The latest federal efforts to cool the Canadian housing market are credit positive for both the big banks and Canada Mortgage and Housing Corp. (CMHC) says Moody’s Investors Service in a new report.
Last week, the Department of Finance Canada announced a series of coordinated measures, along with the Office of the Superintendent of Financial Institutions (OSFI) and CMHC, designed to help reduce the risks building in the overheated housing market. Finance Canada announced an increase in the minimum down payment for new insured mortgages above the $500,000 mark, CMHC revised guarantee fee levels for securitizations, and OSFI announced plans to increase regulatory capital requirements for residential mortgages.
See: Feds and regulators take step to limit housing market risks
The planned increase in capital requirements for mortgages is credit positive for Canadian banks, the Moody’s report says, “because they will help to counteract two of the Canadian banking system’s key vulnerabilities: high household debt to income and elevated housing prices.”
OSFI will consult with the banks and others in 2016, and aims to have the final rules in place by 2017. However, the new rules will only apply to new mortgage loans. “This approach will dilute the immediate credit benefits to the Canadian banks, but nonetheless will be positive in the future,” the Moody’s report says.
The banks with the highest relative uninsured exposures — Royal Bank of Canada and Bank of Nova Scotia — will be most affected by OSFI’s action, the Moody’s report.
The increase in the minimum down payment on new insured mortgages “is credit positive for CMHC because higher down payments will increase homeowner equity in insured properties, lowering CMHC’s potential credit losses should the borrower default,” says Moody’s in a separate report.
Similarly, the changes to the fee structure for securitizations are also credit positive for CMHC, the Moody’s CMCH report says, “because higher guarantee fees will add to CMHC’s capital and strengthen its solvency should an economic downturn increase mortgage default claims.”