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The OECD has released its OECD Economic Surveys – CANADA – June 2014 – OVERVIEW.

Housing issues and monetary policy

• • Tighten mortgage insurance to cover only part of lenders’ losses in case of mortgage default. Continue to increase the private-sector share of the market by gradually reducing the cap on the Canada Mortgage and Housing Corporation’s (CMHC) insured mortgages. The government would also need to carefully consider its ability to achieve its housing-finance and financial-stability objectives in the context of a smaller mortgage insurance-market share for CMHC.
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Low borrowing costs and loosening credit restrictions over the mid-2000s made it easier for homeowners to carry larger mortgages, driving household debt to a historical high of 166% of disposable income. Easier credit over this period partly reflected growing mortgage securitisation by the Canada Mortgage and Housing Corporation (CMHC), which is wholly owned by the federal government.
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The extent of federal government involvement in mortgage markets via mortgage insurance and CMHC securitisation operations is unusual by international standards. Some 65% of mortgages in Canada are insured, three-quarters of them by CMHC and the rest by private-sector insurers. The government fully backs all CMHC-insured mortgages and, in the event that a private insurer becomes insolvent, 90% of the value of the mortgages it insures (i.e. the government would honour lender claims for privately insured mortgages under insolvency, less 10% of the original principal amount of the mortgage and any applicable liquidation proceeds). Furthermore, mortgage insurance covers 100% of the loan balance (less the 10% in the event of private insurer insolvency), compared with losses of only up to 10-30% of outstanding balances in most other countries (BIS, 2013).

This extensive role exposes the taxpayer to potentially large risks, although the track record has been good so far.
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CMHC’s currently dominant role could be reduced by progressively lowering the amount of insurance it can write (currently capped at CAD 600 billion) and raising that of the private providers (currently CAD 300 billion). Over the longer run the insurance activities of CMHC could be privatised, shifting the government’s role to one of guaranteeing only against catastrophic losses.

Oddly, these recommendations regarding the CMHC were not highlighted by either G&M story, which focussed on inequality and labour mobility barriers.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets winning 16bp and DeemedRetractibles gaining 10bp. There was a fair bit of volatility, but not with any clear trends. Volume was very low.

PerpetualDiscounts now yield 5.30%, equivalent to 6.89% at the standard equivalency factor of 1.3x. Long corporates now yield a hair under 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a slight (and perhaps spurious) tightening from the 255bp reported June 4.

This entry was posted on Wednesday, June 11th, 2014 at 11:44 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.