As 2020 began, a vast majority of surveyed Canadian lenders predicted their commercial mortgage loan originations this year would match or surpass 2019 levels. COVID-19 has now derailed that $62-billion+ prospect as lenders invoke tighter underwriting criteria or withdraw entirely.
Newly released analysis from CMLS Mortgage Analytics Group points to nosediving lender sentiment over the first quarter. The independent provider of mortgage valuation services traces how tenant-prompted pressure for rent deferrals begets landlords’ needs for loan concessions and heightened uncertainty for financiers, who reported approximately $317 billion in outstanding loans in CMLS’ 2019 year-end Canadian commercial mortgage market survey.
“The extent to which the national shutdown will ultimately affect real estate investment cash flows remains to be seen,” the CMLS commentary states. “This uncertainty has led to increased challenges in valuation as investors and borrowers try to determine if the impact to NOI (net operating income) will persist or correct itself in the short term.”
Accordingly, Canadian regulators and institutions — including the Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI) and Canada Mortgage and Housing Corporation (CMHC) — have introduced measures to counter what CMLS analysts term “rapid deterioration in the lending space for the time being” and bolster mortgage loan liquidity.
In addition to slashing the overnight interest rate to 0.25 per cent, the Bank of Canada will buy back up to $500 million in CMHC-guaranteed Canada Mortgage Bonds (CMBs) per week in the secondary market. That’s aligned with the Commercial Paper Purchase Program, announced in late March to support short-term financing needs.
OSFI has given banks leeway to categorize loans as still “performing” in cases where borrowers have needed to defer payments due to COVID-19- related stress, thus freeing banks from a requirement to hold extra capital to offset those loans. It also reduced the domestic stability buffer to 1 per cent as of April 1 — a 125-basis-point cut calculated to free up an additional $300 billion in lending capacity.
The Canadian government has introduced policies to support the CMHC-insured loan market. Notably, through its Insured Mortgage Purchase Program (IMPP), it will purchase up to $150 billion of insurance mortgage pools.
“The stimulus effectively triples their mortgage purchases from the previous year and more than doubles the amount purchased during the last financial crisis. The move aims to expand stable funding available to banks and mortgage lenders in order to ensure continued lending to consumers and business,” the CMLS analysis explains.