A Budget Change Which Can Affect Vancouver Home Mortgages

A Budget Change Which Can Affect Vancouver Home Mortgages

The Federal government made a subtle change to their budget recently that affects something most people probably haven’t even heard about. It’s called “ABCP” which is an acronym for ‘asset backed commercial paper’, and over the next few years it could impact future Vancouver home mortgages.

It was used before but had a bad reputation back in the credit blow-out of 2007-2208, but has been revamped since then to make it more secure.

It is basically used by smaller sized lender to lower their funding expenses which allow these smaller lenders to offer a better mortgage rate than the banks. It also forces the banks to be more competitive.

The role played by these smaller lenders is significant because it either attracts a potential borrower or allows them to challenge the bank to match the rate being offered by the smaller lender. This essentially helped to keep mortgage rates even lower.

The future of ABCP is now in doubt because the budget released by the Feds in March indicate that it intends to prohibit the selling of insured mortgages to other investors if it is not managed by the CMHC (Canada Housing and Mortgage Corporation).

There was no warning that this was being considered, but the reasons for the Feds wanting to do so is only speculative at best. Some believe that the Feds are trying to earn more guaranteed fees by forcing lenders to use CMHC backed securities, while others believe the Feds want to increase the competitive ability of the banks.

The government on the other hand contends the change is being used to strengthen lending practices and lessen the risk faced by the taxpayer. They say their objective is to increase overall lending stability and that lenders need minimal standards throughout.

From a regulator standpoint, it appears the Feds want to have better control over securitization and the mortgage assets, by reducing the risk affecting the balance sheets of the banks. The issue is that that most mortgages are already insured before ABCP is applied so there is no risk to the taxpayer.

The policy won’t really lessen mortgage insurance volume significantly and won’t improve the quality of the credit for borrowers who are already insured.

The end result is that lenders will be forced to sell their mortgages in a manner decried by the Feds. The problems arise because there are many low-risk mortgages that don’t qualify for a CHMC securitization program. The bottom line is that by closing these private securitization options the borrower will see their mortgage costs increase and they will have to end up paying more.

It’s not so bad as there are approximately $200 billion in mortgage business annually, and the ABCP funding amount of insured mortgages is only around $6 billion dollars, but the affects of this change could be felt down the road.

Previously, just four years ago, there were no insurers of ABCP backed Vancouver home mortgages, but now there are 11 lenders and in the last six months there were $2.3-billion of new ABCP programs that have started up.

This budget change isn’t carved in stone just yet as the Feds say they will listen to feedback from mortgage lender stakeholders, so there is a possibility the Feds could better understand the potential negative consequences of their decision, and make additional changes.