If the Canada Mortgage and Housing Corporation (CMHC) were to create a new mortgage securitization program, it would encourage a more vibrant market for the financial instrument and open up more home financing options, according to one industry executive.

A mortgage-backed security is a share in a pool of real estate debt that is sold to investors. When homeowners pay their mortgages, investors make a return. They are issued in Canada through the CMHC’s National Housing Act Mortgage-Backed Securities (NHA MBS) Program and the Canada Mortgage Bond (CMB) Program.

Kevin Fettig, president of Mississauga-based private mortgage lender CMI Financial Group, proposes a program under which CMHC would issue securities based on the cash flow. This would introduce more competition and help break a one-sided relationship Canadians have with banks as the primary source of home financing, he said.

“The more funding sources we have for mortgages, the better. This is creating more liquidity in the market generally. The more funding tools we’ve got, the better,” he said in an interview with RENX Homes.

It could serve to stimulate the mortgage-backed security market, building the foundation for developments in the field that can serve more Canadians, although it does carry greater risks.

How the new program could look like

Interest in mortgage securitization programs in Canada has dwindled over the past decades, Fettig said, which has reduced investor interest because it limits information about pricing and removes funding facilities for lenders.

As of Dec. 31, 2023, the CMHC guaranteed $195.6 billion of securities — $150.6 billion of NHA MBS and $45 billion of CMB.

Fettig's solution to address this slide is a residential mortgage-backed securities program created and backed by the CMHC. Rather than buying from the NHA MBS Program and issuing bonds, the CMHC could issue securities based on the cash flow of the CMB Program.

An example would be pooling NHA MBS and issuing a new pass-through security for residential and multifamily markets. This would mean securities could be issued when the CMB is not actively issuing products. Thus, the CMHC can offer large, liquid mortgage-based security issues on a frequent basis, which appeals to investors.

“Now you have size, because you’ve got a much bigger pool of MBS issuance,” Fettig said about its advantages. “It’s being issued on a regular basis so investors know it’s coming on a schedule.”

The new security could be particularly attractive to fixed-income investors, banks, international insurance companies and fund managers.

Such a program would boost competition in the housing finance market by forming the building blocks for “broader, deeper capital markets” in trading securitized assets. This would lead to more financing options for mortgages and housing, Fettig explained.

Minimizing the risk in Canada

There are inherent risks, but for those who remember the role mortgage-backed securities had in the 2008 recession the situation today in Canada is different. Unlike the U.S. with the poor quality underwriting and highly structured securities that were issued at the time, Canada is exposed to less risk, Fettig explained.

There is a lower rate of mortgage defaults in Canada than in the U.S., for example.

Another difference is insurance. Canadian mortgage coverage is for the life of the loan; in the U.S. it is top-down insurance where if the loan-to-value goes below 80 per cent the coverage disappears, Fettig said.

Plus, mortgages in the NHA MBS Program must be fully insured, unlike mortgage-backed securities in the U.S. The CMHC also provides a timely payment guarantee.

“This is much more plain vanilla, which still requires good underwriting,” Fettig said of the securities.

With a more robust set of regulations in place, he contends there is limited peril for the federal government in supporting such a new program.

If the pass-through security takes off, Fettig envisions more complicated structures being issued. An example is a real estate mortgage investment conduit that issues a range of securities to investors from a fixed pool of mortgages.

The CMHC could follow this approach or consider credit-linked notes to sell the transfer risk.

A CMHC-backed program could establish an active residential mortgage-backed security market. This might also later evolve into more dealers joining and a greater amount of invested capital into riskier mortgages that are not CMHC-insured, such as uninsured near-prime assets.

“The next step would be once you have the CMHC program, the dealers now have active trading, they’ve got capital invested in this structure," Fettig said. "It creates interest to then say, 'OK, what could we do next, the next step out in the risk spectrum of mortgages could we potentially securitize'”