NHA MBS are investments that are backed by distinct pools of insured mortgages. Investors in NHA MBS pools receive blended monthly payments of principal and interest, where principal is passed through from payments of the underlying mortgagors and the interest is based on the pool’s coupon rate. The timely payment of NHA MBS principal and interest is guaranteed by the Canada Mortgage and Housing Corporation (CMHC), a federal crown corporation fully backed by the Government of Canada.
There are two basic types of NHA MBS: non-prepayable and prepayable pools. In non-prepayable pools, the principal on the underlying mortgages can only be repaid according to the original amortization schedule. In prepayable pools mortgagors are allowed to make unscheduled principal payments under certain conditions. Thus, in addition to scheduled principal and interest, investors holding prepayable NHA MBS may also receive unscheduled principal and, in some cases, penalty interest charged to mortgagors who make early prepayments
For many years, investing in mortgages was limited to investors with large financial resources. Now, thanks to Mortgage-backed Securities (MBS), the investment is accessible to all Canadians. MBS investments guarantee a timely payment to the investor, and provide more money through mortgage markets to help Canadians purchase a home.
The CMB Program was designed to complement CMHC’s long-standing NHA MBS Program. Introduced in 2001, the CMB Program has provided a continuing investment opportunity for investors and a cost-effective source of funding for mortgage lenders. The objectives of the program are to increase the supply of funds to and the competitiveness of the mortgage market and thereby lower mortgage costs for Canadians. Most CMBs are fixed-rate, five- or ten-year terms with semi-annual payments. Since its introduction, the Program has expanded and also includes multi-family residential mortgages.
Compared to NHA MBS, the CMB Program effectively converts the monthly and amortizing cash flows of the NHA MBS into typical bond-like payments, i.e., semi-annual coupon payments and a final principal payment. Thus, CMBs appeal to a broader investor base, are more investor-friendly and, therefore, funding via CMBs can be achieved at relatively lower costs.