The new rules on government-backed mortgages that were announced last week may be conducive to future issuance of Canadian covered bonds, while also leaving the central bank with some breathing room on interest rates, says Fitch Ratings in a new report.
The rating agency says that the new rules announced by Finance minister, Jim Flaherty, which are primarily aimed at cooling the residential real estate market, could also benefit Canadian covered bonds issued under the new regulatory framework for those instruments, which only allows for uninsured mortgages as collateral.
“In our view, when Canada Mortgage and Housing Corp. (CMHC) has instituted more restrictive underwriting guidelines for insured mortgages, lenders have generally followed suit for the uninsured product to the extent they weren’t already adhering to more restrictive guidelines,” it says, noting that uninsured mortgages typically have exhibited stronger arrears performance than their insured mortgages.
“Guideline revisions that encourage more prudent underwriting would be supportive of the observed performance,” it adds.
While lenders could opt not to follow the tougher standards in order to maintain lending volume with uninsured mortgages, Fitch says that it doesn’t think this is likely given that federal banking regulators also recently proposed the final version of new prudent underwriting standards.
“We also believe that these rules create an important opportunity for monetary authorities, as they may slow growth of the market without an actual increase in interest rates in a context of high economic uncertainty,” Fitch adds. “Should the economy suffer an unemployment shock or other negative event, the central bank now has arguably more room to effectively conduct monetary policy.”