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Interesting article from The Financial Post...

A few days ago, Scotiabank received permission from the Securities and Exchange Commission (SEC) to market to US retail investors what are known as covered bonds. In pursuing SEC approval for market access, Scotia was following a trail blazed by RBC (market rumour has it that BMO is on the same path). There is no madness to the approach – there is method. Change is underway in Canada’s housing finance system. More of it will be done without the taxpayer backing, or insurance, that common financing channels currently enjoy, by way of CMHC. RBC’s covered bonds are backed by uninsured residential mortgages – so too will be Scotia’s, in future, and so will others. Lenders, mostly banks, who have not already developed the financial instruments and skills to diversify their funding sources will do so, because they must. This is all to the good. Background: CMHC, a Second World War era Crown agency intended to help returning vets find homes to live in, until recently grew in leaps and bounds. CMHC became a source of systemic risk because its mortgage insurance products, which insulate lenders from loss when the loans they make go bad, for years backstopped easy loans, mortgages with long amortizations, and cheap home equity lines of credit that Canadian consumers took up in droves. As consumer debt rose, and housing investment bubbled, so did Canadian house prices over the past decade, well outstripping income growth. Low interest rates helped, but so too did easy credit terms – with few incentives, owing to CMHC insurance, for lenders to hold back on extending them.

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