Residential mortgage-backed securities (RMBS) are secured by mortgages that qualify under the National Housing Act (NHA) and the Canadian Mortgage Bond (CMB) programs. Over a third of the outstanding mortgage debt is securitized, almost all of which through public securitization programs reaching over $496 billion in 2019. Public securitization does not have credit risk beyond that of the government, as they are all insured by the government.
Using different government guarantee assumptions of mortgage pools that support the current public MBS market, the objective of this research is to quantitatively examine how MBS spreads over the Canadian government yield curve could be influenced by:
- Increasing the amount of information available to MBS secondary markets about mortgage pools through the introduction of mortgage data standards; and
- Increasing the number of investor participants in the MBS secondary markets.
The key hypothesis tested in this study is whether increasing the number of market participants and/or the level of information about the underlying mortgages in an MBS for a given level of mortgage pool credit risk could reduce the equilibrium spreads over the government yield curve.
We find that increasing the information about mortgages included in a mortgage-backed security can act to reduce the spread and lessen market volatility at the cost of lower market liquidity. Increasing the number of investors in the market can result in similar outcomes, but with increased liquidity. The spread and volatility are minimized when both additional information and more participants are introduced to the market. Finally, if investors favour lower-volatility assets, increasing information could result in increased market participation.