U.S. bank eyes mortgage bond market

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.

Previous efforts to kick-start 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 failed to properly disclose possible loan-application fraud, leading to a liquidity crisis and emergency bailout by Warren Buffett’s Berkshire Hathaway Inc.

The market for 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.