New rules governing Canadian government backed mortgages with LTVs in excess of 80% could have a positive spillover effect on uninsured mortgage lending and therefore potentially benefit Canadian covered bonds issued under a new regulatory framework, said Fitch yesterday (Monday).

A new regulatory framework for legislative covered bonds is being rolled out by the Canadian government, and prohibits issuance of covered bonds backed by mortgages insured by Canada Mortgage & Housing Corp (CMHC), which until now all Canadian issuers except Royal Bank of Canada have been doing.

On Thursday the minister of finance announced new rules for government backed insured mortgages, such as a reduction of the maximum amortisation period from 30 years to 25 years and lowering the maximum amount Canadians can borrow when refinancing from 85% to 80% of the value of their homes.

The rules are intended to cool the residential lending market and come into effect on 9 July, according to Fitch.

The rating agency said that the rules could potentially benefit Canadian covered bonds issued under the new regulatory framework.

“In our view, when CMHC has instituted more restrictive underwriting guidelines for insured mortgages, lenders have generally followed suit for the uninsured product to the extent they weren’t already adhering to more restrictive guidelines,” said Fitch, adding that uninsured mortgages typically have exhibited stronger arrears performance than their insured counterparts due to lower LTVs, higher credit scores, and lower debt-to-income ratios. Guideline revisions that encourage more prudent underwriting would be supportive of this observed performance, it said.

The rating agency played down the likelihood of lenders choosing not to maintain comparable standards and turn to uninsured mortgages as a means to maintain lending volume because of a guideline (B-20) recently released by The Office of the Superintendent of Financial Institutions (OFSI) that sets forth prudent underwriting standards for all federally regulated financial institutions.

Fitch also said that the new rules set out by the government show that it is vigilant about the housing market situation.

“Canada’s strong macro prudential policy framework provides the opportunity to use tools that could help engender a soft landing in the country’s housing market,” it said.