Friday, October 10, 2008

CMHC to buy mortgages from banks.

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.

16 comments:

ForWhomTheTollBuilds said...

Has anyone heard of Canadian consumers having even the slightest problem accessing credit (especially mortgage credit) over the last 6 months?

Why are taxpayers being put on the hook for bad loans so soon?

I have long feared that our govt would decide that the US problems are rooted in falling house prices and take actions that will stop Canadian house prices from falling at any expense.

jesse said...

"take actions that will stop Canadian house prices from falling at any expense."

The sheer enormity of the amount of money required to keep house prices elevated makes any attempt futile. All remedies a government can mete out are merely palliative.

jesse said...

"The mortgages involved in today’s initiative are already guaranteed through government-backed mortgage insurance and are high-quality assets"

One must distinguish between a "high quality" asset pool that is (government) insured and the individual underlying assets.

Somebody still has the turd sandwich and no amount of insurance innovation can change that.

Jordan said...

mohican:

You *just* made a comment that our banking system is different because of the structure of CHMC. So what is your take on this dramatic about face? If our banks are so secure and profitable why can't they afford to take on this risk themselves?

How does our country at 1/10th the size of the US need a bail out 1/3rd the size of theirs? I thought our mortgages were so much conservative?

Do you think this is a good idea, or the prequel to news of sharply increasing mortgage defaults with the tax payer on the line?

Your interpretation is greatly appreciated.

condohype said...

Mohican, please correct me if I'm wrong but as I see it, it's a swap. Basically the feds are trading cash for mortgages, which they will securitize in order to break even. The thinking is that it's the right thing to do because it exposes the taxpayer to little risk -- the mortgages are insured -- but it makes available mountains of cash for the banks to lend to customers.

igor said...

It is called debt monetization by swapping illiquid mortgage debt for liquid government bonds readily convertible into cash. Wonder why the Canadian dollar has been so week lately?

mohican said...

Let's be really clear here:

The taxpayer was already on the line for these mortgages via CMHC.

The move was mostly political - if you haven't noticed there is an election on Tuesday.

The move undoubtedly helps the banks free up money to strengthen their capital ratios and provide a cheap source of funds for further lending.

The short term credit markets in Canada, which the banks use to fund a lot of lending, has seen rates rise dramatically in the past few months. The banks are not charitable institutions so they must either pass on the cost or get cheaper funds. The banks were prepared to pass on the cost to the borrower but if the government is going to provide them with cheaper funds then they will take them up on it.

The way I interpret this move is that it is a pre-election stint so the Conservatives can appear to be 'doing something' and it is a direct subsidy to the banks so that they will have more funds to lend. It doesn't really cost the government anything and the banks get a benefit which is seen to be beneficial to the consumer.

The impact is temporary unless the credit markets are restored to 'normal' spreads between t-bills and commercial paper.

Warren said...

Do the fees collected by the CHMC go into general revenue, or is there a pool set aside for times like this?

I'd like to hope they are set aside (since that pool should be huge right now). Does anybody know the accounting details?

Warren said...

Make that CMHC :)

Octagonian said...

Look -- this is a bail out, pure and simple.

Mortgage backed securities?!? Where have we heard that one before?

The Harper government has issued a multi billion dollar hand out to banks at taxpayer expense.

As Canadian RE falls, the mortgages banks have amassed will melt down and they will belly up to the taxpayer bar for more. It has nothing to do with the availability of credit; the world, and especially Canada, are awash in liquidity, and it is lent at very cheap rates, below the rate of inflation, to be exact.

And inflation is the name of the game here; banks unload their foolhardy mortgages directly onto the backs of taxpayers (reducing liabilites) and THEN get both tax dollars AND freshly printed digital bucks ($20 billion) to play with. The banksters win doubly over, the taxpayers lose via sraight cash give-away and through a cheaper, inflated dollar.

The beauty of it is, the banksters don't even have to lose much money (yet) and they still get the bail out. Beautiful. And criminal.

The absurdity is, the Libs would spend even more on this fraudulent, inflationary fleecing of the public. Get ready for the first serious inflationary depresion in Canadian history.

Octagonian said...

The assessment of Austrian economist Gary North (www.garynorth.com) who called this mess. He responds to Ottawa's press release paragraph by paragraph. Enjoy:

It's a pack of lies.

Financial institutions in Canada hold a substantial amount of residential mortgages on their balance sheets. These mortgages include a large volume of mortgages that are insured against default by the Canada Mortgage and Housing Corporation (CMHC) or by private sector firms that are backed by the guarantee of the Government of Canada.

(These were insured by taxpayers at below-market rates. Now they must be paid off.)

National Housing Act Mortgage-Backed Securities (NHA MBS) are comprised of pools of these insured residential mortgages. These securities are high-quality assets that are backed not only by the overall strength of Canada's housing market, but also by the Government's guarantee of the insured mortgages.


(Same -- a subsidy covered by taxpayers.)

NHA MBS carry CMHC's guarantee of timely payment and thus entail no credit risk to the investor (see NHA Mortgage-Backed Securities | CMHC). NHA MBS issuers are approved by CMHC and include chartered banks, trust companies, insurance companies, credit unions, loan companies and caisses populaires.


(Something for nothing? Never. Taxpayers will cover the losses.)


The NHA MBS Program and CHMC's related Canada Mortgage Bond (CMB) Program support the continuing flow of financing from Canadian financial institutions to borrowers.

The CMB Program has recently been expanded, including a record issue in June of this year. Nonetheless, because of the protracted and severe credit turmoil that originated in the U.S. and spread to Europe, the ability of financial institutions in Canada to continue to provide mortgages and other credit to qualified borrowers has recently become constrained by the disruption of global credit markets.

(Bailout.)


In recent weeks, the Bank of Canada has taken steps to offer liquidity to the domestic market to alleviate persistent pressures in funding markets (see Home-Bank of Canada). NHA MBS are eligible collateral for these operations. Most recently, the Bank has 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.

(Liquidity = central bank inflation.)


Under the initiative announced by the Minister of Finance today, the Government will help Canadian financial institutions raise longer-term funds by purchasing up to $25 billion in NHA MBS insured mortgage pools through CMHC.


(More insurance -- more losses.)


CMHC borrowings from the Government of Canada will increase to fund this operation. The Government of Canada will increase its issuance of treasury bills and bonds to finance these loans.

(More government debt.)


The purchases of NHA MBS will be conducted at market prices through a competitive auction process. As the NHA MBS are already guaranteed by the Government through CMHC, there will be no material risk to the Government through this program.


(Canada will fall with the U.S. It is already happening. Mass bailouts by taxpayers.)

patriotz said...

Look -- this is a bail out, pure and simple.

No it's not. The mortgages were already insured by CMHC so neither the exposure of the banks (zero) nor the taxpayer (100%) has changed. As Mohican said this is just window dressing.

Do the fees collected by the CHMC go into general revenue, or is there a pool set aside for times like this?

CMHC like all Crown corporations has its own balance sheet and revenues/expenses. A Crown corporation can declare divedends to the Federal Government but in the case of CMHC I believe all earnings are retained to meet future contingencies. They're gonna need them.

Warren said...

Yes they probably will need them, but I'm thinking that the CMHC's money pile is probably at it's biggest level ever right now. The fact that they can go out and buy billions in mortgages without asking the feds for a dime is at least somewhat reassuring.

Just Jack said...

I'm not so sure that CMHC is doing all that well. Fanny Mae is the USA equivalent to CMHC and I would expect CMHC to have similar problems. Furthermor, if the insurance market was that lucrative would Genworth be pulling out?

In my opinion, I think CMHC requires a steady input of new mortgages to keep from needing to be bail out by the taxpayer. For this reason, you have seen CMHC expand what it will lend on. Their policies over the last decade have been for profit rather than helping Canadians get homes.

I do expect the taxpayer to pay for large CMHC losses over the next few years. Expect much higher CMHC premiums in the future.

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