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Implications of changes and interest rate news

  • Jason Ellis, Managing Director, Capital Markets

Good Morning,

Many people continue to analyze the implications of the changes announced by the Department of Finance last week.  Investors and borrowers alike have placed worried calls wondering what the future holds for them.  Never fear.  My mind is a raging torrent, flooded with rivulets of thought cascading into a waterfall of creative alternatives.  In other words, we’ve got you covered.

As mentioned last week, CMHC insured construction and multi-family lending activity continues unchanged.  It’s business as usual.  Send us your mortgages.

With respect to “single family” or 1-4 unit properties, the default insurers have been sending out some clarifying advice around implementation parameters.  Some details are yet to be sorted, but the bottom line is that if you have a commitment from First National issued prior to today, the new mortgage rate stress test does not apply.  Your commitment is still valid as is.

First National also issued a press release on October 11th commenting on the new mortgage rules.  In short, “First National’s business model and diversified mortgage lending activities and sources of funding provide all the strength and flexibility we need to respond effectively in the coming months to the Federal Government’s new policy directions,” said Stephen Smith, Chairman, CEO and all around smart guy.  In a separate press release that was not approved for release to the public, Treasury Guy was quoted as saying “You don’t frighten us, English pig dogs!  Go and boil your bottoms, you sons of a silly person.  I blow my nose at you.” 

Moving on to securitization news, following the recent RBC “REAL-T” CMBS transaction, IMC is on the road promoting a new $352 million transaction (“IMSCI 2016-7”) including a $187 million 5.5 year AAA tranche and a $117 million 8.9 year AAA tranche. 

Merrill Lynch Canada was in the market yesterday re-opening the ‘Jumbo’ single family residential NHA MBS pool that was first issued in August.  The second half of the $1.5 billion pool was issued at +80 compared to +88 at the end of August and is already trading at +77 in the secondary market.  NHA MBS has been underpriced, in my humble opinion for some time, but the recent changes to mortgage insurance rules have some investors worried about future supply.  In any case, a great result for the MBS market. 

Interest Rate News

In my rush to discuss the insurance eligibility requirements last week, I completely neglected to comment on rates.   Rates are higher.  5’s are trading around 0.75% compared to 0.60% just 2 weeks ago.  10’s are trading around 1.20% compared to 1.00% just 2 weeks ago.  Reports last Friday showed that conditions in the Canadian labour market improved in September.   The change in employment was +67k, well above the market consensus of +7.5k.  That, combined with oil back above $50 (vs. $40 at the end of the summer) has been supportive of rates.  There are also many macro-economic story lines globally that could be used in an effort to explain why rates are higher.  I don’t really understand most of it, so let’s just chalk it up to more sellers than buyers.  Prices down, yields up.

The Bank of Canada meets next Wednesday October 19th, and expectations are that the overnight rate will remain unchanged at 0.50% with a continued ‘dovish’ tone to the accompanying statement.  Recent ‘macro prudential’ policies should act to remove some of the downside risk from housing and take some pressure off the Bank. 

Down at the FED, the minutes from the Sept 20-21 meeting, released on Wednesday, show that there was some real dissention in the ranks at the last meeting and  the FOMC could hike ‘relatively soon’.  The probability of a hike on November 2nd is now at 20%.  The probability is over 60% by December.

I think we’ll stop here.  It’s been a trying week, and I need to start preparing for the Blue Jay game tonight.  Treasury Guy predicts the Blue Jays win in 6. 

 My message to Cleveland:   Your Mothers are Hamsters and your Fathers smell of elderberries!  Now go away or I will taunt you a second time.

Go Jays,

Treasury Guy
Jason Ellis, Managing Director, Capital Markets