Regent Park in Toronto, Canada
Canada’s housing finance system is national, that is mortgage credit is accessible in all regions of the country on similar terms and conditions. Various financial institutions including: chartered banks, credit unions and caisses populaires, finance and non-deposit-taking companies, life insurance companies, pension funds and trust and mortgage loan companies, operate in the mortgage market. Banks are the largest providers of mortgage credit in Canada, however intense competition in housing finance provides mortgage borrowers with many options in terms of rate and term options and in terms of payment features.
Mortgage loans in Canada typically amortize over a 25-year period, with mortgage terms running from six months to 10 years. The 5-year fixed rate mortgage has traditionally been the dominant mortgage in Canada (accounted for 69% of originations in 2009), but there has been a trend in recent years towards shorter-term mortgages as well as the growing popularity of variable rate mortgages, which accounted for about 30% of residential mortgage originations.
Mortgage insurance is a dominant feature of the Canadian residential lending landscape. By federal law, federally regulated financial institutions can extend conventional mortgages up to 80% of the value of a residential property (loan to value; LTV). Above the 80% LTV threshold, the Bank Act requires mortgage insurance to protect lenders against borrower default. Mortgage insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), a federal Crown Corporation, which operates the largest mortgage insurance program, and two private mortgage insurers – Genworth Financial and Canada Guaranty. CMHC reported insurance in-force for 2009 of $472.3 billion. Insurance in-force for Genworth, the larger private mortgage insurer, was reported at $224 billion in their 2009 financial statements.
On-balance sheet lending remains the main source of mortgage funding; approximately 70% of Canadian mortgages are held on-balance sheet and are funded through deposits. The main mortgage securitization instruments in Canada are National Housing Act Mortgage Backed Securities (NHA MBS) and Canada Mortgage Bonds (CMB). Total NHA MBS outstanding stood at $300 billion as of June 30, 2010, with total CMB outstanding accounting for $185 billion of this amount. A key feature of both NHA-MBS and CMB for investors is the CMHC guarantee - on behalf of the Government of Canada - of the full timely payment of principal and interest, in the case of mortgagors’ default and/or NHA-MBS issuers’ default. CMHC operates its securitization activities on a commercial basis with no government subsidization. NHA-MBS and CMB are also attractive to foreign investors as they are exempt from withholding taxes. Covered bonds, while increasing in popularity are still a minor source of mortgage funding.In 2007 , the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal financial institutions regulator, issued guidance limiting banks’ issuance of covered bonds to no more than 4% of their total assets. As of September 30, 2010, Canadian banks had $21.6 billion in covered bonds outstanding. In the March 2010 federal budget, it was announced that a legislative framework for Canadian covered bonds would be considered. The drafting of the legislation is ongoing, and while the in-force date of such legislation remains uncertain it appears that covered bonds will remain an additional funding source for Canadian financial institutions going forward.
 TD Securities, Mortgage Market Primer, June 17, 2010, p. 1.
 Reference: Bank of Canada, Banking and Financial Statistics – September 2010; http://www.bank-banque-canada.ca/pdf/bfs.pdf
 Source: FIRM Residential Mortgage Survey, Winter 2010.
 It should be noted that CMHC’s insurance in-force represents the outstanding balance of insured mortgages, whereas Genworth reports the total of the original balance of the mortgages it has insured (i.e. no adjustment for amortization).
 Reference: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/notices/osfi/cvbnds_e.pdf
Regent Park in Toronto, CanadaAs of 2006, just over 68% of Canadian households owned their homes, the most prevalent housing tenure form. Statistics Canada estimates that the overall housing stock – residential structures plus land – is worth about $2.78 trillion. Of this, Bank of Canada statistics indicate that approximately $960 billion was mortgaged as December 2009.
Since 1996, Michael Borish and Company, Inc. has carried out extensive work in housing finance, risk management policy, and banking supervision regulations focused on credit risk. Michael Borish has an MBA from the University of Chicago (1985), and is currently working on his PhD at Carleton University in Canada. He served as Director of International Housing Finance at the Canada Mortgage and Housing Corporation (2007-2012) and was a Financial Analyst at the World Bank (1993-1996).