How CMB/MBS Allocations Work + Mortgage Bytes

When Smith Financial bought out Home Capital, it necessitated that Home lose its precious NHA mortgage-backed securities (MBS) and Canada Mortgage Bond (CMB) allocations—i.e., the ability to fund its mortgages through MBS and CMBs.

That was a crushing blow to Home's prime mortgage competitiveness. After all, the spread on CMB/MBS funding is just 25-50 bps more than the Government's risk-free borrowing rate. Lenders must add miscellaneous costs (guarantee fees, insurance premiums, etc.), but CMBs/MBS are still often the cheapest way to fund a mortgage.

Knowing this crucial lifeline would end, Home Capital chose to cut off its low-margin prime mortgage business like a gangrene-infected leg.

The loss of Home Trust as a prime mortgage competitor, in turn, led some to ask why this had to happen.

We turned to CMHC, the Yoda of securitization, for an explanation. It said...

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