage insurance still be available for low ratio financing? For now, the answer to the last question appears to be, yes, at least until CMHC reaches its current total insurance underwriting limit of $600 Billion. The government has no plans to raise the underwriting limit, but is leaving the detail of how to stay within the limit up to CMHC. In February 2012, CMHC began limiting its portfolio insurance underwriting through an allocation process. The government has announced further reforms to that area, which are found in the Budget implementation bill. “Portfolio insurance” is insurance on previously uninsured (low-ratio) loans, usually on single family homes (or buildings of four units or less), which is bought by banks usually to help them sell “covered bonds”.
that clarity, the interest rates to be paid on the covered bonds can be expected to rise. In turn, that will tend to increase the interest rates required on uninsured low-ratio borrowing over what they would have been apart from the reforms. It is hard to predict the effect on CMHC insured borrowing on multifamily properties at low-ratios. A higher cost of capital for the banks would tend to increase those interest rates, but the benefit of the CMHC guarantee (if that is not available through portfolio insurance after the loan is advanced) may tend to reduce the market interest rates, balancing out the first factor. CFAA is in touch with the Finance Minister and the key Finance Department officials to seek to ensure that the changes to CMHC’s operations do not negatively affect rental housing providers. CFAA is advocating strongly for CMHC to remain a back stop for lending for rental housing, both for high-ratio and low-ratio mortgage loans, and that is expected to be the result.
Covered bonds are very secure investments, being backed first by the issuing bank’s promise to pay, and then by the mortgages in the asset pool designated for the bond issue. With CMHC insurance on those mortgages, the bonds were in effect backed by CMHC, and ultimately by the Government of Canada.
Happily, CFAA can report that the recent policy changes were not aimed at reeling in multi-family mortgage insurance or multi-family lending. CFAA will continue to work with the Finance Minister, the Finance Department officials and CMHC to ensure that they do not unintentionally sideswipe rental housing, while they make reforms to address other problems.
Due to those guarantees, CMHC and the government were enabling the banks to issue debt at very low interest rates. The government has decided to get out of that guarantee business, by rules which prohibit the inclusion of CMHC-insured mortgages in the covered bond asset pools. That should reduce the demand for portfolio insurance, and enable CMHC to manage any residual demand for portfolio insurance through its allocation process.
Given the American problems with undue lending on single family homes, and the world wide problem of governments becoming overextended on debt and debt guarantees, we can all agree that avoiding such problems in Canada is extremely important. We can also hope that the government has minimized the negative effect of stepping out of the covered bond market by making the legal status of the asset pools clear at the same time.
The Budget implementation bill will also clarify the legal status of the asset pools, removing any doubt that the bondholders have priority over other creditors of the banks on those assets. However, even with
Avoiding the debt guarantee problem without raising interest rates for rental housing would be an ideal result. Time will tell whether that has been achieved.” RHB
16 may / june 2012