Realty Times February 4, 2003

Canadian Mortgage Market to Top C$500 Billion, Favoring Mortgage-backed Securities
by PJ Wade

Canadians will continue to take on mortgage debt in 2003 to the tune of more than C$517 billion in mortgage credit. This will keep the Canadian mortgage market strong for another year, a pattern that is expected to favor mortgage-backed securities as well.

"A combination of continued economic growth and job creation, positive demographic factors and low mortgage rates will sustain demand for home ownership in new and resale housing markets," says Ali Manoucherhi, a senior economist with our federal housing agency, Canada Mortgage and Housing Corporation (CMHC). "This will lead to a six to eight per cent annual growth in residential mortgage credit in 2003."

CMHC is no slouch when it comes to acquiring debt either. One of Canada's largest borrowers, it annually borrows $2.0 to $2.5 billion. CMHC uses this money to provide mortgage loan financing to social housing project sponsors.

Forecasts of continued strength in construction and housing finance, also make National Housing Act Mortgage-Backed Securities according to CMHC. In the first 9 months of 2002, more than C$16.4 billion in NHA MBS was issued – more than three times the amount issued during the comparable period in 2001 – and uncertain stock market conditions continue to make these securities an attractive option in 2003.

These securities, as investments, combine the investment qualities inherent in both real estate mortgages and Canadian Government bonds. The NHA MBS represents an undivided interest in a pool of NHA-insured residential mortgages. As mortgages, these financial instruments are secured by the value of the underlying real estate. CMHC provides Mortgage Loan Insurance on all pooled mortgages and an unconditional guarantee under the National Housing Act (NHA) of timely payment to NHA MBS investors.

CMHC guarantees, on behalf of the Government of Canada, "the timely payment of principal and interest on securities." This is the key innovation in the NHA MBS. Regular monthly payments are made to the NHA MBS investors whether or not payments from mortgagors are actually received by the issuing financial institution. Although there are other investments based on a pooling of mortgages, NHA MBS issues are the only such investments that CMHC guarantees on behalf of the Government of Canada.

CMHC provides these details on how NHA MBS work:

  • An NHA Mortgage-Backed Security is created by a CMHC Approved Issuer. NHA MBS Issuers are approved by CMHC and must be either a chartered bank, a trust company, an insurance company, a credit union, a loan company or a caisse populaire. The Approved Issuer brings together a pool of mortgage loans insured under the National Housing Act, which must meet specific eligibility requirements. The investor buys an undivided interest in this pool. The issuer then carries out its plan to sell and deliver the securities to investors. NHA MBS issues are sold to investors by investment dealers or may be sold directly by the issuer.

  • Principal and interest payable by the mortgagors of houses and apartment buildings on which insured mortgages are issued are passed through to the registered NHA MBS investors by the CPTA (Central Payor and Transfer Agent). The principal is distributed based on an expected actual pass through approach, while interest payments are calculated and credited at the coupon rate of the securities. Similarly, any lump sum prepayments, including any applicable interest bonus payable by the mortgagors in the case of some pool types, pass through to the investors.

  • NHA MBS are RRSP and RRIF (Registered Retirement Savings Plans and Registered Retirement Income Funds) eligible. NHA MBS are exempt from non-resident withholding tax - an important consideration for foreign Investors and Canadian expatriates who would normally pay this tax.

    Since each NHA MBS pool may have different prepayment conditions, potential investors should read the Information Circular relative to each pool and consult their financial advisors.


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