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CMI Housing Affordability Watch: What Analysts Missed in the Fall Economic Update

29 November 2023

CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis

In the wake of the federal government’s Fall Economic Statement, released on November 21, expert and media analysis has focused primarily on future government housing spending. However, there are a few other items that warrant a closer look.

CMHC losing its policy role

One of the more interesting things in the fiscal update was the announcement of legislation that would establish the Department of Housing, Infrastructure and Communities (currently Infrastructure Canada, or INFC) and clarify the department’s powers, duties, and functions. CMHC will effectively lose its leadership role for federal housing policy – a role it has held since 1946. CMHC is unique for a Crown corporation in having policy responsibility on top of its commercial responsibilities for insurance and securitization. Despite its housing policy responsibility, being a Crown corporation places it outside the usual bureaucratic process.

This change has been in the works since late 2022, based on a PCO (Privy Council Office) briefing note available through the Access to Information Act. What is clear is that, over time, CMHC’s mandate will no longer include leading housing policy development. A discussion paper states, “[o]ver the medium term, it is advisable that INFC work assiduously to grow its housing policy capacity so it can assume a more central advisory role with the Minister in coming years, including leadership for policy development.”  Hopefully this does not derail efforts to deliver on the National Housing Strategy during the transition. 

Canada Mortgage Bonds (CMB) – A windfall for investment dealers

In the spring budget, the federal government said it was considering consolidating the Canada Mortgage Bonds (CMB) program into the regular federal borrowing program. Following a public consultation, the government backed away from its plan in response to pushback from investors who value the attractive risk/return profile of CMBs. Instead, the government has opted to act as a proprietary trading desk. Starting in February 2024, the government will buy up to $30 billion annually of CMB. Trading desks have done this trade before (sell Government of Canada bonds and buy CMBs), but never at this volume. 

For background, CMBs are issued by CMHC, which uses the proceeds to purchase pools of mortgages (mortgaged-backed securities) from private lenders, with the goal of helping to funnel capital to smaller lenders – and ultimately, to lower mortgage rates. CMBs have moderately higher yields than regular government bonds. By rolling the CMB program into the general borrowing program, the government was aiming to capture the yield spread for itself and direct the funds into affordable housing initiatives. 

The move to become a major CMB buyer will be beneficial for the program by creating a backstop bid – a type of guarantee where the government will fix a price at which to purchase any unsubscribed bonds. It will also likely lead to moderate spread compression – a narrowing of the difference in yield between different types of bonds – within the program. There is some concern that this leaves the door open for the government to proceed with its original plan to merge the programs. This is because the incentive will remain for the government to scrap the CMB program and direct the savings toward its affordable initiatives, as described above. The government has noted that it will consult the market around any further participation in the CMB program.

An open question is what should happen to the underwriting fees paid to investment dealers. Despite the CMB limit increasing from $40 to $60 billion, the supply of tradeable bonds decreased by $10 billion based on the government’s stated intention to purchase up to $30 billion annually of CMB. Assuming a 15-cent underwriting fee, underwriters would receive $45 million annually through the Government’s bond purchases. CMHC, acting as the Financial Services Advisor (FSA) to Canada Housing Trust, oversees the underwriting syndicate. CMHC should seek a fee reduction from investment dealers, and instead of passing on these savings to banks and lenders, it should retain them. The $45 million could be recaptured through a special FSA Fee and the funds directed to improving housing affordability and reducing homelessness.


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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