28 Mar

New Bulk Insurance restrictions could mean higher interest rates!


Posted by: Linda Colpitts

March 25, 2013

More on the New Bulk Insurance Restrictions

Budget 2013Last week’s federal budget included few mortgage changes. One exception was a new proposal to restrict the use of default insurance on low-ratiomortgages (i.e., those with 20% or more equity).

The Department of Finance says it will gradually prohibit lenders from bulk insuring low-ratio mortgages unless those mortgages are part of a CMHC-backedsecuritization program.

In addition, the government said it eventually intends to prohibit insured mortgages from being used in any non-CMHC sponsored securitization program.

Here’s what this may mean to borrowers and lenders…

OttawaWhy is the government limiting “bulk insurance?”

The Department of Finance ostensibly wants to:

  • Lower Ottawa’s exposure to “nonessential” mortgage insurance (which taxpayers guarantee)
  • Encourage lenders to assume more risk themselves when extending credit, instead of relying on mortgage insurance
  • Free up insurance availability (CMHC has a legislatively-capped $600 billion insurance limit and it’s running close to that limit now. Bulk insurance eats into that available capacity and is deemed less essential to the housing market than regular [a.k.a. flow] insurance.)
  • Encourage banks to keep more capital on hand by restricting their ability to “portfolio insure” large numbers of mortgages. (Thus far, banks have been able to minimize the capital they must post against mortgages simply by purchasing low-cost portfolio [i.e., bulk] insurance. That’s because bulk insurance makes those mortgages essentially “risk-free” from a capital ratio and regulator’s standpoint.)

funding-cost-impactWhat effects might this have?

Here are some of the possibilities:

  • First off, the cost of funding mortgages should rise as banks may need to:

(a)  raise additional capital to hold low-ratio mortgages on their balance sheet (given that they can no longer bulk insure as freely), 


(b)  securitize a greater number of low-ratio mortgages. That would require banks to:

  • pay additional government application and guarantee fees(two basis points plus ~0.2% of the mortgage amount on a 5-year fixed), and 
  • sell those mortgages into a higher-cost mortgage-backed securities (MBS) market 
    (Securitizing via MBS may get more expensive since other lenders would be doing the same thing, thus raising the cost of “liquidity”)
  • Smaller non-bank lenders will have fewer securitization options (Insured mortgages won’t be allowed as collateral in non-CMHC sponsored securitization vehicles like asset-backed commercial paper [ABCP]. ABCP is a private funding option that’s made a comeback since the credit crisis.)
  • Higher funding costs could lead to slightly higher mortgage rates, to the extent that lenders pass along these costs to consumers.
  • Government risk exposure will drop slightly (Although, the odds of mass defaults on mortgages with 20% or more down are already exceptionally low.)
  • Bulk insurance restrictions could encourage more use of covered bonds (a securitization mechanism that Ottawa is trying to promote as a way to fund uninsured mortgages)


  • Why would Ottawa allow insured mortgages as collateral for securitization sponsored byCMHC, but not allow them in privatesecuritization vehicles? The Department of Finance told CMT on Friday: “The Government is making these changes to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector. Funding channels that use taxpayer-backed insured mortgages should be subject to minimum standards and Canadian oversight in order to promote financial stability.”
  • Do these new rules apply to mortgage insurance from all three insurers? Yes.

Stethoscope and Canadian dollarFeedback from Industry:

These are quotes from various top-level industry leaders, who spoke to CMT on condition of anonymity:

  • Capital markets expert:“Wider mortgage spreads would seem to be the most obvious impact. The ‘race to the bottom’ should stop now.”
  • Industry executive: “The impact on mortgage insurers is not significant as most portfolio insured loans have (already) been used in CMHC securitization programs…There could be some impact to the smaller specialty mortgage lenders, but I feel this will be addressed during the commentary period.”
  • Another industry executive: “I think this is the Department of Finance not trusting the banks. They already put the covered bond framework in place. Why else would they take this further step?”
  • Another capital markets pro: “NHA MBS is now the only game in town (for bulk insured mortgages) and funding costs will reflect that…If you’re a little guy (i.e., small lender)…it’s going to cost you…You’re going to potentially have to put up more equity or find a balance sheet lender (to sell more of your mortgages to).”

The changes contemplated here are expected to occur slowly, and not before the government gets comment from various stakeholders.

Rob McLister, CMT

6 Mar



Posted by: Linda Colpitts

OTTAWA — After months of staring down increasingly threatening economic data here and abroad, the Bank of Canada appears to have blinked — ever so slightly.

The central bank on Wednesday did what it has done for more than two years — leaving its near-rock-bottom interest rate unturned.

But the wording behind the decision to keep its trendsetting lending level at 1% has been softened somewhat, highlighting concerns over continued slack in the economy and pointing to a possible extension of the holding pattern.

“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” policymakers said.

The bank’s key rate has remained at the same level since September 2010.

Missing on Wednesday, however, was the phrase “the timing of any such withdrawal is less imminent than previously anticipated,” which has accompanied recent rate announcements.

No doubt, economists will be sifting through those words in the coming days for signs of movement on the rate front.

Mark Carney, who will leave his post as bank governor June 1 to head the Bank of England, has been walking a fine line as weak inflation, lagging exports and business investment – as well as a stronger Canadian dollar —limit his policy options.


Uncertainty over Europe, which seems to crawl from crisis to crisis, and the ongoing fiscal deadlock in the United States have likewise dampened the growth outlook in this country.

The Canadian economy grew by a disappointing 1.8% in 2012, compared to 2.6% the previous year. Both the Bank of Canada and the Finance Department have previously forecast growth of around 2% for 2013 — although private-sector economists are expecting a weaker performance, and Finance Minister Jim Flaherty has acknowledged the pace could fall behind his previous estimates.

Mr. Flaherty will meet with senior economists on Friday to gather their growth forecasts for the federal budget, expected near the end of March.

In Wednesday’s statement, the Bank of Canada continued to strike the positive tone of its quarterly Monetary Policy Report released in January.

It still expects the economy to pick up through 2013, “supported by modest growth in household spending, combined with a recovery in exports and solid business investment.”

The Bank of Canada’s target inflation rate is 2%, within a band of 1% to 3%. But the annual pace of price increases have been well below that goal.

The overall inflation rates was 0.5% in January from a year earlier, while the core index — stripping out volatile items such as some energy and food products — eased to 1% during the month.

Inflation is expected to “remain low in the near term before rising gradually to reach 1% over the projected horizon as the economy returns to full capacity and inflation expectation remain well-anchored,” the bank said Wednesday.