Most Canadian mortgage lenders fund some portion of their mortgage lending using CMHC’s National Housing Act Mortgage Backed Securities (NHA MBS). That is, cash flows from mortgages are aggregated into investment securities and then sold to investors through a process called securitization. Payments from these mortgage backed securities are guaranteed by the CMHC, and therefore backed by the federal government, which allows banks to fund their mortgage business more cheaply than would be possible through other sources of funds such as deposits or uninsured mortgage securitization.
At the beginning of each year, the Department of Finance and the CMHC set out a maximum volume of mortgages that can be securitized through its NHA MBS. That number for 2013 was $85 billion. It is important to note that the limit on NHA MBS has not changed. However, by the end of July lenders had already issued $66 billion or 78% of this year’s MBS limit. To ensure that the 2013 MBS limit is not reached before the end of the year, and that access to the program is fairly allocated, the CMHC announced yesterday that it has capped each lenders MBS issuance for this month at $350 million until it can formalize a new process to allocate the remaining amount of the 2013 NHA MBS limit. That means that some lenders may need to fund new mortgage issuance through alternatives to NHA MBS and will therefore likely experience higher mortgage funding costs. These higher costs would likely be passed through to mortgage rates. Preliminary estimates put the potential impact on mortgage rates in a range of 20 to 65 basis points (0.25% to 0.65%).
The market impact of an increase in mortgage rates in the short-term is uncertain. Preliminary modelling by TD Economics suggests that a 1 per cent increase in mortgage rates leads to an initial 6 per cent increase in sales as buyers rush to lock-in existing rate holds, but that those gains are reversed in subsequent months, leading to an ultimate 1% decline in sales. Therefore, the impact of a 20 to 65 basis point increase would, all else equal, likely lead to a minimal decline in overall sales activity.