Huzzah! Canada’s banks can tap American investors for mortgage funding again. Earlier this year, the U.S. SEC quietly granted a no-action exemption for covered bonds, allowing Canadian lenders to market them to American investors without the loan-level disclosure required for comparable U.S. products.
The exemption arrived just months after Canada’s bank regulator clashed with lenders over inflated appraisals used to secure mortgages. It marks a significant shift in how the SEC treats foreign regulation—and may provide more fuel for a systemic risk Canada’s central bank has already warned is building.
How Covered Bonds Lower Investor Risk
Before we get into the nitty-gritty, a quick refresher. Bonds are debt instruments used to raise capital. An issuer sells bonds to investors and pays interest, or yield, in return. That yield reflects factors such as inflation, liquidity, and risk. Higher risk generally means a higher yield; lower risk means cheaper financing.
Covered bonds are secured by a dynamic pool of uninsured mortgages that remain on the bank’s balance sheet. They give investors dual recourse: if the issuer fails to pay, they can pursue both the bank and the underlying mortgages. That added protection reduces investor risk, helping lenders lower yields and financing costs.
Sounds straightforward, right? The conflict is over who gets to buy these bonds—and who gets to decide how much risk they carry. That has been a point of friction between U.S. regulators and Canada since 2014.
U.S. Transparency Rules Locked Canadian Issuers Out
In August 2014, the SEC introduced Regulation AB II to strengthen disclosure requirements for asset-backed securities (ABS). The reforms standardized asset-level reporting, giving investors loan-level details instead of forcing them to rely on issuer summaries. Investors could rebuild the risk model themselves—loan by loan, appraisal by appraisal.
You wouldn’t trust Jeffrey Dahmer as the sole provider of evidence of his innocence. Why would you let a bank tell you how risky their securities are without the ability to verify the details yourself?
These changes clashed with the CMHC framework, which doesn’t provide loan-level reporting. The two systems became difficult to reconcile, and Canadian issuers pulled back. By mid-2016, major Canadian issuers, including banks, had allowed their SEC shelf registrations to lapse.
Earlier this year, that changed.
Canadian Covered Bonds Get A U.S. Exemption
On May 12, 2026, the SEC quietly issued a “no-action” draft for Canadian covered bond issuers. Instead of requiring loan-level details, the draft allows summary-level disclosure from CMHC investors’ reports. Canadian issuers can once again market covered bonds to U.S. investors without the stricter loan-level disclosure required under the domestic framework. The change also broadens the potential investor base beyond institutions to retail and fixed-income funds.
That opens the door to more capital, but also marks a stark shift in how the SEC treats foreign regulation. The agency is effectively accepting summary-level disclosure under Canada’s framework in place of the granular transparency required domestically.
Two decades ago, confidence in Canadian regulation made that kind of deference easier to justify. A lot has changed since then—especially in Canada’s mortgage market.
Canada’s Mortgage Risks Are Coming From Inside The House
Home prices climbed everywhere during the 2020 low-rate boom, but nowhere surged quite like Canada. In key markets like Toronto, speculative investors bought roughly 80% of pre-construction units. Many lacked the financing to close, but that barely mattered because the plan was to flip before completion. The purchase price only mattered if there was a greater fool willing to pay more.
Then prices fell.
Demand dried up and speculators were forced to close. With prices plunging, much of their equity—and in some cases all of it—had effectively been wiped out by the decline in value. New-construction mortgages require at least 20% equity, forcing buyers to come up with even more cash.
Canadian lenders found another solution: blanket appraisals. These relied on project-level appraisals, often completed years before construction finished, allowing lenders to validate the original contract price instead of the lower market value at closing.
If that sounds reckless, Canada’s bank regulator thought so too.
Canada’s Bank Regulator Warned Banks Over Inflated Appraisals
OSFI, Canada’s bank regulator, first criticized the practice in mid-2025. The regulator warned that lenders were using stale appraisals, potentially leaving them with properties worth less than the loans they secured.
Earlier this year, OSFI provided us with notes showing those concerns had escalated. In Q4 2025, the regulator held several meetings with banks that quickly grew more confrontational. In one example, a bank had guaranteed financing for purchasers. OSFI explicitly stated that the arrangement violated the Bank Act’s loan-to-value limits.
We ran the numbers a few months ago and found many of these projects had little to no equity left. The equity securing these mortgages doesn’t exist unless you have a time machine. Those same mortgages are used to back securities sold to domestic and foreign investors.
The SEC had “no comment” when asked whether it was aware of the OSFI notes we published a few months before its decision.
Foreign Capital: Cheaper Financing or Greater Systemic Risk?
Most people can see there’s a risk here. The harder part is identifying where it lands. Canadian banks are unlikely to default on these bonds, but that doesn’t make the structure risk-free. And the risk doesn’t stop with American investors—Canadians may ultimately carry the larger exposure.
Without loan-level transparency, investors can’t independently price tail risk. That cuts both ways. Weak U.S. demand would add an illiquidity or risk premium, pushing yields higher and turning what’s supposed to be a low-cost funding tool into a more expensive one.
Strong demand creates the opposite problem. It can push financing costs lower and create excess liquidity. Canada just spent years dealing with the consequences of a destabilizing surge in home prices fueled by cheap credit. The answer isn’t more cheap credit.
There’s also no guarantee that lower funding costs are passed on to mortgage borrowers. If they are, cheaper mortgages can further distort capital allocation toward non-productive investment.
The bigger risk is less obvious, but resembles one the Bank of Canada recently flagged in government bonds. An influx of “foreign investment” has often been framed as confidence in the Canadian economy. But those investors weren’t necessarily buying Canadian companies—they were buying Canadian debt. The BoC recently warned that demand for government bonds is becoming concentrated among hedge funds.
Hedge fund demand isn’t inherently a problem. In the short term, these funds provide liquidity and can smooth yield spikes. The risk comes from concentration and leverage, often secured against government bonds. In a global downturn, these investors may be less willing to ride out volatility and more likely to sell. Leverage can amplify that move, putting upward pressure on credit costs at exactly the wrong time.
The BoC has identified these mechanics as a systemic risk that could require liquidity operations. Just months after that warning, Canada is opening another channel that could concentrate leveraged foreign demand—this time around mortgages.
