The federal government is increasing oversight on the issuing of government-backed mortgages in Canada, while also putting more of the risk for lending on the banks.
As previously signaled in the budget, Finance Minister Jim Flaherty tabled changes Thursday that will place Canada’s Mortgage and Housing Corp. under the control of the federal financial regulator.
Flaherty said CMHC has become a significant financial sector player in Canada, and it was appropriate that it meet the high standards of soundness demanded by the Office of the Superintendent of Financial Institutions.
“I’ve been concerned about CMHC for some time, in this sense, it’s become an important financial institution in Canada and it was not subject to the same supervision” as banks, he said.
Under the changes, CMHC will be subject to annual “stress tests” like those that currently exist for banks to ensure its financial soundness under extreme economic conditions.
The agency, which Flaherty noted was created to assist social housing, has evolved into a pillar of Canada’s overall housing market, providing government backing on mortgages with less than 20 per cent down payment – so called high-leverage mortgages. The guarantee, which essentially removes banks’ exposure, is one reason Canada’s housing market remained robust through the 2008-09 financial crisis.
But policy-makers, including the Bank of Canada, worry the guarantee, along with super-low interest rates, encourages too much housing-related lending and inflates home prices.
The changes, contained in the budget implementation bill tabled Thursday morning, would also restrict banks from issuing bonds backed by pools of CMHC-insured mortgages, in essence using Ottawa’s guarantee for private-sector financial instruments.
TD Bank chief economist Craig Alexander called the changes “appropriate” and minor “tweaks” to Canada’s financial regulations, particularly compared to the major overhaul occurring in the United States.
“This isn’t going to make a big difference to either the real estate market or Canadians,” he said. “Banks will continue to offer covered bonds, but they just won’t be able to use CMHC-insured products in those bonds.”
In a statement, the Canadian Bankers Association said that the statutory protection puts them in a “better position to diversify their sources of funding because this legislative framework will increase investor interest in Canadian covered bonds.”
Alexander said the changes in covered bonds will likely raise the cost of funding to the banks modestly and, “all else equal that will help to temper lending a bit.”
Flaherty and Bank of Canada governor Mark Carney have signaled for well over a year they are becoming increasingly uncomfortable with the level of lending and rising indebtedness.
Household debt reached record levels of over 150 per cent of disposable income last year, close to the 160 per cent mark that preceded the housing collapse in the United States.
This week, Carney said he has seen encouraging trends on the debt front. Although he expects household debt to keep rising, he said the pace of growth has slowed sharply and more new mortgages being taken out have been of the more predictable fixed-rate variety.
Flaherty said Thursday he remains concerned about the hot condo markets in Vancouver, Toronto and even Montreal, although he gave no indication he was ready to tighten mortgage rules a fourth time.
The new actions in Canada are incremental and should be seen in context of the aftermath of the financial crisis, said Alexander.
“We’ve tightened up mortgage rules three times in the last couple of years, OSFI has now released new draft mortgage guidelines and now we’re getting changes to the oversight of CMHC,” he explained.
“The changes we’re seeing is very much tweaking the system, and that contrasts with what we’re seeing in the United States where the financial system is experiencing dramatic and radical structural change.”