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

Canada is taking crisis-style mortgage market intervention, and making it an everyday thing. That was the feedback the Government of Canada (GoC) received from the CMHC. In recommendations dated in 2022, the CMHC explained the country’s plan to directly fund mortgage borrowing is unusual for a Sovereign, and blurs the line between normal markets and crisis intervention. 

The heavily redacted document also warns it’s likely to drive away investors, raise the cost of government borrowing, and ultimately concentrate risk. If that’s what they left out, how bad was the stuff redacted.

Canada took the first steps anyway last year, borrowing money to buy tens of billions worth of mortgage bonds it guarantees. A plan it was so happy with, they included doubling the initial proposed purchase in the latest budget. 

Canadian Mortgage Bonds (CMBs)  

Let’s start with a quick refresher. Lenders originate mortgages, bundle them into pools, which are then packaged and sold as mortgage backed securities (MBS) to the government. To fund the purchase of MBS, the government sells CMBs to investors. At the end of the term, the bond is paid in full to the investor. In short, CMBs are state-guaranteed bonds sold to investors to fund eligible residential loans.  

Since Canada guarantees the bonds, the interest cost is only slightly higher than GoC bonds. This doesn’t just allow domestic investors, but also global investors, to provide low cost mortgages. That’s also an important note—the role of credit supply. 

The cost of interest is based on supply and demand of credit. If the demand to buy bonds rises faster than issuers need capital, the issuer pays less to borrow. If everyone wants to lend you cash, you pay the least amount of interest. The opposite is also true—issue more bonds than investors are willing to absorb, and the cost of interest rises until it’s attractive enough for investors. Let’s put a pin in this. 

Canadian Mortgage Plans Blur The Line Between Normal & Crisis

In 2022, it appears Canada’s department of finance sought the CMHC’s advice on eliminating CMBs. The Government was investigating funding loans directly to financial institutions, selling GoC bonds for the capital. The government would create excess demand for all of its bonds, thus lowering costs for financial institutions. The CMHC, despite redacting a good chunk of the consequences, painted a less-than-ideal picture. They warn it would taint Canada’s reputation as a stable capital market, divert investors into other markets, and raise the cost of borrowing for all government services. 

The CMHC explains they currently operate on a breakeven basis, passing costs onto financial institutions. All interest risks and hedging costs are currently retained by issuers through swap agreements and matched funding. In addition, the CMHC is compensated for its advice on delivering the program, helping to diffuse taxpayer costs. That’s not how things would work if the government tackled this directly. 

“… it would be difficult to find an example of a sovereign directly funding its banking system,” warned the CMHC. Continuing to explain what they’re doing would become revenue generating activity.  

They elaborate, “it would be unusual for a sovereign to be compensated beyond administrative and risk provisions in the delivery of their programs when not providing a lender of last resort function in time of crisis.” 

A lender of last resort is typically a role carried out by the state, usually its central bank. In the event an institution is near collapse, the state directly funds a high-risk loan to mitigate the issue. The GoC is moving towards assuming that role all day, every day.  

“Direct funding for [Financial Institutions] FIs by the Government has been traditionally reserved for crisis action and the application of this model during normal markets could distort the line between “business as usual” activity and crisis intervention,” the agency explains. 

If a country was carrying out crisis-style management of its mortgage market, would you consider it a safe place to invest? That presents the next issue. 

Canada’s Mortgage Plans Increase Borrowing Costs & Will Drive Investors Away

The report also explains that CMBs have a slight premium to government bonds, important in attracting capital. By removing that premium, the foreign capital used to fund cheap domestic loans will be reduced. Canada is under the impression it will collect the premium as revenue, but reduced capital and higher borrowing costs means… 

We’re not just trailing off, the CMHC did. They redacted several points on the risks in this section. The next unredacted point is about RBC estimating the COVID support widened GoC borrowing costs by an estimated 10 basis points in 2020. Before going on to explain, Canada’s fixed income market is $4 trillion, so this means borrowers will pay an extra $4 billion in interest. 

In other words, they’re not just reducing the opportunity for capital to enter the market. They’re also increasing credit demand and raising the cost of general borrowing for government expenditures, while increasing debt servicing costs for the rest of the market. 

The CMHC also explains that Canadian investors, such as retirees and pensions, held about $108 billion in CMBs at the time. By eliminating the opportunity, domestic income would decline by roughly $350 million. 

That’s likely to reduce funds for investing, consumption, and tax revenues. In exchange, certain buyers get cheaper loans to absorb demand for stagnant loans. And you thought Canada was already all-in on housing, eh?

Canada Has Already Begun A Mortgage Debt Buying Spree

Canada has yet to eliminate CMBs, but it’s taking the direct approach to accomplish similar goals. Late last year, the GoC announced it would buy $30 billion worth of CMBs, borrowing money to buy debt it guarantees. It expanded that to $40 billion earlier this year, and the latest budget proposes raising that amount to $60 billion annually. 

While not direct funding, it has many of the same issues such as crowding credit markets and poor capital market optics. Not something needed when investors are currently fleeing the country’s markets as quickly as possible

Unfortunately, the CMHC redacted how this would influence housing markets. Apparently, that’s confidential so you’ll have to wait and see. 

Pro tip for opaque governments: Make redactions in the page color and it isn’t obvious how much you’re hiding.

Source: CMHC.



We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • RW 3 weeks ago

    Absolutely bonkers to buy the assets they securitize.

    • Trader Jim 3 weeks ago

      Circular way to achieve the exact same thing.

      They THINK they’re going to capture the spread as revenue and CMB investors will be redirected to GOC bonds, but costs are influenced at the margin. Driving investors away from higher yield CMBs means greater supply of GoC bonds, and higher yields than we need to pay.

      With rate cuts around the corner before the US, it’s unclear why they think everyone is going to want CAD bonds.

    • Skippy 2 weeks ago

      So basically this is a sign that banks in Canada are viewed by investors as ttoo heavily invested in resi mortgages. This should lead to banks seeing bond prices fall, and their borrowing costs to go up.
      So along with the hundreds of billions in corporate welfare to maintain high home prices, this also keeps mortgage rates lower than they should be, since the govt is taking on all the risk?
      So I’m still unclear on how this 10 years of the dumbest housing policy ever is going to get fixed by this?
      On thing is sure in a free market if prices are way too high eventually they will crash. It seems Trudeau is trying to gift that collapse to the position in 18mos.

  • JF 3 weeks ago

    In other words, the Trudeau government (and/or who advises them) is a bunch of dumb idiots /in the pocket of Big Banks… Gotcha.. Manchurian Candidate confirmed. This guy needed to go in 2015…..
    I don’t mind the Liberal party usually, but this guy is the biggest, least educated leader … Ever.

    • Bay Street Guy 3 weeks ago

      Not in the pocket of banks, the pocket of developers.

      I thought the banks were being targeted by this gov but then saw the HSBC fiasco was overlooked in exchange for lending money to developers in specific cities. Now they’re using CMBs to fund mortgages that aren’t just owned by residential end users, changing the use.

  • Fazid 3 weeks ago

    I wonder what the influence of borrowing when investors are dumping their CAD exposure is. Presumably the government is able to scale its own purchasing of assets since it’s printing its own money, which could not be absorbed at market.

  • Edward McTeague 3 weeks ago

    Canada must do everything possible to save house prices from falling.

  • Trader Jim 3 weeks ago

    Just to clarify, the Gov’s takeaway was only that eliminating the CMHC in the process would be the issue. They still went ahead and bought bonds directly, because the warning wasn’t really a warning, it was the goal.

    • TK 3 weeks ago

      Yes, I was on the industry consultation. They thought our concern was the structure to achieve it apparently, not the fact the gov is borrowing to buy its own debt, and considering it revenue in short-term operations.

  • TK 3 weeks ago

    Good piece in an undercovered area. Unfortunately most people won’t understand, since even the bank economists seem to think the only impact with rates being cut early is a weak CAD. They missed the whole issue with attracting global capital that we can no longer attract, raising borrowing costs in general.

  • Susan 3 weeks ago

    My fear is that these Canada Mortgage Bonds are eligible pension investments. In that case, I want an Alberta Pension Plan ASAP.

Comments are closed.