Canada Bans Insured Mortgages From Covered-Bond Collateral

Greg Quinn and Andrew Mayeda, ©2012 Bloomberg News
Bloomberg Thursday, April 26, 2012
April 26 (Bloomberg) — Canada will prohibit banks from using insured mortgages to back their covered bonds while increasing oversight of the federal housing agency to cool off the country’s real-estate market.
Under rules in a budget bill that Finance Minister Jim Flaherty introduced in Parliament today, banks will only be able to use uninsured mortgages as collateral on covered bonds, which are notes usually backed by mortgages. The government will also strengthen oversight of Canada Mortgage & Housing Corp. through Canada’s banking regulator.
By barring banks from securing covered bonds with government-insured loans, Flaherty is discouraging mortgage lending by limiting cheap funding for home loans. The moves may raise borrowing costs for banks, leading to higher mortgage rates that would curb a housing market that has seen prices in some cities almost triple over the last decade.
“The government wants to be a little bit more restrictive in terms of slowing down the issues in the housing market and with consumer leverage more generally,” said David Tulk, chief Canada macroeconomic strategist at Toronto-Dominion Bank’s TD Securities unit.
Canadian lenders have been issuing covered bonds, which are backed by pools of residential mortgages, to fund their home- lending business. In most cases, the loans used to secure the bonds are insured by Canada Mortgage & Housing. The government currently guarantees the full value of home loans insured by CMHC and 90 percent of mortgages insured by private companies. The government will also set up a registry for companies that sell covered bonds.
Taxpayer Guarantees
“This is a superb long-term move for the development of the housing finance framework,” said Finn Poschmann, vice president of research at the Toronto-based research group C.D. Howe Institute. “As the market matures, we should find that the housing finance system can function perfectly well, out from under the umbrella of taxpayer guarantees.”
Under the legislation, lenders won’t be permitted to use mortgages insured by CMHC or private insurers such as Genworth MI Canada Inc. as collateral for the covered bonds.
Existing covered bonds will not be affected by the measures, according to the legislation. That means existing securities should benefit from greater investor demand than new ones because of the extra protection, said Francis Kestler, who trades covered bonds at Bank of Montreal in Chicago.

‘Better Bid’
The price of Toronto-Dominion Bank’s 1.5 percent covered bond due 2017 rose, narrowing the spread to government debt four basis points to 68 basis points, according to data compiled by Bloomberg.
“The outstanding issues will be better bid,” Kestler said in a telephone interview. “I don’t think it kills the market” for new bonds, he said, adding “it will be more expensive for Canadian banks to fund themselves going forward using covered bonds.”
Banks that use insured mortgages as collateral “will launch new programs with uninsured mortgage pools,” said Andre- Philippe Hardy, a bank analyst with RBC Capital Markets in Toronto. The rule “would increase the funding cost on future new originations by an estimated 10-15 basis points,” Hardy said in a note to clients.
Of the C$1.2 trillion ($1.2 trillion) of mortgage loans made to Canadians, C$67 billion are insured mortgages that are pledged to covered bond pools, or about 5.6 percent of the total, according to data provided by Kevin Chiang of credit- rating company DBRS Ltd. Of the C$63 billion of outstanding covered bonds, C$54 billion or 85 percent are backed by insured mortgages.
Lisa Azzuolo, a spokeswoman for Genworth, declined to comment on the Canadian government’s plans on covered bonds.

Excessive Risk-Taking
The legislation also proposes that CMHC’s finances be checked at least once a year by the federal banking regulator to guard against excessive risk-taking.
“CMHC fully supports the measures,” spokesman Peter De Barros said by e-mail. “Enhancements to the governance and oversight framework for CMHC support the government’s continuous efforts to strengthen the housing finance system and Canada’s housing market.”
The Office of the Superintendent of Financial Institutions will study if CMHC is acting “with due regard to its exposure to loss,” according to the budget implementation bill. CMHC’s board of directors would also add two government deputy ministers under the legislation.

‘Important Financial Institution’

“I have been concerned about CMHC for some time in this sense: that it’s become an important financial institution in Canada and it wasn’t subject to the same supervision,” Flaherty told reporters in Ottawa. “This is an important step forward.”
The tightening of oversight over CMHC and changes to covered-bond rules will probably make it more difficult for borrowers “at the margins” of the market to qualify for mortgages, said Louis Gagnon, a professor of finance at Queen’s University in Kingston, Ontario.
“It will have the beneficial effect of preventing the most vulnerable borrowers from getting access to mortgages,” said Gagnon, a former senior risk-management official at Royal Bank of Canada. “So these people will have to wait longer to get into the game.”
–With assistance from Cecile Gutscher in London and Chris Fournier and Doug Alexander in Halifax, Nova Scotia. Editors: Paul Badertscher, Dave Liedtka

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Canada The Canadian Press – ONLINE EDITION Oshawa offers lessons on population growth as other cities struggle

New restaurants popping up, an art gallery opening, university campuses expanding — the changes have appeared over time, but to Shanti Fernando they’re all signs of an actively growing city doing everything it can to attract new residents.

Fernando lives in Oshawa, Ont., a community perched on the eastern edge of the Greater Toronto Area which has typically been identified as a blue-collar automotive manufacturing hub in years past.

But that image is changing.

With the latest census figures highlighting the city as a metropolitan area with population growth exceeding the national average — one of just four such areas in recession-weary Ontario — Oshawa is a bright spot in a province being somewhat eclipsed by the success of the West.

“The character has changed from being a one-focus city to having a number of different things that they are getting known for,” said Fernando, who teaches community development at the city’s University of Ontario Institute of Technology.

“It is really diversifying.”

With a population growth rate of 7.7 per cent, Oshawa ranks above the national average of 5.9 per cent. Ontario’s growth rate, on the other hand, was just 5.8 per cent for the latest census period, down from the 6.6 per cent reported in 2007.

To Fernando, there are three main reasons for Oshawa’s good news on the population front.

“It’s the bedroom community (for Toronto), it’s economic growth in a number of areas with business and education, and then immigration,” she said.

As other manufacturing cities in Ontario struggle with plant closures and residents migrating to the resource-rich western provinces, Oshawa has been working hard to break its dependence on General Motors for jobs, particularly after the auto sector’s meltdown in 2008.

“Oshawa doesn’t just mean GM to people,” Fernando said. “It can mean something else.”

The city is working on revitalizing its downtown, expanding its health-care services and is also developing a suite of support services to attract immigrants to the area. The big driver of growth, however, seems to be Oshawa’s proximity to Canada’s most populous city.

With frequent express trains into Toronto’s downtown core, observers say Oshawa allows residents to commute to work in the country’s financial capital while still being able to afford larger houses to raise a family in.

“It’s not so much what’s going on locally… increasingly people are just living there and working elsewhere in the GTA,” said John Andrews, director of the Queen’s University real-estate roundtable.

“Oshawa is an affordable alternative.”

The rate at which people are buying comparatively cheaper homes in Oshawa may slow in the future, however, as Toronto’s condo market soars and Canadians choose downsizing over commuting to work, Andrews warned.

“It’s not like people are going to be fleeing the suburbs, but if the government doesn’t get the public transit system under control, you’re going to see tremendous intensification in the inner city.”

Oshawa’s story is significant because it shows just how much of an effect a large urban centre can have on neighbouring cities. And the impact runs both ways.

The Ontario border city of Windsor, which sits across the river from Detroit, was once very similar to Oshawa — a gritty, blue-collar city with an economy utterly dependent on a bustling auto manufacturing industry.

The most recent census data shows Windsor is one of just two metropolitan areas in the country to experience a drop in population. The other was the Ontario forestry hub of Thunder Bay.

Alan Phipps, a professor with the University of Windsor and a member of the Canadian Institute of Planners, has seen that decline first-hand. Just as Oshawa has benefited from growth in Toronto, Windsor has been shrinking in the shadow of Detroit.

“Oshawa is just insulated from any impact from loss of manufacturing by being in the suburban commute zone of the GTA,” Phipps said.

“Windsor is in the international commute zone of an incredibly declining city.”

To turn things around, Windsor is trying to change its identity and brand itself as more than an auto city, but that evolution could be a long time coming, he added.

“They keep talking about it being a retirement sort of place … but I wouldn’t come here thinking I could retire, because it’s a de-industrializing kind of place.”

That being said, Phipps noted that housing in Windsor is among the cheapest in the country and is drawing some buyers looking for affordable vacation homes.

Despite Ontario’s apparent decline in light of the rising West, analysts are quick to point out that Canada’s most populous province is, in fact, still growing.

“It’s flirting with the national average,” said Mario Lefebvre, Director of the Centre for Municipal Studies at the Conference Board of Canada.

With nearly 12.9 million residents, Ontario accounts for 38.4 per cent of Canada’s residents. While February’s census figures indicated more people were migrating west, analysts say it’s unlikely population levels in the western provinces will surpass Ontario in the next decade.

Once the U.S. economy strengthens further and housing prices in the west rise as those in Atlantic Canada drop, the population will eventually spread out more evenly across the country over the long term, Lefebvre said.

“These things come and go,” he added, noting British Columbia was once a big benefactor of inter-provincial migration in the 90s, followed by Alberta.

These days, it’s Saskatchewan that’s attracting the bulk of the migration. For now.

“As things turn around, these trends will change.”


Posted by Frank Uithoven

The upside of higher rates

Jason Heath Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET

For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.
York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.
Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.

Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.
The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.
It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.
Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.
Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.
Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.
Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.