Analyzing the Canadian Housing Crisis: An Argumentative Essay

This essay delves into the pressing issue of the affordable housing crisis in Canada, arguing that the Federal Government must take control of the property market to improve affordability for renters. The author contends that this can be achieved by building more affordable housing units and implementing rent control measures. The essay further explores the opposition's viewpoint, acknowledging the private owners' desire for rental profits and the challenges this poses to government intervention. It then analyzes the potential impacts of the Federal Government's involvement in building affordable housing and introducing rent control on rent prices. The essay employs evidence-based arguments, incorporates concession and refutation, and utilizes diverse in-text citation methods to support its claims. Ultimately, the essay aims to provide a comprehensive analysis of the crisis and propose actionable solutions to alleviate the financial burden on renters.

Environment and Planning A 2015, volume 47, pages 1624 – 1642
doi:10.1068/a130226p
The political economy of mortgage securitization and
the neoliberalization of housing policy in Canada
Alan Walks
University of Toronto Mississauga, 3359 Mississauga Road, Mississauga, ON L5L 1C6,
Canada; e-mail: [e-mail]
Brian Clifford
Simon Fraser University, 2100-515 West Hastings Street, Vancouver, BC V6B 5K3,
Canada; e-mail: [e-mail]
Received 25 September 2013; in revised form 9 November 2014; published online 1 April 2015
Abstract: The Canadian case represents a distinct variety of financialization unde
capitalism, one conditioned by the structure of its mortgage markets and the domina
role played by the state in the process of mortgage securitization. Securitizat
been a key component of the neoliberalization of housing policy, with new state role
in the insuring, directing and funding of residential mortgage-backed securities
undergirding and justifying the federal shift from the provision of social rental housi
toward supporting a rental market increasingly characterized by private sector indivi
unit landlord-investors. It was primarily the state’s control over, and utilization of, th
securitization process that maintained the solvency of the financial system in the fac
the global financial crisis. However the resulting rapid uptake of liabilities on behalf
both the state and households brought forth new contradictions, necessitating new p
experimentation and reregulation, to which securitization was once again direct
which now articulate the political economy of housing in the country.
Keywords: securitization, neoliberalism, mortgage markets, financialization, governance
public policy, housing, financial crisis, Canada
Among the debates concerning the political economy of ‘financialization’, defined as the
increasing tendency for profit to accrue through financial channels as well as the increasing
importance of finance across the economy, (Epstein, 2005; Krippner 2005), the role played
by the securitization of loans is attracting new attention. Whether pursued by the private
sector or the state,(1) securitization is a method for widening private sector participation in the
funding of loans, facilitating increased access to credit, and for distributing lending risk among
different investors. Under securitization, various financial credit products are packaged into
commodities which can then be traded, including mortgage-backed securities (MBS), and
sometimes tranched into collateralized debt obligations (CDOs)—the financial instruments
whose unstable and unknown values set off the global financial crisis (GFC) (Engelen et al,
2011). By stimulating the creation of secondary bond markets open to international investors,
securitization is (officially) meant to enhance financial stability by spreading risk, while
simultaneously facilitating ‘market completion’ by allowing the level of risk associated with
different borrowers to be ‘properly’ priced. Yet in reality, securitization encourages market
competition for yield while allowing debt issuers to offload credit risk, inducing ever-more
(1) While securitization in the United States was initiated and implemented by the Government
Sponsored Enterprises (GSEs), over time the dominant trend in the US and elsewhere has been for
private sector financial institutions to package loans into securities for sale to investors. Regardless,
securitization could not occur without the policy and regulatory context being set by national states.

The political economy of mortgage securitization 1625
risky behavior among an assortment of players, including banks, mortgage brokers, and
households (Ashton, 2009; Engelen et al, 2011).
Understanding the historical and political evolution of securitization provides insights
into related processes of neoliberalization and financialization (and their cotravellers, rising
indebtedness and financial instability). Neoliberalization is often posed as the solution to
the problems which it itself throws up, with neoliberal public policies improvised in relation
to existing legislative and regulatory legacies, characterizing neoliberalism’s tendency to
‘fail forward’ (Peck, 2010; 2012). Debates remain, however, about how to understand the
path-dependent and scaler aspects of this process (Brenner et al, 2010; Peck and Tickell
2002), and how they pertain to financialization and/or financial crises. In contrast to scholars
who focus on either the greed of elites (supporting an explanation of ‘fiasco’) or misplaced
public policies (in which the financial crisis might be termed an ‘accident’), Engelen et al
(2011) invoke the concept of bricolage, supporting an explanation of ‘debacle’. Bricolage
presents an alternative rationality to that attributed to the scientist, planner, or engineer,
whereby structures are created in order to provide the means for attaining particular ends or
events. Instead, bricolage involves the creation of systems and structures in path-dependent
fashion “by means of events” and “the creative and resourceful use of materials at hand—
regardless of their original purpose” (page 51). Such structures develop and evolve as a result
of the incremental opportunist activities of interested agents in response to stimuli within
the confines of contexts not of their own making. The development of various financial
innovations, as well as their markets and the roles played by actors within them, were thus
dependent on how the interests, promises, and expectations of those agents interacted with
the evolving financial architecture.
The concept of bricolage works well as a heuristic for the confluence of factors that
stimulated financial innovations and the resulting debacle/crisis in the United States and
the United Kingdom (Engelen et al, 2011). However, given tendencies toward uneven
development and the variegated character of capitalism (Peck and Theodore, 2007), processes
of neoliberalization and financialization can be expected to take many different forms, and
display distinct path dependencies (Brenner et al, 2010). How are we to understand these
processes in the Canadian case? In Canada, which has seen its housing market become
one of the least affordable on the planet since the GFC (The Economist 2013), the state
has promoted neoliberalization through financialization, and has been a central player in
the institutionalization of mortgage securitization. The Canadian experience challenges
common views on neoliberalism that link it necessarily with deregulation or the withering
of the state. It was only through the fashioning of more complex regulatory structures and
deeper involvement of the state that securitization came to dominate mortgage finance in
Canada, and it is these state-driven changes that have been at the forefront of the incremental
neoliberalization of Canadian housing policy. Neoliberalization and financialization have
become mutually reinforcing, locking out alternative policy frameworks and creating vested
interests opposed to reform of the system. With the federal state and key state institutions as
core ‘bricoleurs’ in this system, we understand neoliberalization and financialization in the
Canadian context as reflecting a particular, state-centered, form of bricolage.
This paper has three main objectives. First, it seeks to uncover the political and legislative
events through which Canada’s peculiar state-driven program of securitization was fashioned.
Second, the paper interrogates the relationship between the rise of securitization and the
restructuring of housing policy, asking how the latter relates to processes of neoliberalization
and what role the former plays in this. Third, this paper draws on this empirical work to
examine the spatiopolitical structures and pressures acting on the system and guiding path-
dependent policy experimentation within the context of state, regional, and household strains

1626 A Walks, B Clifford
related to the financial crisis. In these objectives, this article empirically extends Walks’s
(2014) research on the state’s role in Canada’s housing system, by; (a) excavating the
legislative roots of neoliberal reforms to Canadian federal housing policy in the 1980s and
1990s; (b) interrogating the links between the new mortgage finance system centered on
securitization and the residualization of social-rental housing; and (c) analyzing the post-
GFC restructuring of mortgage insurance functions.
This paper begins with a discussion of the relationships between securitization,
financialization, and neoliberalism. It then moves on to examine the structure and history
of mortgage securitization in Canada, with a focus on key decisions, events, and institutions
as the main ‘bricoleurs’ of the system. The political history of securitization is excavated
from analysis of published reports, parliamentary standing committee minutes, debates, and
Hansard—the Canadian parliamentary record (all the data analyzed for this paper derive
from publicly available sources). The political economy of securitization in the post-GFC
era is then interrogated, with the implications of the shift of public policy toward further
marketization explored for the evolving sociospatial terrain of financialization. The paper
concludes by discussing the importance of this political history for an understanding of related
processes of financialization, state-centered bricolage, and neoliberalization in nations such
as Canada.
Securitization, financialization, and neoliberalism
The restructuring of mortgage markets and the practice of securitization have been
among the most salient processes associated with contemporary financialization. Particularly
in the period after the Asian currency crisis of the late 1990s, securitization (regardless of
the level of state involvement) enabled capital investment to switch between the primary
(production-based) and secondary (property development) circuits (see Gotham, 2009). Ease
of credit availability and declining interest rates spurred the take-up of mortgage credit, and
fuelled global housing bubbles as rising demand pushed up housing prices. This has resulted
in record levels of household debt in many nations, primarily but not only in the form of
mortgages. It is in this context that mortgage securitization represents the ‘financialization
of home’ (Aalbers, 2008), as the new liquid securities linked to residential real estate became
the ‘widgets’ of the financialized postindustrial economy (Newman, 2009). Securitization
is associated with more risky lending and higher loan-to-value ratios (Sufi, 2012). The
‘originate-and-distribute’ model of securitization reduces banks’ interest in fair and prudent
lending and, as the supply of low-risk borrowers dwindles, lenders are incentivized to search
out those with ever-lower credit scores, incomes, and employment prospects, leading over
time to declining lending standards (Sassen, 2009; Sufi, 2012). The growth of predatory
loans and rising indebtedness (and subsequent foreclosures) are linked to new class, race,
and generational inequalities (see Engel and McCoy, 2011; Immergluck, 2009; Sufi, 2012;
Walks, 2013; Wyly et al, 2006; 2012).
Key tenets of neoliberalism include prioritizing of private property, commodification,
and trust in price signals to provide valid information regarding underlying values, needs, and
preferences, combined with antagonism toward the welfare state and redistributive policies
(Hackworth, 2007; Harvey 2005; Peck, 2010). Neoliberalism has in practice been associated
with the deregulation of finance, and the rise in importance of derivatives and bond markets,
both as technologies for disciplining private and public actors (for instance, punishing the
bonds of states or firms that do not budget wisely), and for hedging investments and relaying
information about shifts in valuation through specialized price signals such as interest-rate
spreads, and credit default swap (CDS) spreads (Hackworth, 2007; Major, 2012). Peck and
Tickell (2002) distinguish between ‘roll-back’ neoliberalism, involving reductions in welfare
state benefits, deregulation, and the privatization or elimination of state-provided collective

The political economy of mortgage securitization 1627
consumption, and ‘roll-out’ neoliberalism, involving the reregulation of both private and
public functions via market-based technologies, pricing, management, and accounting
principles.
Securitization fits well with the logic of neoliberalism. It facilitates the extension and
broadening of private ownership through commodification of income streams separated from
underlying assets, as well as stimulating new secondary markets for trading such commodities.
Furthermore, it promises market-based pricing solutions to problems of credit risk caused
by imperfect markets and asymmetric information (Ashton, 2009; Wyly et al, 2012).
Securitization capitalizes on advanced mathematical and computing technologies to monitor,
score, and underwrite credit products, and to model delinquency and default, facilitating
the development of models to price credit risk more accurately as well as providing greater
investor choice of financial products by bundling loans with different risk portfolios into
different securities. The extension of credit to underserved borrowers, and new securities to
underserved investors, is discursively constructed as ‘market completion’ (see Ashton, 2009).
One irony (for neoliberalism) is that lack of trust in the accuracy of these pricing models and
the refusal of securities owners to own-up about their assets helped fuel the credit crunch
and GFC. Furthermore, securitization in particular leads to new ‘information asymmetries’
in which financial institutions have an incentive to hide information both from regulators and
from borrowers, a factor in predatory subprime lending at the heart of the crisis in the US
(Ashton, 2009; Engel and McCoy, 2011).
Structure of the Canadian mortgage market and the role of securitization
The Canadian mortgage finance system differs from its peers elsewhere in the developed
world. Perhaps most importantly, mortgage insurance and the securitization process have
been dominated by a state-owned Crown corporation, the Canada Mortgage and Housing
Corporation (CMHC). Canada is among few developed nations that did not formally
witness any bank failures, and which escaped the GFC relatively unharmed (Carter, 2012;
Ratnovski and Huang, 2009); yet it also witnessed rapidly rising housing values and levels of
indebtedness (Walks, 2013; 2014). The key to these contradictions is found in the structure
of Canada’s mortgage finance system, and the ability of the state to intervene decisively.
Unlike the situation in other Anglo nations, in Canada securitization has been dependent on the
federal state, not only for structuring and regulating mortgage finance, but also for insuring,
guaranteeing, and purchasing most of the mortgages that have been bundled into MBS.
CMHC was created in 1946 as a vehicle for the construction of affordable rental and
owner-occupied housing and for insuring mortgages in order to encourage lending by large
banks, more similar to the US Federal Housing Administration (FHA) than to the GSEs
that insure many mortgages in the US. There are six large banks in Canada, and banks have
issued roughly three quarters of mortgages originated, with the remaining quarter issued by a
series of nonbank institutions (CMHC, 2012, page A22). Since the early 1980s, when banks
were allowed to swallow trust companies and mortgage broker-dealers, the large banks have
simultaneously housed both deposit-taking and investment banking functions (representing
roughly 33% and 10% of bank earnings, respectively) (Blakely, 2009).
In Canada mortgages issued with loan-to-value (LTV) ratios above 80% must be insured.
It is the borrower who pays the insurance, but it is the lenders (not the borrowers) who are
protected from loss in the event of default.(2) CMHC provides the majority of this insurance,
but there are two main private insurers that also insure mortgages issued by traditional
lenders—the General Electric Capital Mortgage Insurance Corporation (Genworth),
(2) Borrowers can purchase separate private mortgage insurance to protect them from death, illness,
or personal injury, but not from job loss. There are no public programs that protect borrowers from
inability to pay due to lack of employment.

1628 A Walks, B Clifford
and Canada Guaranty (arising out of AIG United Guaranty Insurance—AIGUG—which
entered Canada shortly before the financial crisis but then had to exit once it began). Because
CMHC is a Crown corporation, 100% of the value of the mortgages insured by CMHC is
guaranteed by the federal government. However, in order to stimulate ‘competition’ in the
mortgage-insurance business, the federal government also provides the private insurers a
guarantee of 90% of the value of the outstanding conforming mortgages they insure in the
event of default (with the first 10% of losses coming from a fund which the private insurers
must contribute to as a condition of their license). Thus, the Canadian public takes on all the
risk of the mortgages insured by CMHC, and 90% of the risk of the conforming mortgages
insured by the private lenders, leading Mohindra (2010) to characterize the Canadian
mortgage finance system as the ‘high taxpayer vulnerability model’.
Under the National Housing Act (NHA) only mortgages conforming to specific criteria
established by the federal government regarding LTVs, amortization terms, downpayments,
and gross-debt service (GDS) ratios, can be insured by CMHC, or packaged into MBS insured
by CMHC (the latter are termed ‘NHA–MBS’). For this reason, most mortgages issued by
traditional lenders are NHA-conforming mortgages, leaving a small subprime market for
the origination of nonconforming mortgages to nonbank/shadow lenders. Unlike the US and
many other nations, there is no mortgage-interest tax deduction on a primary residence in
Canada; but there are also no taxes on realized capital gains on the sale of one’s primary
residence.
Securitization evolved differently in Canada than in most other developed nations. While
there are a number of different models, the more common practice that arose in other nations
is for financial institutions themselves to create special purpose vehicles (SPVs) to purchase
and pool mortgages into MBS, and to service or tranche the MBS. In Canada since June
2001, through a special purpose trust of the CMHC called the Canada Housing Trust (CHT),
the state has performed these functions, which largely did not exist beforehand. CHT sells
nonamortizing bonds called Canada Mortgage Bonds (CMBs) to large-scale investors, and
uses the funds thus raised to directly purchase conforming mortgages in NHA–MBS from
banks, moving them off banks’ balance sheets and onto on the books of CHT/CMHC. Thus,
it is a public body that absorbs credit risk and reduces the amount of capital the banks are
required to hold in reserve, allowing them to ramp up their lending. As the CMBs are 100%
guaranteed (principal and interest) by the federal government, there is no risk to investors.
Banks also have the option of bundling mortgages into NHA–MBS and either keeping
them on their books, or selling them directly to large-scale private investors. Regardless,
they remain risk-free to lenders because the underlying mortgages are fully insured. Because
of the strong role of the state in guaranteeing the value of NHA–MBS, Canadian financial
institutions did not get into the habit of structuring CDOs. Furthermore, the success and
effectiveness (and triple-A ratings) of the public-label system led to low demand for private-
label securities. The use by Canadian financial institutions of asset-backed commercial paper
(ABCP) to fund private-label MBS and other debt hit C$122 billion in 2007, but the practice
slowed dramatically with the GFC (Perkins, 2013). By early 2013 the entire Canadian ABCP
market was worth only C$26 billion (Perkins, 2013). Of the C$384.5 billion in outstanding
mortgage credit securitized in 2010, $16.2 billion, or just over 4.2%, derive from private-label
(non-NHA–MBS) securitizations (figure 1). Meanwhile, covered bonds—private securities
that banks sell to fund mortgages, but with more direct creditor access to the underlying
assets in the event of default (see CMHC, 2013)—were introduced in 2007 and have grown
rapidly since (discussed in the last section).
Just like Canadian Treasury Bonds, the CMBs come with a direct and unconditional
guarantee. If the NHA–MBS on the books of the CHT were to lose value or suffer defaults,

The political economy of mortgage securitization 1629
the difference has to be made up by the Canadian government, which makes the Canadian
state highly sensitive to the value of these assets. This is key to understanding the political
economy of securitization in Canada. In effect, the Canadian public, through federal
government institutions developed to securitize mortgages, has borrowed at fixed nominal
interest rates to collectively gamble on real estate. If real estate values continue to rise and
mortgagees continue to make their payments, the CMHC and the federal government reap
a profit, as do the speculators and households who might not have accessed mortgage credit
as easily in the absence of the program. If, on the other hand, the real-estate market were to
suffer defaults, this would effect a socialization of losses as the federal government would
have to make up the gap between the actual flows of mortgage payments and the full value of
the principal and interest of the bonds paid to private investors. The CMBs are mostly sold to
Canadian institutions (72% in 2011), or those in the US (14.5%), with insurance companies
and pension funds the most common form of investor (41.5%) (CMHC, 2012, page A27).
Thus, the pensions and insurance policies of many Canadians also largely depend on real-
estate values being maintained.
Securitization, CMHC, and the neoliberalization of housing policy 1985–2001
The history and evolution of the securitization process in Canada are implicated in the
incremental neoliberalization of housing policy, programs, and political rhetoric/discourse
at multiple scales (table 1). As in Bush’s ‘ownership society’ in the US, and ‘asset-based
Figure 1. Total outstanding credit (C$ billions) by type of securitization, Canada 1987–2012 (source:
calculated from CMHC, 2012, pages A24–A27). ‘Regular NHA–MBS’ includes the NHA-MBS
purchased as part of the Insured Mortgage Purchase Program (IMPP) implemented as part of the
federal response to the GFC in 2008–09, and the latter is the main reason for the drastic increase in
NHA–MBS between 2007 and 2010. There is no difference in the qualifying criteria for residential
mortgages packaged into regular NHA–MBS, whether purchased through the IMPP or not, nor between
regular NHA–MBS and NHA–MBS purchased through the CMB program. All of these mortgages
must meet the minimum criteria for qualifying loans set by CMHC, including those for maximum
amortization terms, minimum downpayments (although these downpayments can often be ‘gifted’ by
the lenders and/or capitalized into the mortgages). Private-label MBS, on the other hand, in most cases
involve mortgages that would not qualify for inclusion in NHA–MBS. Covered bonds are issued by
the lenders, but the criteria for their issuance and registration is set by the CMHC.
Total outstanding credit (C$ billion)
200
160
120
80
40
0
Regular NHA–MBS
Canada Mortgage Bonds (CMB)
Private-label securitization
Covered bonds
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Table 1. Periodization of Canadian housing policy and governance, 1970–2012.
1970–84 1984–92 1992–2001 2001–08 2008–12 and after
Structural • Prosperity then
stagflation
• Early 1980s recession
and recovery
• Growing public debt
• Early globalization
• Rise of service-based ‘new’
economy
• Early 1990s recession
• Aggressive deficit reduction
• North American Free
Trade Agreement, new
international financial
regimes
• Dotcom (and US housing)
bubble
• Financial deregulation/
growth of financial markets
• Rising deindustrialization,
also household debt
• Global Financial Crisis
• Rapid deindustrialization
• Housing and finance as the new
leading sectors
• Canadian housing bubble
• Rapidly rising household
and government debt
Political/
rhetorical/
ideological
Keynesian/embedded
liberalism
• Housing framed as
a social right, state
has role in providing
subsidized housing
Neoliberal onset and
roll-back
• Discrediting of Keynesianism/
embedded liberalism
• Emphasis on deficit reduction,
‘efficiency’
• Need to harness private sector
Neoliberal roll-out
• Construction and
consolidation of market-
based approach
• Regulated financial
innovation and market
competition can meet social
objectives
• Emphasis on partnerships—
‘third way’ social policy
Deepening neoliberalization
through financialization, and
deregulation
• Euphoria over the power
of financial markets and
competition to deliver
housing outcomes
• Rhetoric: deficit problem
‘solved’
Crisis management and
government stimulus
• Rhetoric: banking system saved
by prudent regulation and prudent
private sector practices
• Government deficit once again a
problem
• Emphasis on austerity, further
welfare-state roll-back
Housing
policy
Emphasis on social
housing
• Subsidy-based
public, nonprofit, and
cooperative programs
• Subsidy-based
homeownership plans
(AHOP)
• Subsidy-based
programs to increase
private rental supply
(ARP)
Restructuring and cancellation of
social housing programs
• Questioning of Canada
Mortgage and Housing
Corporation’s proper role
• Mortgage securitization
launched to promote access
to mortgage credit (National
Housing Act—mortgage-backed
securities) (Bill C-37)
• Extension of mortgage insurance
on more products (Bill C-111)
Capping of social housing
subsidies
• Devolution of social
housing responsibility to the
provinces
• CMHC reformed to operate
like a competitive, private
insurance company
• Use of securitization,
mortgage insurance reforms
to achieve housing policy
objectives
• Commercialization of the
CMHC (Bill C-66)
Reliance on private sector to
supply rental housing
• Securitization and loose
credit becomes primary
affordable housing policy
• Canada Mortgage Bonds
(CMB) program
• New private mortgage
insurance competitors, yet
with state guarantees
• Extension of mortgage
insurance to ‘exotic’
products aimed at low-
income households
State bails out the mortgage-
finance system
• Insured Mortgage Purchase
Program (IMPP)
• Post-GFC, official silence on use
of securitization for recession
fighting
• Shift from CMHC to private-
sector mortgage insurers (while
maintaining state guarantees), and
to new private sector financial
vehicles (covered bonds, etc) as a
way of dealing with rapidly rising
state liabilities

The political economy of mortgage securitization 1631
welfare’ in the UK (Ronald, 2008), the Canadian state has increasingly relied on the
triumvirate of securitization, credit growth, and rising homeownership as the basis for
an asset-based approach to housing policy, and moved away from the direct funding of
purpose-built, subsidized social-rental housing. While CMHC, set up to maintain housing
affordability, insure mortgages, and build social housing, has been the key institution through
which the federal government has implemented and directed the securitization program, it is
the Canadian federal government which has been the core ‘bricoleur’ in building the unique
state-led yet neoliberal housing system.
From its early inception CMHC was tasked with achieving state social policy objectives
both in affordable social rental housing and in private mortgage insurance (Bacher, 1993).
The social role of CMHC was strengthened over the early postwar period as amendments
to the NHA increased its commitment to income redistribution through a raft of subsidy-
based programs and activities aimed at increasing the supply of social and nonprofit housing
(Government of Canada, 1979; Smith, 1981). However, these social policy objectives came
into question after the early 1980s recession and the election of a new federal government
in 1984. The embrace of neoliberalism began in earnest with the implementation of a
consultative review of the government’s role in the mortgage market in 1985 (CMHC,
1986), which de-emphasized subsidy-based housing programs and promoted the expansion
of the CMHC’s role in delivering housing policy outcomes through its mortgage insurance
activities. It was this review that recommended the creation of a system of mortgage-backed
securities (CMHC, 1986), in part as a tool for reducing the federal deficit in the face of high
nominal interest rates under the assumption that MBS insurance operations would not require
direct subsidies.
The original securitization program, begun in 1987, was mostly modeled on the public-
label securitization process then practiced by the US GSEs. Although implemented quietly
and without much public or media awareness of the program, securitization was touted as
“one of the most important initiatives in Canadian housing finance since the introduction of
public mortgage insurance” (CMHC, 1987, page 26). While other ways of structuring housing
finance could also have been proposed, securitization was already perceived as successful in
reducing US banks’ capital funding costs and freeing them to increase lending, increasing US
rates of homeownership and stabilizing their mortgage finance system, and so was looked
upon favorably (Government of Canada, 1985; O’Brien, 1988). The Canadian program also
sought to use securitization to provide a non-subsidy-based method of funding social-rental
housing, through amendments (in 1988) that allowed for exclusive social housing loan pools
for securities issues (CMHC, 1988, page 18, discussed below).
The initial securitization program experienced some success in the late 1980s and very
early 1990s, with the proportion of new mortgage originations securitized rising from zero
to over 15% in only five years. However, the early 1990s recession and rising interest rates
reduced investor demand for this form of NHA–MBS, while also squeezing public finances.
While the neoliberal ‘roll-back’ of the Canadian welfare state had begun earlier, it was only
when the recession hit that this came to be aggressively pursued through housing policy
reforms. This occurred in two ways. First, the federal government disentangled and devolved
itself from new social housing commitments, freezing subsidies in 1993, off-loading much of
its social housing portfolios onto the provinces (most of whom were also financially strapped,
and who then chose to limit or cancel new social housing commitments), discontinuing its
cooperative housing program, and restructuring federal transfer payments for social welfare
functions (see Colderly, 1999; Hackworth, 2008; McKeen and Porter, 2003). The result was
a drastic decline in the numbers of social-rental housing units built after 1993, a problem that
continues to this day (figure 2).

1632 A Walks, B Clifford
Secondly, the federal government moved to make CMHC’s mortgage insurance
operations the new centre of affordable housing provision. This process was accomplished via
incremental policy reforms that turned the CMHC into a quasi-private financial institution.
Key amendments to the NHA were introduced in Bill C-82 in 1992, which gave the CMHC
the power to borrow and invest in capital markets on its own, restructured the Mortgage
Insurance Fund (MIF) and the Mortgage-backed Securities Guarantee Fund (MBSF) in the
model of a private insurance company, increased the cap on mortgage insurance, and extended
payment guarantees for NHA-MBS, allowing CMHC to underwrite the expansion of the
securitization program. As these changes encouraged lenders to issue and then securitize
mortgages in order to maintain demand among homebuyers (Dupras, 1992), they can be seen
as one of Canada’s first attempts at private credit-induced stimulus along the lines of what
Crouch (2009) calls ‘privatized Keynesianism’. It was accepted that such changes would
lead to a rise in household debt, but they were nonetheless promoted given that securitization
was assumed to be self-financing and would help reduce state outlays. Conservative
Member of Parliament (MP) Elmer McKay defended these amendments in terms of “the
importance of being able to change with the times” and develop “creative ways to attract new
sources of funding to respond to the housing needs of low to moderate income Canadians”
(McKay, 1992, pages 12087–12089). The central role of financialization and credit/debt
creation in the federal government’s new housing policy was encapsulated by McKay:
“Danish writer Henrik Ibsen … said that there can be no freedom or beauty about a home
life that depends on borrowing and debt. I suggest to the House that this is exactly the
opposite now and that one has to have access to borrowing and debt in order to enjoy
the kind of amenities in housing that Canadians feel they are entitled to have” (1992,
page 12086).
In the decade that followed the federal government (regardless of political stripe) sought
to bring market logics to bear in stimulating housing production. Securitization played an
Figure 2. Social housing units built, by year, Canada 1972–2010 (source: calculated by the first author
from CMHC Canadian Housing Observer, various years).
33
30
27
24
21
18
15
12
9
6
3
0
Number (thousands) of social rental housing units completed 20
16
12
8
4
0
Percentage of total housing unit completions
10080604020098969492888684828078767472 90
Number of social housing units
Social housing as % of all housing built

The political economy of mortgage securitization 1633
important role in both facilitating and justifying the restructuring of the system. In 1995
Genworth entered the mortgage insurance market and lobbied successfully to attain a 90%
guarantee of its insurance book. This was followed, crucially, by the 1996 budget legislation
that gave CMHC the mandate to run its insurance and guarantee operations on a commercial
(for-profit) basis, rather than the break-even basis on which it had originally been mandated,
allowing it to compete effectively with Genworth. It was hoped this would spark financial
innovation and lead to lower interest rates, greater product choice, and more affordable
mortgage credit, and possibly allow the state to get out of the mortgage insurance business
altogether by privatizing CMHC later—as Australia did in 1997.
Yet, it was only with the passing of Bill C-66 in 1999 that the new system could crystalize.
One key aspect of Bill C-66 involved changes to the NHA enabling CMHC to insure any kind
of housing loan that it saw fit (see Dupuis, 1999). This opened up the door in the 2000s for
more exotic mortgage-loan insurance products (which had already been introduced in the
US over a decade earlier), including zero-down mortgages and self-employment mortgages
(in which applicants do not need to prove their income). The bill also allowed for CMHC
to set fee and premium structures for mortgage insurance products instead of having to rely
on Parliament or an order-in-council. Ostensibly meant to encourage CMHC to price risk
more effectively, such changes also allowed it to trim back fees and premiums in order to
attract more business and compete with Genworth. Finally, the bill enabled CMHC to further
enhance the payment guarantee on securities issued on the basis of housing loans, thereby
allowing it to develop new mortgage securitization programs and products, which would be
necessary for the later creation of the CMB program. To facilitate this restructuring, changes
to CMHC governance were also rolled into Bill C-66, reweighting its board of directors with
fewer public servants and more political appointees selected from the private sector. (3) The
minister responsible for housing, Alfonso Gagliano, was direct in stating the state’s objective
was that CMHC be “at a certain distance from government and can be managed with the
expertise of the private sector and can be more commercial” (Standing Senate Committee on
SAST, 1999, page 6).
The other key aspect of this same Bill C-66 removed many detailed provisions and
conditions for non-market and social housing programs contained in the NHA. While not
affecting the existing operating agreements that CMHC had previously entered into with
housing providers, Bill C-66 replaced key public, statutory mechanisms with language that
established that future housing could be provided on a negotiated contractual basis and not
adherent to rigid statutes, and would not have to take into account social policy objectives
related to rent geared to income provisions or democratic control of projects. Bill C-66 was
thus a watershed in articulating the new role for CMHC. Federal subsidies for new social
housing programs were severely constricted, except on native reservations where the federal
government is constitutionally mandated to provide housing. Instead, the financial sector
and CMHC were to be relied on to provide housing outcomes through the development of
a broader range of mortgage products, mostly for homeownership, and stimulated by the
mortgage securitization program.
This restructuring meant that outside of reservations it would now be private investors who
would supply new rental housing for lower income households (either through investment
in CMBs, or by purchasing housing units to rent out), encouraged further by tax deductions
for investment-property expenses. This effectively heralded the rise of the Canadian
version of what Soederberg (2013) calls the ‘debtfare state’, with the federal government
now backstopping a growing rentier class of individual landlords, as well as encouraging
(3) At the time the board was composed of a chair, president, vice president, five political appointees,
and two public servants. Bill C-66 altered the board to a president, chair, and eight political appointees.

1634 A Walks, B Clifford
looser lending standards and the take-up of debt among homebuyers. This has been a key
factor spurring the tremendous boom in condominium development across Canadian cities
that followed, as the condo units became the main private investment vehicle for absorbing
the huge new supply of mortgage credit as well as meeting demand for rental housing in the
absence of new state provision (see Rosen and Walks, 2013).
In framing Bill C-66, Minister Gagliano neatly encapsulated the direction the federal
government was taking:
“We must build new programs to answer the pressing need of affordable housing. We
definitely cannot do it the way we used to do it. We used to put in money and build
houses and distribute them. Nobody is expecting us to do that anymore. (Standing Senate
Committee on SAST, 1999, page 5).
The language used by Minister Gagliano is telling: the “nobody” clearly is not meant to
include the rising numbers of homeless and others whose incomes meant that they were shut
out of the private rental market, a dominant trend in Canada over the 1990s (Walks, 2006).
Gagliano was also clear about who the legislation was there to serve:
“what we are doing in general in this legislation is making sure the corporation [CMHC]
can respond to the demands of consumers and the demands of the financial sector”
(Standing Committee on NRGO 1999, page 2, emphasis added).
It was only after this enabling legislation was passed that the federal government was
able, through the CMHC/CHT, to roll out the CMB program (in 2001). The nonamortizing
CMBs (and CHT as the special-purpose trust holding the securities) were modeled loosely
on the ‘Mastertrust’ structure that had been developed originally in the US and which made
its way to the UK in the late 1990s (see Wainwright, 2012). The similarity of CMBs to other
common bonds, with ‘bullet’ payments returning the principal upon maturity, coupled with
their detachment from the underlying mortgages and federal guarantees of both principal
and interest, vastly improved their marketability among institutional investors. The success
of the CMB program led to lower funding costs for mortgage lenders, encouraged banks to
originate more mortgages, and spurred a rapid increase in the availability of mortgage credit
(KPMG, 2008; Walks, 2014). The program was also celebrated by the financial community,
with one prominent bank official noting “CMHC finally hit the nail on the head with
mortgage securitization” (Dabrowski, 2005), confirming Minister Gagliano’s understanding
that securitization should respond to the demands of the financial sector. Once the CMB
program was put in place, it would appear that there was consensus that the problem of
structuring securitization was now solved: debate in Parliament regarding the proper role or
implementation of securitization ceased entirely until the breakout of the GFC.
While these changes to the NHA also meant that securitization could be used to fund
CMHC’s social housing mandate, the latter securities were not huge sellers. Over time, there
was a clear shift in priority away from using securitization to fund social housing and toward
the funding of residential mortgages (table 2). Securities issues for social housing fell from
C$1.03 billion in 2002 (4.8% of total NHA–MBS issuance), to $490 million (0.33% of NHA–
MBS) in 2012. Over the same period, NHA–MBS issuance related to the funding of private
mortgages rose dramatically, from C$21.6 billion to C$146.7 billion. In the nine years
spanning 2002 to 2010 roughly 13 000 new social/non-profit rental units were built across
Canada (mostly on reserves, and in the province of Quebec where the provincial government
remained active) while upwards of 613 500 households received some rental subsidy through
continuing agreements with the provinces, municipalities, and reserves (CMHC, 2011, tables
52, 54, 55). The average annual subsidy works out to C$3926 per rental unit. By comparison,
during the same period CMHC insured over 6.2 million new mortgages on private residential
dwellings at an average insured amount of $122 279, with roughly one third securitized into
some form of NHA–MBS (CMHC, 2012, page A23).

The political economy of mortgage securitization 1635
Crisis and beyond: the political economy of securitization under ‘stimulated austerity’
Before the onset of the crisis, in 2006 a newly elected minority Conservative federal
government moved even more aggressively to encourage competition within the mortgage
insurance sector and to stimulate the take-up of mortgage credit. Amortization and down-
payment terms on conforming new mortgages were loosened significantly (or eliminated),
and new private mortgage insurers were allowed to enter the Canadian mortgage market
with the same 90% guarantee on mortgage insurance already enjoyed by Genworth. The
new private insurers were eager to compete for the ‘underserved’ market, and the result
was a huge flood of new mortgage credit and a rapid rise in property prices (see Walks,
2014). Many members of the new government, ideologically disposed to neoliberal dictates
and believing in financial innovation and competition, knew that it meant that many lower
income households and those with poorer credit histories would now gain access to mortgage
credit. The then Conservative MP and House Finance Committee member Dean Del Mastro
was open about this:
“What happens when people are competing for market share is that … they approve
things that otherwise were not getting approved, which means that people with shorter
job tenure, worse credit ratings, and higher-debt-to-service ratios are suddenly being
approved. It’s a good thing, particularly for low-income Canadians (Standing Committee
on Finance, 2006b, page 27).
Policy makers of all stripes proffered that allowing the market as much rein as it liked
and enhancing access to credit for new borrowers would have few negative effects. Karen
Kinsley, the President of CMHC at the time, stated:
“we don’t believe that heavy regulation is required in this environment. The marketplace
will dictate where we have to go” (Standing Committee on Finance, 2006a, page 37).
The Liberal Party opposition likewise agreed with the Conservative government’s approach
to mortgage finance. MP John McCallum, former Minister of National Revenue in the
Table 2. NHA–MBS issuance by type (C$ billion), 2002–12 (source: calculated from CMHC, 2012,
2013 (tables A25–A29).
Social
housing
CMB a Other
NHA–MBS b
Total NHA–
MBS issuance c
Social housing
% of total
2002 1.03 13.2 8.41 22.64 4.77
2003 0.19 17.3 15.21 32.70 0.60
2004 0.24 19.3 18.17 37.71 0.65
2005 0.28 18.0 27.72 46.00 0.62
2006 0.74 25.1 32.61 58.45 1.27
2007 1.09 35.7 48.88 85.67 1.29
2008 0.52 43.5 100.96 144.97 0.36
2009 0.66 46.9 86.67 134.24 0.49
2010 0.65 39.4 84.58 124.64 0.53
2011 0.49 41.3 98.11 139.89 0.35
2012 0.49 39.9 106.33 146.72 0.33
a CMB—Canada Mortgage Bonds.
b NHA–MBS—National Housing Act–mortgage-backed securities.
c CMBs and other NHA–MBS are issued to support private residential mortgage funding. Other NHA–
MBS include mortgages purchased as part of the Insured Mortgage Purchase Program implemented as
part of the federal response to the global financial crisis in 2008–09.