From the Department of Finance.
The Honourable Jim Flaherty, Minister of Finance, today announced the Government will take steps to maintain the availability of longer-term credit in Canada by purchasing up to $25 billion in insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC). This action will help Canadian financial institutions raise longer-term funds and make them available to consumers, homebuyers and businesses in Canada.
This relief to Canadian homebuyers and consumers comes at no fiscal cost to the taxpayer. Indeed, these securities will earn a rate of return for the Government that is well above the Government’s own cost of borrowing. Moreover, as insured mortgage pools in Canada already carry Government backing, there is no additional risk to the taxpayer.
"It is important to underline that Canada’s banks and other financial institutions are sound, well capitalized and less leveraged than their international peers," said Minister Flaherty. "Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S."
"However, it is becoming increasingly clear that the continuing disruption of global credit markets, which has been severe and protracted, is making it difficult for our financial institutions to raise long-term funding. This is beginning to affect the availability of mortgage loans and other types of credit in Canada.
"The Government has therefore decided to act to address the current scarcity of private sector lending to Canadian mortgage markets and lending markets overall. This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses."
This action builds on recent steps taken by the Bank of Canada to provide increased volumes of term liquidity across a broader range of collateral. The Bank increased to $20 billion the volume of liquidity that it will provide banks and has widened the range of collateral it will accept, using the expanded statutory authorities provided in the 2008 budget legislation. The Bank also cut its overnight target rate by ½ percentage point to 2½ per cent in a coordinated reduction with five other major central banks.
The actions announced today will also supplement CMHC’s regular Canada Mortgage Bond (CMB) Program, which supports mortgage lending at affordable rates by Canadian banks and other lenders. The CMB Program has recently been expanded, including a record issue in June of this year.
"The mortgages involved in today’s initiative are already guaranteed through government-backed mortgage insurance and are high-quality assets," said Minister Flaherty. "This initiative is an efficient, cost-effective and safe way to support lending in Canada by providing secure, reliable funding at an unprecedented time of global market turmoil."
The first operation is planned for October 16, with a purchase amount of up to $5 billion. The Government will announce a schedule of future purchase dates to take place over the coming weeks. CMHC will shortly announce further details of the competitive auction process that will be used to purchase the insured mortgage pools.