The federal insurer of home mortgages is moving to restrict how much money it’s willing to insure on new loans, a move aimed at a cooling off lending among the country’s big lenders, a group comprised mainly of the major banks.
The move is the latest from the Canada Mortgage Housing Corp. to take steam off mortgage loan-making, which, spurred by cheap interest rates in recent years, has driven record amounts of borrowing among Canadian households.
What exactly is the CMHC and why is it trying to slow things down in the residential real estate market? We take a closer look.
What is the Canada Mortgage Housing Corp.?
Created in 1945, the CMHC is a government-owned corporation that originally lent low-interest home loans to returning veterans. In the mid-1950s, the CMHC introduced mortgage insurance that banks could tap in to in case of default on loans they made to borrowers, which paved the way for more lending by private financial institutions to home buyers.
Today, the CMHC’s main function is to provide this housing insurance to banks and lenders. If a home goes into default, the property is sold and the CMHC will cover the bank’s losses if there are any. In total, the organization insures about $600-billion in home loans.
Why does the CMHC want to cap the amount of mortgage debt it will insure?
The Canadian real estate market has enjoyed a record boom over the last decade, even through the recession. But government officials started to show concerns early last year about an overheated housing market – driven by cheap credit conditions— which could lead to a correction, or decline in sales volumes and prices.
Finance Minister Jim Flaherty has taken steps to rein in home lending by scaling back eligible loans the CMHC will insure. The CMHC has cut amortization periods on insured mortgages from 40 years back down to 25, forcing higher down payments, and nixed government insurance altogether on million-dollar properties.
The latest move came last week, when CMHC notified lenders it is capping how much insured mortgage debt they are allowed to bundle up or “securitize” into tradable investments. The mortgage-backed securities are then sold off to investors.
Analysts say the latest move will reduce appetite among banks to lend beyond that threshold (still $350 million a month per institution). The move also reduces the risk of taxpayers being left on the hook for losses incurred on insured mortgages, as this Ratehub.ca post points out.
What will this do to the housing market?
If the move has the intended effect, the pace of home sales will be pressured and perhaps pricing, analysts say. After undergoing a slowdown last fall that lasted into the first months of 2013 (as Flaherty’s new measures took hold), many markets including the country’s largest in Toronto and Vancouver, have seen a rebound in activity in recent months. Taking some activity out of the market may help it achieve the so-called soft landing that economists and policy makers have aimed for.
What will happen to interest rates?
The move will likely push individual mortgage rates higher among lenders to account for the greater “risk” they will be assuming by keeping the mortgage on their own books.
Some analysts predict the biggest home-loan lenders – Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Nova Scotia – will start to raise rates in response to CMHC’s new cap, which takes effect immediately.
“We expect that lenders will increase mortgage lending rates accordingly,” Michael Goldberg, analyst at Desjardins Securities said in a note Tuesday.
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