Mortgage underwriting risk and investor risk are expected to rise as housing affordability declines in both Canada and the U.S., Moody’s Investors Service says.
In a new report, the rating agency said that high housing prices and rising mortgage costs are cutting into affordability on both sides of the border.
“Borrower incomes in the U.S. and Canada are rising too slowly to fully offset growing mortgage costs,” it said.
The decline in housing affordability is “driving mortgage quality to weaken and originations to slow, spurring risk for securitizations and lenders,” Moody’s said.
In particular, it said that “declining mortgage originations will weaken lender revenue and residential mortgage-backed securities issuance.”
These trends pose challenges to both home builders and the mortgage sector, it noted.
“In Canada, mortgage delinquencies will rise and builder revenue will decline,” the report said.
“However, long-term fundamentals and certain regulations remain positive for the housing market,” Moody’s said. “Also, even if bank credit losses rise, capital levels will remain strong.”
The report also noted that the decline in affordability will boost demand for rentals underlying real estate investment trusts and commercial mortgage-backed securities.