How is the CMHC Helping the Real Estate Market Deal With the Economic Impact of COVID-19?
The Canada Mortgage Housing Corporation is at the forefront of stabilizing the real estate market during the COVID-19 pandemic. Through measures like the Insured Mortgage Purchase Program, banks are freed up to provide financial support to Canadians. Increasing the issuance amount of Mortgage Bonds is another step that is likely to infuse cash into the real estate market. Other measures like the Mortgage Deferral Program allow homeowners to defer their mortgage payments for a specified period. As a crown corporation with billions in readily accessible reserves, the CMHC is well-equipped to handle the economic challenges that are coming its way. These are all just a part of the measures taken by the Canadian government in response to COVID-19.
CMHC Initiatives to Help the Real Estate Market Deal with the Economic Implications of COVID-19
Expansion of the Insured Mortgage Purchase Program and Portfolio Insurance
The Government of Canada announced that it would purchase $50 billion of insured mortgage pools from banks and mortgage lenders via the CMHC on the 16th of March, 2020. This would take place through an Insured Mortgage Purchase Program (IMPP) where the CMHC would purchase National Housing Act Mortgage-Backed Securities (NHA MBS).
On March 26th, the Insured Mortgage Purchase Program was revised and its limit increased by $100 billion to a total of $150 billion in mortgage-backed securities.
How is this move by the Canadian government expected to help residents? By purchasing mortgages from banks and lenders, these measures provide these financial institutions with money and additional liquidity to continue lending money to Canadian consumers and businesses. The program is already in action, with $5 billion in MBS already purchased by the CMHC during March 2020.
In addition to the additional liquidity provided to lenders, eligibility rules for portfolio insurance have been temporarily relaxed, allowing more mortgage lenders to gain access to the IMPP and in effect, lend more to Canadian homebuyers. As of March 24th, portfolio insurance eligibility has been extended to uninsured (low loan-to-value) loans with an amortization of up to 30 years and refinanced loans, with additional details to be provided.
Temporary suspension of CMHC dividend payments
CMHC’s Board of Directors has also placed a temporary suspension on dividend payments. With this prudent measure, more capital is available to be disbursed towards economic recovery from the COVID-19 pandemic.
By the end of 2019, the CMHC had excess capital of $3 billion, and most of it is available for additional financial support to the mortgage and housing system.
Measures to suspend eviction and support renters
Landlords who have CMHC-insured mortgages are expected to make use of relief measures like the mortgage payment deferral program if necessary. With mortgage payments able to be deferred for up to 6 months, landlords are less inclined to evict tenants who, as a result of the COVID-19 pandemic, are unable to make regular rent payments due to job loss or reduction in work hours during this crisis.
Additional tools offered by the CMHC to help homeowners handle financial difficulties include:
- Conversion of a variable interest mortgage to fixed interest mortgage by the CMHC, to protect the homeowner from an unprecedented increase in interest rate.
- Short-term mortgage payment deferral. More flexible payments might be offered if you’ve previously made lump sum prepayments or had an accelerated payment schedule. Both lump sum payments and accelerated payment schedules help reduce your outstanding mortgage balance, which increases your credibility with the mortgage lender. This makes it easier to be flexible with short-term mortgage payment deferral arrangements on account of COVID-19.
- Allowing extensions to the amortizations of insured mortgages. For example, if you change your mortgage amortization period from 20 to 25 years, your monthly mortgage payment would be reduced since the payment is spread over a longer period of time. However, you would be paying more interest over the life of the longer mortgage. You can find out the differences between your payments and total costs by using WOWA’s mortgage payment calculator.
- Special payment arrangements that will depend on your own personal situation
Expansion of the issuance of Canada Mortgage Bonds
Apart from the additional liquidity which the IMPP is offering banks and mortgage lenders, the CMHC is expanding its issuance of Canada Mortgage Bonds by up to $60 billion on top of the previous annual issuance amount of $186 billion, depending on market conditions and investor demand. This helps the CMHC get funds from investors in the bonds, which it can then use to further help the housing market.
Will These Efforts be Enough to Help the Canadian Real Estate Market Thrive?
The answer is dependent on the type of real estate property and mortgage in question.
The likelihood of a significant drop in the residential real estate market is very low. Homeowners are unlikely to default on their mortgages. Canada’s strict standards for mortgage borrowing and the CMHC’s recent initiatives to assist borrowers will make sure that homeowners stay afloat during this crisis. This will prevent forced selling and help keep real estate markets stable.
In Ontario, real estate was considered an essential service and real estate agents can still close transactions. The same cannot be said for provinces like Quebec, where real estate agents are not classified as essential service providers. Even so, with the aid of virtual tours of properties, top real estate agents can still show prospective homebuyers around houses.
Nonetheless, demand may drop slightly as some potential buyers find themselves unemployed or with more urgent financial concerns.
The commercial real estate market would be harder hit as lockdowns lead to significant drops in customers for commercial properties like hotels, restaurants and shopping malls. Bankruptcies of overleveraged and smaller businesses are likely, and many companies will try to arrange for a reduction or deferral in rents. Commercial properties are valued based on cash flow, and with decreased occupancy and rent, their values are likely to plummet. Not to mention, commercial property owners tend to be highly leveraged and may be forced to liquidate their properties in an economy where nobody is buying.
The Canadian real estate market is being supported by recent steps taken by the CMHC. With significant measures such as the Insured Mortgage Purchase Program, Mortgage Deferral Program, expansion of mortgage bonds and temporary suspension of CMHC dividend payments put in place, the residential real estate market may still thrive. However, commercial real estate markets might not be so favoured due to the decreased demand and increased strain placed on them in this period.