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Understanding Canada Mortgage Bond (CMB)

  • First National Financial LP

Jason Ellis, Managing Director of Capital Markets

From the beginning: Mortgage Backed Security (MBS)
When CMHC created the MBS program, the goal was to create an easier way for investors to access investments in the housing market. Commonly referred to as a ‘pass through’ security, MBS investors receive the principal collected on the underlying insured mortgages on a monthly basis as well as an interest payment based on the remaining principal balance and the coupon rate. For lenders, MBS created a pool of ‘cheaper’ money to fund borrowers.

From MBS to CMB
While many investors welcomed the simplicity of MBS, others were uncomfortable with the amortizable/pre-payable nature of MBS pools. Despite the extra yield they provided relative to other ‘AAA’ guaranteed investments, they still chose not to participate.

Recognizing this challenge, CMHC introduced the CMB program, which further simplified the process of investing in mortgage-backed securities. Lenders still create the MBS pools, but then sell those pools once every quarter to Canada Housing Trust (CHT) rather than an end investor. CHT then funds the purchase of the MBS pools with CMB, a non-amortizing, semi-annual, interest-rate-paying bond. Investors covet the simple and familiar cash flows, while lenders are able to pass on even more aggressive rates to borrowers.

Giving borrowers the full CMB advantage
Not all lenders have access to the CMB program as a funding option for CMHC-insured, multi-family properties. And it’s not entirely about access either. It takes liquidity and solid capital to be able to capitalize on the advantages inherent in the program. First National is among relatively few non-bank lenders with the access as well as the means to fully capitalize on the CMB program. We have the required liquidity and capital under our own roof, allowing us to maximize the potential of CMB. We can act independently and quickly, eliminating layers of complexity or additional execution cycles. By extension, we can pass on the full program benefits to our borrowers, enabling them to take advantage of the lowest cost of funds for insured mortgages.