Bank of Canada: more investors, less government for mortgage business

Investors could win with private-label mortgage securities in Canada

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(Getty Images/Arda Guldogan)

(Getty Images/Arda Guldogan)

If you’re interested in making money off of other people’s debt you may have an increased opportunity, at least if the Bank of Canada gets its way.

A recent article, written by Bank of Canada deputy governor Lawrence Schembri, pressed for risk exposure changes in Canada’s mortgage market. In particular, Schembri suggested that the creation of a private-label mortgage securitization market in Canada.

Private-label mortgage securities includes any mortgage product that does not conform to criteria set by A-list banks and the CMHC. As a result, these private-label mortgages carry a significantly greater risk. Examples of these mortgages include: low-doc (aka: Liar loans), 40-year mortgages, large loans (over $415,000 in the US, over $1-million in Canada), B-lender loans. Of course, these types of loans may already seem familiar given that they, along with other private-label mortgage securities, played an integral role in the 2009 credit crisis.

Schembri commented on the paper at a speech he made to Britain’s National Institute of Economic and Social Research, yesterday. In the paper, he stated: “post-crisis imbalances have accelerated a trend in which the government has become more exposed to the Canadian housing market via its guarantees on mortgage insurance and mortgage securitization.” He continued by stating: “This trend is not sustainable. The housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures among the participants in this market.”

If Schembri’s vision takes hold in Canada, then investors and home buyers can expect a few changes.

Home buyers may soon find it harder to qualify for mortgages if they are self-employed, if they require non-standard mortgages, such as amortization periods greater than 25-years, or if they struggle to qualify for the 5-year posted fixed rate.

Investors will probably see more opportunity to invest in the debt held by Canadians in mortgage-backed securities. However, investors will have to be extra vigilant about the quality of this debt and the underlying assets secured by the debt.
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