At the American Securitization Forum annual conference last
month, a panel discussed the future of U.S. mortgage finance.
Following the 2007 financial crisis and the collapse in U.S.
housing values, there has been a transfer of U.S. mortgage funding
from private sources of capital to government sources. At a basic
level, the panel discussion was about the prospects for the return
of private (as opposed to government) risk capital to the U.S.
mortgage funding market. There was very little optimism that this
transformation would take place in the foreseeable future.
Although with less intensity and clarity, the same debate is
under way in Canada. Last month, CMHC announced limits on the amount of
portfolio mortgage insurance it will provide. Portfolio mortgage
insurance is used by Canadian banks and other mortgage lenders to
insure conventional residential mortgages. The use of portfolio
mortgage insurance for mortgages that are otherwise very low on the
risk scale has been encouraged because of the favourable capital
treatment it gives to regulated financial institutions holding
mortgages and because it is a requirement for access to the federal
government sponsored residential mortgage securitization programs.
Directly or indirectly, portfolio mortgage insurance has been used
to transfer mortgage funding risk to the federal government. This
risk transference will now be reduced.
If this channel of mortgage funding is reduced, will other
channels open up? One question to be answered is whether uninsured
conventional residential mortgages will again be privately
securitized in Canada? Will credit rating agencies, which operate
globally, be willing to isolate Canadian experience from their
world-wide experience? Should they? Questions that will be answered
in the next year or so.
Peter Milligan is Chair of the Banking &
Financial Services Practice Group.
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