BofA keen to package riskier Canadian mortgages
Sell as bonds FINANCE
TORONTO• Bank of America Corp. is looking at packaging riskier Canadian mortgages into bonds, as rules designed to cool the housing market may spur demand for the securities.
The bank has met with Canadian lenders to assess their interest in supplying mortgages for the bonds, which would be backed by home loans that don’t have government guarantees, according to a person familiar with the matter. It was also considering discussing the sale of the securities with U. S. investors, according to a government memo from June obtained through a records request.
Bank of America declined to comment.
The firm is the latest to consider selling these securities after federal regulators made it harder for Canadians to qualify for government insurance on mortgages. The new rules, and others that followed, were meant to reduce demand in the stretched housing market by making it harder for individuals to borrow. They also cut the government’s risk.
The impact from the rule changes on home prices, mortgage- credit growth, consumer behaviour, and mortgage funding may not appear until at least the second half of 2018, Sanjay Narine, an analyst at S& P Global Ratings, said in a Jan. 29 report.
“The market is in a unique position and offers an opportunity for all participants to ' get it right’ and preserve gains, maintain competition, and foster a private- label RMBS market that is a deep, liquid, and sustainable,” he said.
Banks may be looking at this market, but for now it’s tiny. There are two offerings outstanding: around $ 200 million of the securities from a 2014 sale by alternative lender MCAP Corp. and a small portion of the bonds backed by $ 2 billion of uninsured mortgages f rom Bank of Montreal issued last year.
Previous efforts to kickstart a market for bonds backed by uninsured home loans have stalled as investors remain concerned about over- valuation in the Toronto and Vancouver housing markets and record consumer debt levels. Royal Bank and National Bank sounded investor interest last year in two separate deals.
The transactions didn’t go ahead after regulators said mortgage lender Home Capital Group f ailed to properly disclose possible loan-application fraud, leading to a liquidity crisis and emergency bailout by Warren Buffett’s Berkshire Hathaway Inc.
The market f or bonds backed by government insured home loans is much bigger. There are some $463 billion of the bonds known as National Housing Act securities. Bank of America Merrill Lynch has been selling them since 2005.
Even so, there’s a growing number of possible borrowers. About three- quarters of the new mortgages created by federally regulated banks last year didn’t have government support, according to a recent Bank of Canada report. Nearly 50 per cent of the $1.5 trillion in outstanding mortgages in Canada are uninsured, thanks to the tighter rules.
The measures are showing some signs of cooling the housing market, too. Sales in Toronto plunged 22 per cent in January from the same month a year earlier.
A security backed by uninsured mortgages will need to offer higher yields than government- insured residential mortgage bonds — perhaps as much as a half percentage point more, the S&P report said.
Disclosure of the actual mortgages in the collateral pool would improve pricing for issuers, the report said. Broadening the i nvestor base to the U. S. would also help pricing, the government memo said.
Home Capital chief financial officer Brad Kotush said in a recent statement that the lender would consider becoming involved in the uninsured mortgage-backed securities market if the opportunity made sense for its funding strategy.