Canadian Mortgage Backed Securities


Of late, my blogging has been very infrequent because I am following my new passion of wood working. However, when I saw the news that a leading Canadian bank is introducing Mortgage backed securities, it prompted me to write this article.

I have earlier blog posts on Vancouver real estate where we explored the booming property prices and also some unscrupulous real estate agents helping circumvent existing rules that keep our markets safe.

Further to that the BC government introduced foreign buyers tax and the market dropped steam instantly and is only recently picking up again. Meanwhile as a consequence of the clampdown in BC, Ontario market (most particularly GTA) saw a boost in property prices with the latest increase pegged at around 30%.

Previous measures to cool the frothy market included insisting on higher down payment. The CMHC chief succeeded in limiting the CMHC exposure (and that of the tax payer) by tightening insurance norms for the Mortgage issuer.

The Bank of Canada Governor also indicated his discomfort with the housing prices. Meanwhile, the banks had been merrily issuing mortgages only to realize at this late stage that the risk is high. So what do they do? They have packaged the mortgages ( a small tranche at first as a trial balloon) and announced that a bunch of uninsured “Prime” mortgage is being bundled and offered to the general public as mortgage backed security (MBS).

We have seen this movie before recently in USA where the so called “Aaa” rating was proved to be false and also mortgage originating norms flimsy. This lead to a lot of MBS investors burning their fingers and most of the resultant lawsuits are almost settled and the US economy is just coming out of the mess.

Our consumer debt level is at an all time high. The government is going to introduce housing price cooling measures next week. CMHC has limited its exposure and now it seems that the bank has decided that this is the opportune time to pass the baby to clueless private investors!

I am no expert, but to me it seems what is at stake now is that with weak salary growth, increasing cost of living and a lack of returns from safe GIC, the average retiree and potential retiree is looking for yields and may end up buying the MBS without knowing what they are getting into. This can amplify the impact of any housing price crash in a big way given that housing related activity (construction, renovation etc) accounts for 6% of the GDP. I personally know of at least one Canadian who lost money in US – MBS and then unsuccessfully sued a Canadian bank that sold it to him.

In this situation, I am looking for is that some Financial authority has to review the offering and confirm if the “Prime” rating is merited and the risk disclosure is adequate. They also need to make sure that Investors completely understand the risk factor before they buy the product. So far no one has spoken out.

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