News on Covered Bonds: Covered Bonds Rules in Canada

Covered Bonds Rules in Canada

 

30th April, 2012: Covered Bonds rules have been introduced in the Budget Bill, 2012 in Canada. Under the Covered Bonds rules, banks will be prohibited from using insured mortgages to back covered bonds. According to the Finance Minister the move will strengthen the housing market, which has seen housing prices in some of the Canadian cities rally in the recent times.

The move will result in increase in the borrowing costs and mortgage rates and curbing the housing market. While in hunky dory times uninsured mortgages may be lesser default category than those insured, in case of stressed market scenario, these assets would have a high default risk. Further, in absence of secondary market, liquidity for these uninsured mortgages would be a high risk. Over collateralization levels in case of uninsured mortgage cover pools is higher than those of insured mortgages. However, the legislation provides a cap of 10% on over collateralization, also capping the covered bonds ratings that issuers might target.

The legislation requires government to set up a registry for financial institutions to register themselves as issuers of Covered Bonds.

Mortgage insurance had become a huge burden for the taxpayers as government was providing 100% guarantee on Canada Mortgage and Housing Corporation (CMHC) insured mortgages and 90% guarantee on privately insured loans; these have also been the prime reasons for banks adopting lax underwriting standards while giving out housing loans. Absence of government guarantees will ensure that the banks assess the risks properly before providing home loans regulate the housing market.

Recently, Monetary Authority of Singapore had also proposed covered bond rules. (See our news here)

[Reported by: Nidhi Bothra]