Mortgage-backed securities

Canada Mortgage and Housing Corp. is putting a cap on the amount of mortgage-backed securities sold by banks that it is willing to guarantee.

A spokesperson with CMHC confirmed media reports Monday that the national housing agency will, effective immediately, limit banks and other mortgage lenders to $350 million worth of new mortgage-backed securities per month. The decision comes in the wake of “unexpected demand” for the guarantees, a spokeswoman for CMHC said in an emailed statement.

Under the National Housing Act Mortgage-Backed Securities (NHA MBS) program, banks have been able to securitize large portions of the mortgages they carry on their books. Because those securities are backed by CMHC, not the banks themselves, they’re able to go out and lend that freed-up money to new homebuyers at lower prices, which adds fuel to Canada’s housing fire.

Earlier this year, Ottawa announced it would limit the amount of those mortgage-backed securities that it would guarantee to $85 billion this year. That’s a rise from from $76 billion in 2012.

But by the end of July, barely over halfway through the year, the banks had already tapped the program for as much as $66 billion, hence the need for the cap to stay under the annual limit.

CMHC said Monday no one lender will get guarantees for more than $350 million worth of securities per month, from now on.

The move takes some of the air out of the housing market by forcing banks and other lenders to be responsible for the risk of mortgage defaults, instead of being able to pass that risk on to government and taxpayers via the CMHC.

To read the full article visit:

http://www.cbc.ca/news/business/story/2013/08/06/business-mortgage-banks.html

What are mortgage backed securities?

Mortgage-backed securities (MBS), also known as MBS Bonds, are a type of bonds that is secured by a pool of mortgage loans. Individual mortgages are pooled together and used as collateral to issue mortgage-backed securities, which are then sold to investors.

The investor as bondholder receives monthly payments (usually on the 15th of each month) that include both mortgage principal and interest. The key difference between an MBS and a regular bond (which typically pays interest every six months), is that the MBS monthly payments include a portion of principal.

Mortgage-backed securities are typically secured by mortgages that qualify under the National Housing Act (NHA). There are four different categories of National Housing Act (NHA) MBS pools available to investors in Canada:

  • exclusively individual homeowner mortgages
  • multi-family mortgages
  • social housing mortgages
  • mixed (a combination of any of the above)

To read more visit:

http://www.investingforme.com/classroom/investment-type/bondsanddebentures/type-of-bonds/mortgage-backed-securities