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I have been thinking about how the current pandemic compares to what occurred during the global financial crisis in the late 2000s. When the pandemic initially began, I was expecting the Canadian Residential Mortgage-Backed Securities (RMBS) market to take a similar turn with a large increase in the issuance of government sponsored RMBS. Although the Canadian government established the Insured Mortgage Purchase Program (IMPP) at the beginning of the pandemic, the market didn't quite evolve the way I expected. While we saw a significant increase in covered bond issuances by the larger Canadian banks, the IMPP and private RMBS issuances didn't attract much attention in 2020.


A slow start for private RMBS in Canada

Though not as popular as it was prior to the sub-prime mortgage crisis, the private RMBS market in the U.S. has remained active and relatively robust. In Canada, there never really has been a strong private RMBS market, and the NHA-MBS program administered by CMHC has traditionally been the avenue through which mortgage backed securities have been issued. However, this government sponsored program can only accept insured mortgages, leaving a relatively large pool of non-insured mortgages that could be used to help back a private RMBS market. By some estimates, there could be close to $1 trillion worth of uninsured mortgages in Canada that would have the potential to back private RMBS issuances.

There have been some recent private label RMBS issuances in Canada, but the market is nowhere close to the size it could be relative to the private label market in the United States. In Canada, the large banks have the financial strength with corresponding investor confidence to be seen as ‘market leaders' in new types of issuances. Why haven't Canada's big banks taken the plunge, for the most part, into the private label RMBS market?

One point to consider is that these banks already have covered bond programs in which to place non-insured mortgage assets. To date, there have been eight covered bond programs set up by the largest Canadian financial institutions. Given that these banks have the NHA-MBS and Canada Mortgage Bonds programs in which to place mortgages, along with their covered bond programs, it would seem there may be less incentive for them to focus on a private label RMBS issuance.

Regulation changes may attract new players

Recent changes in regulations regarding the percentage of assets that can be pledged to a covered bond program have potentially made these more attractive to smaller financial institutions. However, covered bond programs are complex and relatively costly to set up. Certain economies of scale are needed in order to make these programs enticing to issuers. Another point to consider is investor demand for the securities. Most of Canada's covered bond issuances have been overseas.

Given these factors, it's possible some of the mid-sized financial institutions in Canada may consider a private RMBS issuance a better alternative. It should also be noted that not all financial institutions have the option of establishing a covered program. Due to current financial regulations, it doesn't appear to be an option for any of Canada's fast-growing non-regulated lenders.

One thing is clear — there would need to be sufficient investor demand for the securities to make any issuance appealing. Tight underwriting standards and laws relating to borrower recourse make Canadian mortgages a valuable asset class. These have historically had lower default rates than U.S. mortgages. And unlike the U.S. mortgage market, the Canadian market was relatively unscathed during the global financial crisis. The establishment of mortgage custodial warehouses would help to increase mortgage liquidity and would possibly allow multiple players to easily sell into any established conduit.

Who will lead the private RMBS market?

Given the size of our financial market, it would seem there is room for a private RMBS market to develop in Canada. However, it is likely going to be the smaller financial institutions or non-regulated private lenders that lead the charge in this space.

If you look at Australia as a model, it's possible the private RMBS market will take off in Canada. Australia, relative to its size, has a very robust RMBS market. In fact, the Australian market is unique given that its early government-backed RMBS programs eventually gave way to an entirely private RMBS market. Should the same happen in Canada, could there be lessons to learn from the private RMBS market in Australia?

What do you think? What do investors need to see to make private RMBS an attractive and competitive investment option?

For more information about Mortgage-Backed Securities, reach out to me directly at or to your local Computershare contact.

The material contained herein is provided for general informational purposes only and does not constitute legal or other professional advice or opinion. Computershare does not warrant or guarantee the accuracy or completeness of the material contained herein and such material should not be relied upon. "Computershare" refers to Computershare Canada Inc. and its affiliates.

© 2021 Computershare Trust Company of Canada

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