Devil in the details of Canadian model

by 14 Jun 2012

Now I don’t want to be the financial year end mortgage Grinch, but If the” Canadian way” truly is the way- the devil is sure to be in the detail, so let’s get just a few of those little devils out of the closet  and give them a public airing early in the interest of furthering the debate.

Supporting “Canada Mortgage Bonds” (CMB’s) or their NHA MBS wasn’t the Canada Mortgage and Housing Corporation’s (CHMC) initial activity- it was the provision of “mortgage insurance” for high LVR loans.   Indeed, whilst there are a couple of private LMI providers approved for CMB’s, the vast majority of loans in CMB’s are mortgage insured by the CHMC mortgage insurer, which carries the “AAA” sovereign rating of Canada. 

If we are to have “Australian Mortgage Bonds” (AMB’s?),  it’s likely that AMB’s will need LMI support so there’s bound to be some structural issues around how “AAA” is achieved via an effective government guarantee on the AMB’s, given the Aussie LMI’s don’t have a AAA rating. If some fancy structuring on the bonds is required, this will reduce the appeal of AMB’s to the investment community.

 I don’t think we’re going to see a reformed HLIC come off the bench to support AMB’s.  Indeed, this publication’s Canadian sister title recently reported on debate around the state getting out of the mortgage insurance business.

Of course there’s the practical point, if LMI is required on qualifying mortgages in AMB’s, the industry will continue to be reliant on the capacity and underwriting guidelines of the LMI’s so AMB’s are unlikely to ‘naturally’ permit access to mortgage finance for a cohort of borrowers that can’t get mortgages right now.

Another point- 77% of the mortgages sold into CHB’s are originated by Banks.  Whilst AMB’s would undoubtedly increase access to lower cost funding for smaller lenders and level the playing field, if the major Banks were permitted to use AMB’s- is there a chance that this could actually increase their market dominance?   If ‘Banks’ were excluded from accessing AMB’s, not only would there be a hue and cry (from them) but how would it be defined who could access AMB’s and who could not?

Also by levelling the playing field, and by having ‘plain vanilla’ (CMB’s only allow owner occupied P&I loans) mortgages in the AMB pools, the trend toward commoditisation of mortgages would be exacerbated.   How would lenders accessing AMB’s compete?  Principally on price, I would venture.   Who are the most efficient price competitors?- those with the lowest costs.  Those with the lowest costs are either ‘big’ with economies of scale (i.e.Big Banks) or who employ the lowest cost distribution methods (like online)

Plain vanilla, commoditised, price driven mortgage products don’t sound a mortgage brokers’ stock in trade to my ears, and so I believe we need to think about whether levelling the playing field might actually marginalise brokers as smaller lenders seek to compete by driving costs out of the mortgage value chain.

There are quite a few other little demons that you can no doubt indentify when thinking how AMB’s may actually ‘work’ for the broking sector, however a final Grinch point.

Aussies who meet the criteria can readily get plain vanilla prime mortgages right now, and barring a catastrophic event like a disorderly collapse of the Euro, access to mortgage finance is set to continue. 

AMB’s have immediate egalitarian ‘give the little guy a go’ appeal, but I think we need to think carefully about the detail as the debate progresses and make sure that they’re not a solution looking for a problem, and indeed whether the solution creates a whole new set of problems.