Recent legislative changes may make it tougher for mortgage lenders to compete with the big six banks, says Toronto-based DBRS Ltd.
In a new report, the rating agency observes that, while the federal government has made several recent policy changes that aim to curb household debt levels by targeting borrowers, other recent changes are targeting lenders themselves. And, it cautions that these changes may make it difficult for other lenders to compete with the big six banks, which were designated as domestic systemically-important banks (DSIBs) earlier this year.
For one, it notes, the recent federal budget indicates that the government intends to prohibit use of insured mortgages as collateral in non-Canada Mortgage and Housing Corp. (CMHC)-sponsored securitization programs. DBRS says that this move is intended to restore mortgage portfolio insurance to its original purpose of allowing access to mortgage funding, but, it says, this “may in fact achieve the opposite result.”
DBRS reports that there is currently approximately $6 billion of insured mortgages funded in private-sector asset-backed commercial paper (ABCP) conduits. “While this amount is small relative to the entire Canadian market, these mortgages mostly came from large, non-deposit-taking mortgage finance companies that use ABCP as an important liquidity management tool,” it says.
However, it says, without the flexibility of using ABCP to manage certain insured mortgages… “these finance companies may not be able to offer the same range of mortgage products as the DSIBs, effectively reducing the competition in the mortgage market and potentially further reducing consumer access to mortgage funding.”
Additionally, the government recently created a new legal framework for covered bond programs in Canada, including new legislation and CMHC guidance for covered bonds. While these efforts are designed to create more certainty for covered bond investors, DBRS says that there appear to be two unintended consequences of the legislation and the guidance.
First, it says that the disclosure requirements they impose are onerous, and expected to be costly. “Therefore, DBRS is of the opinion that lenders other than domestic systemically important banks (DSIBs) are not likely to pursue registration as a covered bond issuer under the legislation, and would therefore be at a disadvantage without the benefit of covered bond funding.” And, it doesn’t expect to see the creation of any non-registered covered bonds in Canada, except for existing grandfathered programs.
“As these mortgage finance companies are also not eligible for covered bond funding under the legislation, this further reduces their ability to compete with DSIBs, which may ultimately affect consumers,” it says.