Mortgage bond market may get a boost from new Canadian rules

The Canadian government is increasingly reluctant to insure mortgages against default. That may end up giving new life to a nascent bond market in the nation. For decades, most home loans made in Canada were made by the biggest banks and guaranteed by the government’s housing agency. In late 2016, regulators tightened the requirements for qualifying for that insurance, resulting in more people doing without it: about three-quarters of the mortgages made by federally regulated banks last year didn’t have government backing. Nearly half the nation’s $1.5 trillion of home loans are now uninsured. For lenders, consumers’ growing demand for loans with no government backing creates a thorny problem: funding. A bank can easily bundle government-insured loans into bonds and sell them to investors. That bond market was $463 billion as of September 30. Without that backing, banks and other lenders have to rely on deposits, asset-backed commercial paper, and other forms of funding that can be more expensive and less accessible, particularly for smaller firms. That’s why it could make sense for more lenders to package uninsured mortgages into bonds, which over time could become a cheaper and more reliable form of funding, said Moti Jungreis, head of global markets at Toronto-Dominion Bank’s TD Securities. He thinks an RMBS deal could be sold this year. “The market has to come up with a solution,” he noted, as quoted by Bloomberg. “Otherwise there will be no financing available for mortgages.”

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