Back Matter

Appendix I. Mortgage Funding

Mortgage funding is dominated by deposits, but capital market funding is important as well. Retail deposits, which include demand deposits and term deposits (such as guaranteed investment certificates), are one of the lowest-cost funding sources, with five-year guaranteed investment certificate rates generally lower than five-year Government of Canada bond rates. Capital market funding sources include deposit notes (short- and medium-term debts issued by banks that target capital market investors), the CMHC’s securitization programs, private-label securitization, and covered bonds.

The CMHC’s securitization programs have grown substantially over the past five years, with their combined share in total mortgage funding rising from 19 percent at end-2007 to 33 percent at end-2012. National Housing Act mortgage-backed securities (NHA-MBS) are backed by mortgages insured by the CMHC or the government-backed private mortgage insurers. Canada Mortgage Bonds (CMBs) are issued by the Canada Housing Trust, a special purpose trust, which uses the proceeds to buy NHA-MBS. The CMB program enhances NHA-MBS by eliminating pre-payment risk. The growth of the CMHC’s securitization programs has been driven by three important factors: their attractiveness to mortgage lenders (including specialized non-depository mortgage lenders) as a low-cost funding vehicle, their eligibility as high-quality assets to meet liquidity requirements, and their use as reinvestment assets under the Insured Mortgage Purchase Program (IMPP).29

The participation of small lenders in CMHC’s securitization programs has increased sharply. The number of participants other than the six largest banks in five-year fixed rate CMB transactions almost quadrupled between 2006 and 2012 and now make up more than 82 percent of the participants; the share of issuance volume of non-Big 6 participants increased from 19 percent in 2006 to 61 percent in 2012.

While total private-label mortgage securitization is lower than before the global financial crisis, mortgage-backed ABCP has increased in the past two years. Private-label securitization includes asset-backed commercial paper (ABCP), asset-backed securities, and residential mortgage-backed securities (RMBS), which are backed by uninsured mortgages. There has been only one issuance of RMBS since 2009 (Toronto Dominion Bank in September 2013), so the share of mortgage assets underlying asset-backed securities is now very small. However, over the past two years, small originators have been funding mortgages through bank-sponsored ABCP conduits. As of November 2012, mortgages and home-equity lines of credit represented 50 percent of the ABCP market’s underlying assets.

Recent regulatory developments are helping to mitigate risks in private-label securitization. Under the newly-adopted IFRS, reporting requirements for off-balance-sheet treatment are stricter. Basel III will require regulated sponsors to hold additional capital for committed but undrawn lines of liquidity support. Finally, the government has announced that it plans to prohibit the use of government-backed insured mortgages as collateral in securitization vehicles that are not sponsored by CMHC.

Covered bond issuance has grown substantially since 2007, though the recent prohibition on the use of insured mortgages as collateral has dampened activity. All the largest banks and one large credit union now have covered bond programs. Outstanding covered bonds amounted to Can$64.5 billion at end-2012. The National Housing Act was amended in 2012 to introduce a legal framework for covered bonds and to designate CMHC as responsible for administering the framework. Under the new framework, insured mortgages may not be used as collateral. The framework provides greater certainty to investors with the statutory protection of their claim over the cover pool assets.


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In Ontario, provincially-regulated credit unions are also required to have mortgage insurance in cases where the LTV exceeds 80 percent.


With the adoption of International Financial Reporting Standards (IFRS), the majority of mortgage lenders’ securitization volume is now recorded on balance sheet.


The eight largest mortgage lenders consist of the six largest banks (Bank of Montreal, Bank of Nova Scotia, National Bank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto Dominion Bank) and two large provincial lenders (Quebec’s Desjardins cooperative network and the Alberta Treasury Branches).


Since 2012, the safety and soundness of the CMHC’s commercial activities have been subject to review and monitoring by the federal Office of the Superintendent of Financial Institutions (OSFI), with OSFI making supervisory recommendations to CMHC’s responsible Minister, the Minister of Finance, and the CMHC’s board of directors.


The total value of CMHC’s mortgage insurance is limited by legislation. The limit has been raised in steps from below 20 percent of GDP in 2004 to its current level of Can$600 billion (about one-third of GDP). The limit for mortgage insurance provided by private insurers is Can$300 billion.


In the unlikely event of a private mortgage insurer’s winding up, the government would honor lender claims for insured mortgages in default, subject to the 10 percent deductible and any applicable liquidation proceeds.


OSFI is required to undertake examinations or inquiries and report the results, including any recommendations, to the CMHC’s Board of Directors and Ministers of HRSDC and Finance. While OSFI does not have any corrective powers over CMHC, CMHC’s Corporate Plan must contain a proposal indicating how CMHC will respond to OSFI’s recommendations.


CMHC will pay the federal government an additional 3.25 percent of its insurance premiums, plus an extra 10 basis points on the low-LTV insurance that it sells. Private mortgage insurers have been required to pay a similar fee of 2.25 percent of premiums since January 1, 2013.


The premium hike is the first one since 1998 and follows the premium cuts in 2003 and 2005.


All the control variables enter equations with lags to account for sluggishness in mortgage credit/house price response to the change of their determinants. This, together with the fact that control variables in the two equations are different, simplifies the estimation of the two equations as the endogeneity/simultaneity issues are not present. Therefore, each equation is estimated separately using the OLS.


The effects of macroprudential policy should be interpreted with caution because of possible endogeneity of macroprudential measures.


The cumulative effect of measures is just the sum of coefficients in vector γ.


This follows Crawford and Faruqui, (2012). The analysis is constrained by important data limitations. There is no publicly available disaggregated data on the different types of credit (especially those that were targeted by the measures). Therefore, the analysis focuses on aggregated measures of mortgage credit.


This follows Peterson and Zheng (2011). Igan and Kang (2011) also use similar specifications for Korea.


To isolate the effect of the specific set of measures, we control for measures that were introduced before that specific set.


Even though the government set a minimum down payment of 5 percent for insured loans, “cash backs,” unsecured borrowing and gifts could have been considered part of the down payment. OSFI’s B-20 guideline from July 2012 stipulates that banks should make every effort to determine if down payment is sourced from the borrower’s own resources or savings.


Dunning (2011) shows that the share of new refinance mortgages with an LTV ratio of 90 percent or more fell from almost 50 percent to zero. However, many refinance mortgages with high LTV ratios were replaced by mortgages with LTV ratios between 85 and 90 percent.


All borrowers were required to meet the standards for a five-year fixed-rate mortgage, even if they choose a variable rate, shorter term mortgage. Dunning (2011) shows that following this change there was a large rise in the qualifying interest rate used for variable rate mortgages (30 percent of total new mortgages), implying that more potential borrowers were not able to qualify for variable rate mortgages.


CMHC (2011) suggests that the volume of refinance loans dropped by 22 percent following the 2011 measures. Dunning (2012) estimates that the 2011 measures would push debt-service ratios above the maximum limit for about 6 percent of the high LTV mortgages taken out during 2010. He also suggests that about 11 percent of the borrowers in 2011 would have not been able to access credit following the latest reduction of the maximum amortization period.


OSFI’s B-20 guideline stipulates that banks should make reasonable efforts to determine if down payment is sourced from the borrower’s own resources or savings. CMHC (2012a) claims that 35 percent of households who purchased a house in 2011 were first-time borrowers and about 15 percent of them borrowed at least part of the down payment.


See Crowe et al. (2011) for more detailed discussion on implementation and evidence of instruments’ effectiveness.


While we use mortgage credit growth as the dependent variable, the regressions broadly follow the approach in Arregui and others (2013).


Alternatively, we could use the values of macroprudential instruments as independent variables. However, two problems would arise. First, LTVs and DTIs across countries are not comparable, because the structures of mortgage markets differ sharply. Second, the sample size would get much smaller as many countries introduced macroprudential measures only after 2000. A step function variable takes the value of zero before any measure is introduced, but a “value” variable is not defined.


Since we are working here with step variables representing different stance of macroprudential policies across countries, the comparison of the estimated effects of, for example, LTVs in the international context and in Canada is not possible.


It is important to note that simply comparing LTVs can be misleading, as the appropriate or optimal level of mortgage LTV for each country will depend on a number of country-specific factors. Even though international experience is helpful in suggesting additional measures the authorities could consider, it might not provide much guidance on calibrating this measures. Therefore, any policy advice on changing or keeping the direction of macroprudential policy ultimately depends on whether these policies meet their objectives from an individual-country perspective.


Secured personal lines of credit, which are mostly backed by houses (i.e. home-equity lines of credit), have risen sharply both in absolute terms and as a share of total consumer credit. In 1990, secured PLCs represented less than 10 percent of consumer credit; in 2011 their share had risen to about 50 percent (Crawford and Faruqui, 2012).


Mortgage lenders that do not rely on deposits for funding are not subject to prudential regulation.


Some product design features (like 100 percent coverage and lump-sum prepaid mortgage insurance fees financed as part of the mortgage loan amount) were also similar to Canada’s. However, there were two important differences: Australia had no regulatory mandate for lenders to use mortgage insurance and Australia provided no backup government guarantee for private mortgage insurance coverage. Although mortgage insurance was and is not obligatory in Australia, most lenders now require that loans with LTV ratios over 80 percent carry mortgage insurance. This requirement is driven by private-sector securitization in the mortgage market: to make high-LTV loans marketable to investors, they generally need credit enhancement such as mortgage insurance.


Under the IMPP, the government permitted CMHC to purchase up to Can$125 billion in NHA MBS to maintain the availability of longer-term credit in Canada following the onset of the global financial crisis in 2008. The IMPP remained available until the end of March 2010.

With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada
Author: Mr. Ivo Krznar and Mr. James Morsink