With their banking customers moving money out of deposits and into mutual funds and stocks, Canadian banks are planning to expand the securitization of residential mortgages.
"In Canada, securitization is not the heart and soul of the mortgage business," said Christian Findlay, vice president for residential mortgages for Royal Bank of Canada, Montreal, the country's largest residential mortgage lender.
Mortgage products are designed in Canada according to what the client wants, rather than with the secondary market in mind, Ms. Findlay said, so there has been much less of an appetite for mortgage-backed securities.
Canadian banking and financial services companies are focused on "relationship banking," she said. Some 70% of customers tend to have one provider for all of their banking needs, she said, and this provides banks with retail accounts as a source of funding. Lenders have funded mortgages almost entirely with assets on their balance sheets. As of Oct. 31, she said, 94% of the Royal Bank's mortgages were funded on its balance sheet.
"We're continuing to hear that because of capital restraints, banks are going to be doing what they can to get these loans off of balance sheets," said Thomas J. Warrack, director of structured finance ratings for Standard & Poor's in New York. With the Canadian economy doing better than in the past few years, housing activity has started to pick up, he added.
Only about 3% to 5% of the mortgage market is securitized in Canada. But "conventional" mortgages-those with loan-to-value ratios of 75% or lower- are increasingly being securitized. Banks can now insure loans with ratios above or below 75%, and this is creating a larger pool of insured mortgages that have the potential to be securitized, Ms. Findlay said.
Last year $7 billion of mortgage-backed securities were issued, up from less than $2 billion in 1995 and again in 1996 but still not much when compared with the United States' secondary market, Ms. Findlay said. Forecasts for 1998 are that the market will reach $10 billion, she said.
Banks are moving into securitization because, with interest rates low, customers are moving money from their deposit accounts into mutual funds and equities. Banks are searching for liquidity and for a way to optimize overall funding costs, Ms. Findlay said. Packaging mortgages and getting them off of the balance sheet is one way to create liquidity.
The Canadian market is buzzing with talk that American mortgage companies including Countrywide Home Loans and Norwest Mortgage might enter it, Ms. Findlay said. But American companies would have to learn that securitizing everything that is originated would swamp the market, she said.
"There is going to be a need to develop that investor appetite," Ms. Findlay said. "It won't happen overnight."
There is a securitization market for three-year and five-year mortgage products and a small market for the 10-year mortgage, she said. Canadian homeowners and investors are not interested in the 30-year product that is the staple of the American market, she added.
For securitization to succeed in large volumes, she said, it will have to become competitive with banks' deposit bases as a funding source. But with banking customers' fleeing to mutual funds, securitization is becoming increasingly attractive.
