Government institutions operate under the assumption of permanence, leading to a deep-seated resistance to change. Below, we highlight areas where simple action by the federal government could improve our housing finance system and improve affordability.
Canada Mortgage Bond (CMB) Repo Facility
When the federal government announced its intention to buy $30 billion—half the issuance of the Canada Mortgage Bond (CMB) program—the Bank of Canada was appointed to manage this portfolio. Given the needs of mortgage originators for a reliable hedging tool, the Bank of Canada should establish a repo facility to support the efficient operation of the CMB program. Accommodating a diverse range of participants, including banks, investment dealers, credit unions, and mortgage finance companies, does pose challenges in terms of counterparty risk. However, addressing these challenges and finding an “ideal” solution is likely a priority for the Bank.
A practical approach would be for the Bank of Canada to work directly with banks and dealers (including the aggregation desks)—entities it already engages with in its existing repo facility—while allowing dealers to interface with the other counterparties. Though not a perfect solution, this approach could be implemented quickly and effectively.
Since these parties need to hedge their books daily, it would be beneficial for the Bank to conduct a daily repo operation, ideally toward the end of the trading day.
Simple Changes to the CMB Program
The administration of the CMB program seems to be stuck in a time warp, with initial decisions upheld as gospel and treated as unchangeable. This rigidity has impacted the implementation of simple yet effective improvements. For example, consider the idea of having a mortgage-backed security (MBS) pool from multiple originators. CMHC’s reluctance seems to stem from concerns over added complexity when determining CMB allocations. Currently, lenders can share their CMB allocation with the aggregation desk that purchases their mortgages. CMHC reportedly would prefer to directly map the allocation from each lender to the aggregator. However, this would require a secondary calculation to first determine the distribution among lenders in the pool. This process doesn’t appear overly complex and could reduce the need for small, inefficient pools, easing the administrative burden for CMHC, Computershare, and aggregators.
Perhaps I am being too simplistic. There are potential reporting issues, as two or more services would be reporting on one pool. While this is a problem for aggregators, it should be manageable. Using internal systems like TAO, aggregators can combine the data feeds from pool servicers to produce consolidated monthly securitization reports. CMHC would simply need to provide a test set of data, and each aggregator would have to demonstrate its ability to provide the appropriate report.
In the event of servicer default, the issue is typically covered by the Mortgage Servicing and Underwriting Agreement between the servicer and the aggregator. At worst, CMHC could require that aggregators have specific provisions for servicer default for multi-issuer loans. As for a potential “failure” of an aggregator, CMHC already has a road map in place to address such a situation.
So, what’s preventing these changes?
Tax Reforms to Support Housing Affordability
An estimated 31 per cent of housing construction costs in Ontario stem from government fees, charges, and taxes. To improve affordability, the federal government could take a significant step by lowering the GST on new homes and updating the GST/HST New Housing Rebate.
When the GST was implemented, a rebate system was put in place to offset the tax’s impact on affordability, aiming to “ensure that the new system does not pose a barrier to the affordability of housing in Canada.” Currently, Canadians buying a primary residence can receive a rebate of 36 per cent of the GST paid on homes valued up to $350,000, with a maximum rebate of $6,300. For homes between $350,000 to $450,000, the rebate is clawed back, and no rebate is paid for homes over $450,000. In the current market environment, few homes would qualify for a rebate under these thresholds.
Despite a government commitment to “review[ing] these thresholds at least every two years and adjust[ing] them as necessary to ensure that they adequately reflect changes in economic conditions and housing markets,” they have not been updated since November 1991. Economist Mike Moffat estimated that if the $350,000 limit was raised to $1,000,000, and the $450,000 limit was increased to $1,500,000, this adjustment would return an estimated $1.7 billion to homebuyers each year. Such a move would visibly lower the after-tax cost of housing for Canadians. Like the other suggestions above, it is well within the scope of federal policy and simple to implement.
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.
