Canada's Radical Move: From Mortgage Guarantor to Lender of Last Resort?

Credits: Canadian Mortgage Changes Blur The Line Between Normal & Crisis: CMHC

The Great White North is blurring the lines between crisis lending and everyday mortgage funding

Canada has always been known for its stable housing market and prudent lending practices. However, recent plans by the federal government to directly fund mortgages have raised eyebrows and sparked concerns about potential market distortions.

As outlined in a heavily redacted 2022 report by the Canada Mortgage and Housing Corporation (CMHC), the country's plan to fund mortgage borrowing directly is highly unusual for a sovereign nation and blurs the line between normal market operations and crisis intervention measures typically reserved for economic emergencies.

Traditionally, Canada has relied on a well-established system of mortgage securitization, where lenders bundle mortgages into pools and sell them as mortgage-backed securities (MBS) to the government. The government then funds these purchases by selling Canadian Mortgage Bonds (CMBs) to investors, both domestic and foreign.

This system has worked well, providing a steady supply of low-cost mortgages to Canadians while allowing global investors to participate in the country's stable housing market. However, the government now aims to bypass this process and directly fund loans to financial institutions by selling regular government bonds.

According to the CMHC report, this move would be "unusual for a sovereign" and could potentially "distort the line between 'business as usual' activity and crisis intervention." Typically, direct government funding of banks is reserved for times of crisis, acting as a lender of last resort to prevent systemic collapse.

The concerns don't stop there. The report warns that eliminating the premium paid on CMBs could drive away foreign investors, reduce the capital available for mortgages, and ultimately increase borrowing costs for the government and the entire market.

Despite these warnings, Canada has already begun a mortgage debt-buying spree. In late 2022, the government announced plans to purchase $30 billion worth of CMBs, a figure that has since been increased to $60 billion annually in the latest budget.

While not direct funding, this approach still risks crowding credit markets and sending concerning signals to investors, who are already fleeing Canadian markets at an alarming rate, according to some experts.

Dr. Andrey Pavlov, a professor of finance at Simon Fraser University, expressed concern about the potential consequences of the government's actions. "By directly intervening in the mortgage market, the Canadian government is essentially acting as a lender of last resort on an ongoing basis," he said. "This could lead to a misallocation of capital, moral hazard issues, and potential systemic risks down the line."

The CMHC report also highlighted the potential impact on domestic investors, such as retirees and pension funds, who held over $100 billion in CMBs at the time. Eliminating this investment opportunity could result in reduced income and constrained investment options for these groups.

As Canada grapples with housing affordability challenges and the lingering effects of the COVID-19 pandemic, the government's efforts to support the mortgage market are understandable. However, the unconventional methods being employed raise legitimate concerns about market distortions, investor confidence, and long-term consequences.

Only time will tell if Canada's bold move will prove successful or if it will ultimately undermine the very stability it seeks to maintain.

While the federal government's mortgage market intervention has sparked concerns nationwide, there is one province that seems to be bucking the broader downturn trend: Alberta. Amidst a nationwide housing market cooldown, Alberta has emerged as a stronghold of resilience. Over the past 13 months leading up to December 2023, benchmark resale home prices in the province have shown a consistent upward trajectory, sharply contrasting with the widespread decline witnessed across much of Canada.

Alberta's housing market stands out for its pattern of steady, albeit modest, price increases, diverging significantly from national trends. While it may trail behind the national benchmark, Alberta's housing market is undeniably gaining momentum, a stark contrast to the notable cooling observed in major markets like Vancouver and Toronto.

In light of this promising regional market, we have an exciting opportunity to explore Alberta's real estate potential. I am personally inviting you to our upcoming webinar hosted by Legacy Investments. Join me, Adrian C. Spitters, alongside other esteemed industry experts, on Wednesday, May 29th, 2024, from 3 PM to 4 PM PST / 6 PM to 7 PM EST. Together, we'll dive into Legacy Investment's property portfolio, growth strategies, and forthcoming acquisitions, offering invaluable insights into the Western Canadian real estate market.

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As the federal government continues to navigate uncharted waters with its mortgage market interventions, regional markets like Alberta present unique opportunities for savvy investors. Join us in exploring this resilient market and gain a deeper understanding of the forces shaping Canada's real estate landscape.

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