Canada Mortgage and Housing Corporation (CMHC) reports the successful launch of Canada Mortgage Bonds, a new investment product which this federal agency describes as the latest evolution in mortgage funding and a significant further expansion of Canada's secondary mortgage market.

"We are thrilled with the response of the financial markets to the Canada Mortgage Bonds (CMB) Program," said CMHC vice-president Karen Kinsley, referring to the largest syndicated bond ever issued in a single tranche in Canada.

"The initial issue has reached CN$2.2 Billion dollars exceeding our initial expectations of CN$1.5 billion...The unprecedented size of this bond issue clearly demonstrates the extent to which investors and Canada's mortgage industry have embraced this new and innovative mortgage funding vehicle."

The CMB Program is CMHC's latest housing finance initiative aimed at improving the supply of low-cost mortgage funds in Canada and providing the mortgage market with an alternative and competitive source of funds. CMHC expects its CMB Program to help lower financing costs for Canadians by assisting the mortgage lending industry to manage liquidity, capital and risk. CMB also allow institutional investors and, on a smaller scale, individuals to invest in Canadian residential mortgages through high quality, easily-tradable guaranteed investments.

CMB, which carry Canada's AAA/Aa1 credit rating and a 0% capital weighting under the Bank for International Settlements guidelines, are issued through Canada Housing Trust, a special-purpose trust created to issue these bonds. CMB are "semi-annual coupon, fixed rate (5.527%), bullet maturity bonds" that carry the full guarantee of the Government of Canada. Through CMHC, the federal government guarantees the timely payment of interest and principal on CMB. The inaugural five-year issue will mature on June 15, 2006 with interest paid semi-annually.

The 1999 amendments to the National Housing Act (Bill C-66) and the CMHC Act made it possible for CMHC to introduce Canada Mortgage Bonds.

How do these mortgage bonds work?

To provide investors with a bond-like investment, the Trust transforms monthly cash flows from National Housing Act (NHA) Mortgage Backed Securities (MBS) into non-amortizing bond cash flows with fixed interest payments and principal at maturity. The Trust sells CMB to investors and uses the proceeds to purchase mortgages packaged in newly-issued NHA MBS from approved sellers. CMB investors are paid interest and principal from the proceeds of the underlying mortgages collected by MBS sellers on behalf of the Trust.

NHA MBS are created when a CMHC-approved seller, such as a bank, trust company or other type of mortgage-lending insitution, brings together a pool of eligible mortgages to transform the mortgages into securities which can be sold to investors. CMHC reports that initiatives designed to accommodate a wider array of products, improve the issuing process and reduce issuing costs have contributed to the growth of NHA MBS since 1997.

The acceptance of NHA MBS as collateral by the Bank of Canada and the Canadian Payment System also added to this market's growth. CMHC takes credit for pioneering the development of the Canadian secondary mortgage market with NHA MBS in 1987 and issuing over $70 billion in MBS since then.

"This is more a wholesale operation than a retail operation," explained Denis Abbott, Chief of Media Relations for CMHC, referring to buyers that make purchases in the millions of dollars. "More or less institutional investors were the only groups to take up the initial offerings ş syndicates of banks, investment syndicates, pension funds like the Teachers Pension Fund." Abbott explains the retail opportunity arises through institutions or retail investment houses that want to make money on their holdings of CMB. For more information on Canada Mortgage Bonds, contact your investment dealer.

For some Canadians, CMB may be an attractive secure alternative to stock market volatility.

For more articles by P.J. Wade, please press here.

Published: July 17, 2001

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Futurist and Strategist PJ Wade is "The Catalyst" -- intent on "Challenging The Best Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life. Author of 7 books and more than 1600 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy... Your Choice! (CatapultPublishing.com), which is filled with suggestions and insight on protecting and using home equity. Her new business book, "What's Your Point?," which identifies 7 common mistakes professionals unknowingly repeat to their detriment, will be published in 2009. As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors -- and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking -- a talent she regularly demonstrates in this column. For more on blogs, books and topics, visit TheCatalyst.com.