This is the final week of the federal government’s consultation period for its proposed changes to the Canada Mortgage Bonds (CMB) program.

The changes were first hinted at back in March 2023 in this year’s federal budget, and as part of the process the government has released a consultation paper that provides an overview of its objectives.

But before moving forward with the proposal, the government had opened up a consultation period, providing industry stakeholders with the opportunity to share their views. Feedback can still be provided up until this Friday (July 14).

What is being proposed?

In an effort to reduce borrowing costs and direct the savings into affordable housing projects, the federal government plans to consolidate the CMB program into the government’s general debt program.

The CMB program was launched in 2001 by the Canada Mortgage and Housing Corporation (CMHC), in an effort to stabilize mortgage funding access in all economic conditions. The Canadian Housing Trust (CHT), a special trust created by CMHC, issues CMBs to the market and utilizes the proceeds to purchase National Housing Act Mortgage-Backed Securities (NHA MBS) from Canadian mortgage lenders.

The core of the proposal is to replace one funding source (CMBs), with an in-house funding source via Government of Canada bonds.

This would result in lower borrowing rates and generate some additional revenue for the government, “while ensuring stable access to mortgage financing and redirecting savings to priority affordable housing programs,” according to government documents.

Consolidating CMBs into the government’s lending program—and thus removing the rate “spread”—could result in Ottawa saving up to $150 million in the first year of consolidation (not including commission savings), a report from the National Bank of Canada found.

Concerns over the proposal

Some, however, have expressed concern over the plan, suggesting the final costs may outweigh the potential savings.

Kevin Fettig, president of CMI Financial Group, helped design the CMB program as director of securitization for CMHC when it was introduced in 2001. At that time, the government consolidated the CMHC debt program, similar to what is being proposed now on a much larger scale.

“This is a much bigger program, you’re talking about a $40-billion-dollar-a-year program,” he told CMT. “And so, the question is, does the size of that program create additional borrowing costs for the government in terms of consolidation? For me, that’s the issue.”

The government plans to use these savings to continue purchasing NHA (National Housing Act) MBS (Mortgage Backed Securities) from Canadian mortgage lenders.

By changing the funding source for NHA MBSs, the government says it will have additional funds to supply affordable housing programs. Despite the shift, the government says it plans to maintain current support to the mortgage market, thus preventing market disequilibrium.

“The government plans to maintain the current level of support provided to the Canadian mortgage market,” reads the government’s consultation paper. “The intent is to continue to provide funding to mortgage lenders at a cost that is in line with the current CMB program cost. This should ensure Canadian mortgage lenders maintain stable access to financing to ensure the Canadian mortgage market continues to function smoothly.”

The report notes that the consolidation would not increase the government’s credit exposure to the Canadian mortgage market, as all mortgages in the NHA MBS program are already insured by Government of Canada-backed insurance.

If the government proceeds with CMB consolidation, CMHC’s issuance of CMBs (via the Canada Housing Trust) would cease, and new Government of Canada bonds would replace them as CMBs mature. The consolidation is expected to take approximately 10 years.

“I’ve always believed, if it isn’t broke, why fix it?” says TMG mortgage broker and former financial advisor Ryan Sims. He argues that CMBs have been stalwart investments throughout many different financial ups and downs and that replacing them with GoC bonds could disrupt this investment vehicle.

“Canadian mortgage bonds are well-respected,” he said. “They’ve been stress tested—they work.”

Sims adds that while the increase in cost-effective borrowing due to the 30-bps spread looks nice on the surface, it may come with some issues. “If the government takes on all this debt, Canada’s bond rating could be lowered, thus incentivizing foreign bond investors asking for a premium due to the additional risk,” he states.

If the consolidation goes through, taxpayers will be the ones incurring the additional risk that comes with the takeover—and arguably few of them will benefit, Sims posits.

Large disruption for uncertain savings

A Market View piece from National Bank shares Sims’ point of view on the stability of CMBs over the years—specifically the stability they bring to the market.

The piece notes that through many financial crises, most notably the 2008 Global Financial Crisis, CMBs were still a major player. “CMHC has demonstrated time and again that top-rated CMBs regularly attract a dedicated/hard-core following irrespective of market volatility.”

Courtesy: National Bank Financial

Fettig says additional clarity is needed, adding that just how much of the potential savings is pocketable remains unclear.

He notes that the proposed cost structure would be based on a spread that is reset regularly and calibrated to a basket of liquid securities. “The problem is, that’s going to get really complex,” he says.

This complexity is one area where the “line of sight” for investors becomes clouded and, by extension, their ability to hedge effectively is diminished. This decrease in hedge effectiveness creates a situation where the costs of funds could increase—thus reducing savings on the table for the federal government.

As they stand, CMBs are bullet-maturity bonds that allow for reinvestment opportunities, specifically in the form of NHA MBS—creating demand for NHA MBS to be purchased.

“So as long as [the] structure stays as a bullet bond-type structure, it creates a lot of demand for NHA MBS,” Fettig states. A change in this structure (such as moving to an Insured Mortgage Purchase Program framework (recently used to provide emergency liquidity during the 2008 financial crisis) would remove this ability entirely, he argues.

“If they change the structure in that way, I think it could have a real impact on funding capacity,” Fettig told CMT.

“These may be technical issues, but they’re important to making sure the program works,” he added.

Approaching the consultation period deadline

Though the proposal may bring vast changes to the mortgage-funding landscape, the government says it recognizes the value of deep discussion surrounding its initiative and has called for feedback from industry stakeholders, including bond issuers, mortgage lenders, government securities distributors, investors, and others.

Those wishing to have their voice heard have until July 14. The government said it intends to update the public on its plans in the fall.

Those wanting to share their views on the proposed changes can send an email to CMBconsultation-consultationsOHC@fin.gc.ca