Following the last federal budget, those dealing in Asset Backed Commercial Paper have held their breath over the government’s move to limit housing risk, but CAAMP remains hopeful Ottawa is open to compromise.
Following the last federal budget, those dealing in Asset Backed Commercial Paper have held their breath over the government’s move to limit housing risk, but CAAMP remains hopeful Ottawa is open to compromise.
“CAAMP is pleased that the government is open to discussing the impact of the proposal on the market,” says CAAMP CEO Jim Murphy. “Unlike banks that use insured mortgages for capital relief, monoline lenders require it for liquidity.”
Finance Minister Jim Flaherty’s move to limit housing risk may eliminate the $6.8-billion market for commercial paper backed by insured residential mortgages, according to a recent DBRS research note. The new policy, laid out in the March 21 federal budget, will prevent mortgage-finance companies that don’t take deposits from funding home loans through asset-backed commercial paper.
The Toronto-based ratings company said that sales in that part of the ABCP market have risen from $6-billion in December and now make up more than a quarter of the total $25.6-billion outstanding.
“Government wanted to restrict portfolio insurance access for large bank lenders,” observes Murphy. “The restriction may have the unintended consequences of limiting choice and competition for Canadian consumers by affecting the ability of certain monoline lenders to access use of the ABCP market for funding.”
ABCP – used by a handful of non-bank lenders to raise capital for mortgage lending – fell out of favour when the recession hit in 2007-2008, freezing up on investors. Today, Murphy says, it’s a safer and fully restructured market.
Flaherty and the Bank of Canada have been beating the drum for months on the dangers of rising personal debt to economic recovery, and it was Flaherty who announced that financial institutions will be banned from using insured mortgages as collateral on securities that were not guaranteed by CMHC.
Lenders like MCAP and First National rely in part on asset-backed commercial paper to finance mortgage lending.
