Bernard Atkins, a retired director of special services with the B.C. ministry of tourism, and his wife, Catherine, decided last November to cash in $100,000 worth of their Canada Savings Bonds (CSBs) and other investments. Through Torontobased GMC Investors Corp., the Victoria couple used the money, representing a third of their investment portfolio, to buy an increasingly popular financial instrument known as mortgage-backed securities (MBSs). Conservative investors, the Atkinses were attracted to the securities because of their reliability, relatively high level of return, and liquidity. The securities can be traded like a bond at any time for instant cash. And the 9.35-per-cent interest rate outranks even high-yielding CSBs, which have a current interest rate of 7.75 per cent, or guaranteed investment certificates (GlCs), which are non-cashable, fixed-rate investments that earn interest of up to 9.25 per cent. As a result, the Atkinses will receive a guaranteed monthly income of about $900 from their new investment. Declared Bernard Atkins: “This will bring us to the lifestyle we want to maintain.”
Mortgage-backed securities offer Canadians a new form of investment which has been sweeping the U.S. capi-
tal markets for more than a decade. Introduced in Canada 16 months ago by GMC Investment, the securities in effect allow investors to own a portion of other people’s mortgages. By investing in the government-insured pools of residential mortgages assembled by banks, trust companies and insurance companies, investors receive a guaranteed monthly or annual payment at the highest rates available. Popular since their introduction, the appeal of the securities increased dramatically last month when the Canada Mortgage and Housing Corp. (CMHC), the federal government’s housing agency, began guaranteeing principal and interest of approved MBSs sold by financial institutions. As a result, last month the Canadian Imperial Bank of Commerce and the Bank of Nova Scotia each sold CMHC issues totalling $45 million with interest rates of 9.25 per cent—and both issues sold out within hours.
MBSs provide investors with a direct interest in the various financial institutions’ portfolios of residential mortgages, which currently range from $2 million to $25 million. Individual investors can invest in these pools by purchasing threeand five-year mortgage certificates from a securities dealer in various denominations beginning at $5,000. GMC Investors offers
MBSs for a minimum investment of $10,000 and a maximum of $100,000, while those issued by the CMHC through the banks begin at $5,000 and have no maximum investment ceiling. Each security represents ownership of a percentage of the mortgage pool, and each yields a monthly capital payment. All investments based on the pools are guaranteed either by the banks or the CMHC. Said Ian Russell, director of capital markets for the Investment Dealers Association of Canada: “This is the first time a little guy can invest in government-insured mortgages.”
But security-conscious investors are not the only potential beneficiaries of the growing mortgage-backed securities market. Homeowners as well stand to gain. Many industry analysts predict that the new supplies of funds for mortgages, as a result of the investments, could lead to slightly lower interest rates and the return of 10and 20-year mortgages in Canada. Said Joseph O’Brien, director of the CMHC’s National Housing Act Mortgage-Backed Securities Centre: “If you get a good supply of funds, you will get downward pressure on interest rates.” He added, “A lot of people will be pleased to tie up for 10 years in today’s interest-rate market.” Indeed, GMC Investors currently offers fiveyear mortgages for 10.75 per cent—less than any bank or major trust company. And Canada Trustco began offering 10-year mortgages at rates of 11.25 per cent last month. The trust company has assembled a pool of residential mortgages worth $20 million by issuing 10-year MBSs to investors.
Sales of the securities have been brisk in the United States since 1970, when they were introduced by the federal government’s National Mortgage Association. By the end of last year more than $550 billion worth of MBSs were issued, and the trading volume of MBSs was greater than the total volume of stocks and bonds traded worldwide. In Canada, analysts predict that investors will buy up to $600 million worth of new issues in 1987.
So far, Canada’s $120-million MBS market is minuscule compared to the country’s total mortgage market of $171.6 billion. But analysts said that the potential for linking securities to such assets is limitless. In the United States, financial institutions have issued MBS-like securities against a variety of assets, including car loans, computer leases and credit card charges. If Canadians become used to the idea of owning a piece of their neighbors’ assets, their appetite for making money on other people’s debts could prove to be equally insatiable.
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