April 26, 2012 / 7:49 PM / 5 years ago

Canada increases scrutiny of housing agency, bonds

Canada's Finance Minister Jim Flaherty takes part in a news conference on Parliament Hill in Ottawa April 26, 2012. REUTERS/Chris Wattie

OTTAWA (Reuters) - In an effort to cool the heated housing market, Canada plans to have its bank regulator oversee the federal housing agency’s commercial activities and tighten rules governing the fast-growing market for covered bonds.

In legislation introduced on Thursday, Finance Minister Jim Flaherty said he was giving the bank watchdog, the Office of the Superintendent of Financial Institutions (OSFI), the job of making sure that the Canada Mortgage and Housing Corp (CMHC) doesn’t stoke an already hot property market and create financial instability.

Set up after World War Two to address a housing shortage, CMHC has since become the country’s biggest seller of mortgage insurance and a major provider of mortgage-backed securities. But its financial transactions were not formally subject to the same regulatory scrutiny as those of major banks.

“I’ve been concerned about the CMHC for some time in the sense that it’s become an important financial institution in Canada, and it was not subject to the same supervision by the Office of the Superintendent of Financial Institutions,” Flaherty told a news conference.

“So I think this is an important step forward.”

Flaherty has tightened mortgage rules three times since 2008 to try to reduce the risk of a housing bubble, and declined to say if Thursday’s regulatory move marked the end of his interventions.

“We watch the market closely, and I particularly watch the condo market in Vancouver, Toronto and to some extent in Montreal as well,” he said.

“We continue to monitor the housing and mortgage market and we will take action as necessary.”

Some experts have expressed concerns about Canada’s housing market, with property prices seen as over valued in some cities, and about the condo market specifically. The role played by CMHC in fueling the boom has come under scrutiny.

“I believe that the federal government’s plan to bring CMHC under the direct supervision of the Office of the Superintendent of Financial Institutions is long overdue,” said Louis Gagnon, a professor at Queen’s University in Kingston, Ontario.

LEGAL FRAMEWORK

The bill also creates a legal framework for covered bonds, which are securities backed by a pool of assets, often including mortgages, pledged as security against default.

The main change proposed by Flaherty is one that prohibits banks from using mortgages insured by CMHC as collateral in their covered bond programs.

The credit rating agency DBRS said there were no rating implications as a result of the announcement. It predicted some banks will continue to fund using insured mortgages until the new law is passed.

Unlike regular asset-backed securities, the issuer of a covered bond, usually a bank, is liable if the underlying assets are insufficient. This gives investors an additional layer of security.

The market for covered bonds, big in Europe, has existed in Canada for less than a decade and has only really taken off in the past two years. The size of the Canadian market is about C$60 billion.

Investors have been keen on these types of covered bonds because the underlying assets carried an explicit government backstop and banks were able to issue the bonds at lower rates.

But the rule change could cool the market because the risk that the underlying assets default must now be carried by the banks rather than the taxpayers-backed CMHC.

Spreads on existing covered bonds that are backed by insured mortgages immediately tightened after the announcement, said David Tulk, chief macro strategist at TD Securities.

“They won’t be as cheap of a source of financing for the banks and the issuers that you would see with the insured product currently out there,” Tulk said.

“You might find the banks will pass on the impact of the higher cost of financing on to consumers through higher mortgage rates,” he added.

But TD also said the clarity provided by the legislation could help support international demand for covered bonds from Canadian issuers.

The framework also aims to make this market more transparent by requiring CMHC to create a registry of banks that are eligible to participate in a covered bond program and making that registry public.

All the changes could become law by the end of June, especially if the ruling Conservatives use their majority in Parliament to speed up their passage.

The 431-page bill contains dozens of other initiatives such as lifting foreign ownership limits on telecommunications companies, raising the eligibility age for Old Age Security and speeding up approvals of large oil and mining projects.

Once the bill passes Parliament, OSFI will monitor CMHC’s mortgage insurance and securitization activities and report to the finance minister, the CMHC board of directors and the human resources minister.

Separately, OSFI is now also tightening mortgage underwriting criteria for banks.

Additional reporting by Randall Palmer in Ottawa and Jon Cook in Toronto; Editing by Peter Galloway and Jeffrey Hodgson

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below