Higher costs for mortgages forecast

Canadians may soon be paying more for new home loans as Canada Mortgage and Housing Corp. begins to clamp down on guarantees for mortgage-backed securities.

OTTAWA — Canadians may soon be paying more for new home loans as Canada Mortgage and Housing Corp. begins to clamp down on guarantees for mortgage-backed securities.

The government agency has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350 million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

This year, the federal Crown corporation was given authority to guarantee up to $85 billion under the program but by the end of July, $66 billion had already been committed.

“As a result of this unexpected increase in issuance volumes to date and to better manage volumes going forward, CMHC will be introducing a formal allocation process in late August,” CMHC said in an Aug. 1 note to lenders.

Analysts say the cap will make it harder and more expensive for banks to obtain funds to lend to their customers, which would likely be passed on by way of a bump in mortgage rates.

“The combination of steps the government has taken in the last year, coupled with the beginnings of a sell-off in the bond market… will put a bit of upward pressure on mortgage rates,” said CIBC chief economist Avery Shenfeld.

“Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.”

TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise anywhere from 20 to 65 basis points, or the equivalent of 0.2 to 0.65 of a percentage point.

She noted that historically, this is a minor increase.

“Affordability will still remain in the housing market,” she said.

The conversion of loans into securities with CMHC backing is a way for lenders to tap funds from a broad range of investors and enable banks to issue more mortgages at a lower cost.

Analysts said Canadian banks should have no difficulties securing international markets for funding, but it will come at a higher cost. CMHC-backed securities are attractive for both banks and investors since they are largely default-proof.

Fearing an overheated housing market could infect the larger economy, and result in defaults which the government must bear, Finance Minister Jim Flaherty has taken a number of steps in recent years to stem the flow of mortgage credit.

Last summer, he introduced tighter rules for mortgage lenders and borrowers — a change that the real estate and lending industries say was the main reason for a slowdown in residential property sales that began last August and continued through the first part of 2013.

As well, the finance minister acted to limit taxpayer exposure to a housing crash by setting limits on banks’ ability to buy bulk insurance from CMHC.

Still, Flaherty has been frustrated that banks were priming the house mortgage pump too aggressively, oblivious to the fact that Canadian household debt continued to climb. At 165 per cent of annual income this spring, household debt reached heights similar to the peak in the United States prior to the 2007 crash that literally broke several banks.

This spring, the minister went so far as to publicly chastise some banks for dropping their mortgage rates too low.

The moves worked for awhile, but in the past few months, housing has been on an upswing, with starts again reaching unsustainable levels near 200,000 annually, sales picking up and prices continuing to record new highs.

“We are starting to see the impact of the changes wearing off… prices in most markets are now rising faster than income,” Petramala said. “So it makes sense that the federal government, CMHC, may want to limit some of the risk-taking in the housing market.”

In last month’s monetary policy report, the Bank of Canada cited the recent developments in the housing market as the top made-in-Canada risk to the economy.

“This renewed momentum would produce a temporary boost to economic activity and inflation, but more importantly, it would exacerbate existing imbalances and therefore increase the probability of a more severe correction later on. Such a correction could have sizable spillover effects to other parts of the economy,” the central bank concluded.

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