Canada Unveils Covered Bonds Legislation

Canada Mortgage and Housing Corporation (CMHC) announced today the details of the legal framework for Canadian covered bonds.

A registered covered bond is a bond that is issued through a covered bond program that has been registered by CMHC pursuant to the National Housing Act (NHA). Issuers of registered covered bonds will benefit from being able to reach a broader investor base as some international investors are restricted from purchasing bonds issued under a non-legislative framework. Issuers will also benefit from gaining access to an alternative source of funding.

"The new framework establishes a high standard of disclosure for covered bonds for lending institutions across the country" said Karen Kinsley, President and CEO, CMHC in a press release on Monday. "The framework strikes a balance between issuer and investor needs and takes into account evolving international best practices."

Assets which may be held as covered bond collateral include loans secured by one to four unit residential properties located in Canada. Insured mortgages are not permitted to be used as covered bond collateral and covered bond issues are not guaranteed by CMHC or the Government of Canada.

The overhaul of Canada's covered bond market brought the market to a standstill since the end of the second quarter, following a very active first half of the year, according to a Sept. 13, DBRS report. Since most Canadian mortgage origination is backed by a government guarantee, banks will have to spend some time ramping up portfolios with non-insured mortgages.  RBC is the only bank that has included non-insured collateral in covered pools.

DBRS said ithat larger Canadian banks such as Bank of Nova Scotia and CIBC are likely to build their portfolios with uninsured mortgages with a maximum loan-to-value ratio of 80%.