Banks, credit unions and other mortgage lenders will each be limited to a maximum of $350 million of new guarantees this month, as notified by Canada Mortgage and Housing Corporation.
CMHC has the authority from Ottawa to guarantee up to $85 billion of mortgage backed-securities for the entire year of 2013 but by the end of July the total hit $66 billion causing concerns. As a result of this unexpected increase in issuance volumes and to better manage volumes; CMHC will be introducing a formal allocation process in late August.
This move is going to make it more difficult and costly for banks to obtain funds to lend to customers which will create upward pressure on mortgage rates. One bank economist estimated that this could push mortgage rates up anywhere from 20 to 65 basis points, or 0.2 to 0.65 of a percentage point.
Smaller lending institutions are expected to feel the restrictions far less than the big banks who have used the conversion of loans into securities with CMHC backing to tap money from a broad range of investors and offer mortgages at lower rates.
Some housing analysts found the timing of the CMHC announcement odd given that interest rates have recently increased slightly as bonds have started to surge upward, others say the recent spike in home and condo sales in many major Canadian cities may have caused Ottawa to act to cool a market that has remained surprisingly resilient. The Canadian housing market has seen strong gains in almost every market across the country in 2013.
