On December 1, 2014, the Canada Mortgage and Housing Corporation (CMHC) told the nation’s lenders that they would be raising the fees it charges for guaranteeing mortgage-backed securities (MBS). But you don’t own a bank, so why should you care? Well, it will likely mean higher borrowing costs for consumers. Here’s how and why.
What are Mortgage-Backed Securities?
To start with, let’s take a quick look at what MBS are. These are a collection of investments that are “backed” or secured by the value of the mortgages. Each MBS pools together hundreds or even thousands of mortgages. The banks use these pools, known as securities, to spread around their risk when lending. Much as it does for individual homeowners who have less than 20 per cent for their down payment, the CMHC also guarantees the mortgages financial institutions hold in MBS, for a fee.
Preventing Past Risks
If the phrase “mortgage-backed securities” sounds familiar, it’s probably for its guilty association with the Great Recession at the end of the last decade. When housing prices drop significantly, as they did in 2008, the value of these securities plummets too. And many of the mortgages bundled within these MBS were worth far more than the houses themselves, so these securities turned out to be decidedly unsecure.
While Canadian lending practices helped prevent some of the worst aspects of the economic crisis here at home, the federal government has been actively developing and introducing new regulations to avoid future financial meltdowns.
With Bank of Canada Governor Stephen Poloz recently saying that Canadian housing prices could be overvalued by as much as 30 per cent, this move is part of an ongoing effort by the government to minimize taxpayer liabilities.
Higher Mortgage Rates a Possibility
As many as one-third of all Canadian mortgage are funded through these MBS investments. When word of the rate hike hit, mortgage brokers and other real estate insiders immediately warned that the hikes would be passed on to consumers.
In a posting on his site Canadian Mortgage Trends, well-regarded mortgage expert Robert McLister wrote, “These are no piddly fee hikes. We’re talking 50–200 per cent increases for government guarantees of MBS, and a 100 per cent increase for Canada Mortgage Bond guarantees.”
McLister goes on to speculate that lenders may have to raise the interest rates on mortgage loans by about 0.05 per cent to cover these increased fees. (Others have said it could be as much as 0.1 per cent higher.) The difference between a 3.5 per cent five-year, $300,000 fixed-rate mortgage versus one at 3.55 per cent works out to paying a little more than $1,100 in extra interest over the first five-year term. Likely not a deal breaker when you consider all the costs of home ownership, but that’s $200 and change a year each of us would likely rather have in our pockets.