Once considered a major motivator of the credit crisis that plagued the United States a decade ago, residential mortgage-backed securities might be the key to buttressing the economy against a similar mortgage crisis in Canada.
“While lenders are very well equipped to manage normal market risks, I suspect they are rather unwilling to take on the additional risk of future government intervention in the housing markets,” according to Andrey Pavlov, a professor of finance at the Simon Fraser University’s Beedie School of Business.
“Therefore, lenders are likely more interested today than they have ever been in hedging their residential real estate exposure, and mortgage backed securities would be a good way to do so,” he stated in an interview with the Financial Post.
The Bank of Canada has indicated that it is considering boosting the market for RMBS, especially since only around 0.1% of the nation’s mortgage debt is in RMBS deals. According to DBRS Ltd., this figure represents approximately $1.5 billion in uninsured mortgages.
The shot in the arm would certainly kick the sub-sector into high gear, as no lender has widely marketed an RMBS deal since September of last year. And such a step by the BoC will be helped by the fact that home prices across the country are rising at the slowest rate so far this decade.
Early last month, BoC governor Stephen Poloz urged lenders to improve access to, and usage of, mortgage products with longer terms, as this will evenly distribute risk and help insulate the financing system.
“I know mortgage-backed security is a bit of a swear word in Canada, particularly because of the recession in the U.S., but the fact is we’ve been doing mortgage-backed securities in Canada for at least 20 years and, really, what Poloz is trying to do is open up Canada’s market so it isn’t always institutional or crown corporations buying them,” Ebury senior sales manager and foreign capital specialist Benjamin Sammut explained at the time.
“The way you get mortgage involvement for an MBS market in Canada is by increasing product offerings. Canada is notoriously short for long-term mortgages, and with a larger product offering it would create more demand for Canadian mortgage-backed securities, as well as spread the risk and create a safer structure for the Canadian mortgage space.”