It’s widely known that mortgages backed by CMHC are largely default-proof on the part of the lender, because they’re guaranteed by the Crown organization. It’s also known that CMHC has been nearing its limit for mortgage insurance, and that Finance Minister Jim Flaherty has no interest in increasing that limit at all. Now, the pressure has been taken off him somewhat as CMHC announced this week that they’d be limiting the amount of guarantees handed out to banks. In turn however, that pressure will be directed at mortgage rates, as banks try to make up the CMHC losses elsewhere.
Early this week CMHC announced that they’d be introducing new mortgage rules restricting banks, credit unions, and other mortgage lenders that they’d be limiting the amount of guarantees to $350 million for each institution for the amount loaned this month under the National Housing Act Mortgage-Backed Securities program.
The reason for it? There has simply been too many guarantees lately, so much so that CMHC had already loaned $66 billion of the $85 billion they were allotted for the year.
“As a result of this unexpected increase in issuance volumes to date and to better manage volumes going forward, CMHC will be introducing a formal allocation process in late August,” CMHC stated in a note to lenders dated August 1.
Whenever CMHC starts guaranteeing fewer mortgages, it’s always bound to have a slight softening effect on the housing market. However, in addition to fewer borrowers being approved, banks and lenders will also need to find other areas to make up the lack of mortgages that they’re approving, and profiting from. An area where they’re bound to hit this time while doing it are mortgage rates.
“The combination of steps the government has taken in the last year, coupled with the beginnings of a sell-off in the bond market…will put a bit of upward pressure on mortgage rates,” said Avery Shenfeld, chief economist at CIBC.
However, he also says that while it will put pressure on rates, the effects felt won’t be severe for borrowers.
“Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages,” he says.
The changes in all, really shouldn’t have that much effect on the market, although it will result in fewer borrowers getting fewer mortgages. But because these newest rules are only applied to lenders specifically, and because they only apply to CMHC-backed mortgages, those that are qualified will still be able to get a mortgage. And TD economist Diana Petramala says,
“Affordability will still remain in the market.”
