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* Canada housing agency caps mortgage guarantees for lenders
* Move seen as another move to cool Canada's housing market
* Mortgage rates seen rising as banks reluctant to take on risk
By Andrea Hopkins
TORONTO, Aug 6 (Reuters) - Canada's federal housing agency took small step to tighten mortgage lending in 2013, limiting guarantees it offers banks and other lenders on mortgage-backed securities in another attempt to keep a lid on the country's robust housing market.
The move by the Canada Mortgage and Housing Corp may drive mortgage rates up by a small amount as banks and other big lenders are shut out of an inexpensive way to issue loans and have to take on more risk themselves at a time when some say Canada's housing market is overheated.
"CMHC is pushing back on the banks, (saying) 'You're going to take more risks on your balance sheet if you want to write these mortgages.' Well, the banks aren't going to write the mortgages," said Barry Schwartz, vice president and portfolio manager at Baskin Financial Services, which owns Canadian bank shares.
"No way are they going to take on risk when everyone is concerned about the housing market ... so this is going to cool off the housing market."
Canada's five biggest mortgage lenders - Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Bank of Montreal - have used the CMHC's National Housing Act Mortgage Backed Securities (NHA MBS) program to convert loans into securities with CMHC, or government, backing.
The program allows investors to buy government-backed mortgage paper and allows the lenders to issue mortgages at a lower cost.
Canadian mortgage rates have bumped along near record lows in recent years, fueling a housing boom that has driven double-digit price increases in many markets and sparked fears of a housing bubble.
The government has tightened mortgage lending rules four times in five years, and the national market cooled in the second half of 2012 and early part of 2013. A surge in spring demand for homes has prompted a debate over whether the market is heating up again as mortgage rates remain low.
CMHC said the mortgage guarantee program has proven more popular in 2013 than in 2012, so that lenders are approaching the C$85 billion limit set by the Finance Department more quickly than anticipated. As a result, it said lenders will be restricted to a maximum of C$350 million of new guarantees in August and it will come up with a formal allocation process for the final four months of the year.
"In short, home lenders will not have the same prospective access to market NHA MBS as a source of funding," National Bank Financial bank analyst Peter Routledge said in a research note.
Routledge said given the lower cost of funding through the program, he would not be surprised to see mortgage rates at the bigger banks climb an extra 15 to 45 basis points over time. Smaller lenders would likely follow suit, driving up the cost of home buying for consumers.