TD Lowers Prime to 4.35% as Government Buys Mortgages

It’s another exciting day in mortgage finance:

  • The Canadian government has taken the unusual move to buy $25 billion of insured mortgages.  The plan will add liquidity to the system and “make loans and mortgages more available and more affordable for ordinary Canadians,” said Finance Minister Jim Flaherty.  This injection equates to about 3% of Canada’s $800+ billion mortgage market. Coverage: Globe, Bloomberg
  • “…we anticipate that our cost of funds will decrease with the implementation of this program.” – TD CEO Ed Hockey
  • TD has lowered their prime rate 0.15% to 4.35% as a result.  Other banks should follow, but you never know in this environment. (CNW)
  • “There’s still a healthy market for Government of Canada bonds, and a very unhealthy market for other debt,” — CIBC economist Avery Shenfeld (Globe)
  1. Apparently ING hold their Prime Rates constant four three months from the start date of the mortgage. My VRM began on Oct 1 so I won’t see today’s rate change until Jan 01, if its still effective on Dec 01! For example, the Prime rate on Jan 01 is dependant on the Prime rate on Dec 01, not today! Every three months the rate is adjusted according to the Prime Rate. Their explanation was that if rates increase you won’t see the increase till 3 months later, so it all balances out. Nice!

  2. I don’t want to offend anyone here but the fact you are all squibbling over 0.1% of a rate cut is anedoctal evidence that our society is one that people only care about themselves.
    Why is there no talk about the $25 billion bailout of our banks? Adjusted for population differences this is on the same playing field as the $700B bailout in the US. At least down south there was a massive debate and congress, senate, and the president himself had to sign off here. And there was ample time for the electorate to voice their displeasure. Here it was simply announced? What the f&*k???
    On a separate note…if our banks are so fundamentally sound and we don’t have any subprime here, why the need for this bailout?
    Yet on this forum, the enlightened amongst us are not worried about the big picture, only how my monthly payments might be affected by a 0.1% drop.
    Let’s focus on the big picture people….we are witnessing history here, and we have an election around the corner. Can someone please explain how Harper can just announce this with no recourse? He doesn’t even have a majority government????????

  3. I couldn’t agree with Toronto Bear more.
    Conservative Leader Stephen Harper said Friday. “This is not a bailout; this is a market transaction that will cost the government nothing,”
    In the exact same article, Flaherty insists Canada does not face the same problem.
    “Instead, the country’s financial companies are having trouble getting money to borrow because banks and other lenders in other countries are not offering up enough money – a classic credit crunch.
    Under the government’s proposal, the $25 billion will flow back to the banks and other institutions as a way of injecting cash into the country’s mortgage market.”
    You look up the definition of bailout- “A bailout, in economics and finance, is a fresh injection of liquidity given to a corporation or a bank, in order for it to meet its short-term obligations. Often bailouts are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds.”
    Sounds like a bailout to me and sounds more serious than a $6/month difference on a mortgage payment.

  4. Uh, Toronto Bear,
    First, your anecdotal evidence is pretty lame.
    The US “Bailout” is nothing like the Canadian Government’s purchase of low-risk, CMHC insured loans. Nothing. If you want a serious debate about it, we can have one, but get informed first. The government’s actions were to help the Canadian Governments get access to outside credit markets (i.e., those which have been hit by the crunch). The CDN bank direct exposure to the problem is low — but indirectly they get affected because they don’t have access to the same amount of credit as they used to.
    0.1% of a rate cut may seem small to you — but over the life of my mortgage it equates to about $20,000. That’s pretty substantial to me.
    As for Harper’s ability to call an election — that’s Constitutional Monarchy, my friend. Look it up.

  5. Of course the anecdotal evidence is lame, that is why it is called anecdotal. Still, you reinforce my own point spelling out the particulars of your situation.
    I wasn’t posting that to be inflammatory. I’m simply trying to point out that there are bigger issues to worry about right now other than these little rate cuts. I’m not saying that you shouldn’t be happy about a drop, but when you signed up for a variable rate, this is the stress that you chose to put yourself through.
    But of a bigger concern, doesn’t it bother you that the banks appeared to hold the government “hostage”, refusing to lower their rates until the gov’t injected 25 BILLION DOLLARS!!!
    To say that this isn’t a bailout is quite confusing to me. Perhaps I am wrong, but I fail to see your point. As Ashley points out, the gov’t says that this is only a market transaction. So if it’s just a market transaction, why didn’t the banks or the CMHC themselves just sell the securities out on the open marketplace to raise the 25B. The answer is, just like in the US, that nobody knows what the true market value of those securities are. That’s why they can’t sell them. True they may not be as worthless as some of the US-based MBS’, but my guess is that the canadian MBS’ are starting to get a bit stinky as home prices fall in Toronto, Vancouver, Calgary and Edmonton.
    I’m sorry, where did this talk about Harper calling an election come from? I was trying to make that point that the US bailout of 700B had to be approved by passing through 3 bodies (congress senate and president) whereas Flaherty, operating under a minority government, was able to conduct this 25B bailout (sorry, market transaction) with no debate?? That is ridiculous, in my opinion.

  6. “I’m simply trying to point out that there are bigger issues to worry about right now other than these little rate cuts. I’m not saying that you shouldn’t be happy about a drop, but when you signed up for a variable rate, this is the stress that you chose to put yourself through.”
    Stressed? Who’s stressed? I’m happy about the rate cut. As I said, it may seem small to you, but it is big to me. Apparently I’m allowed to be happy about the rate cut, but I’m not allowed to talk about it because “there are bigger issues to worry about”? Huh? Why are the two issues mutually exclusive. Can’t I be pleased about a rate cut — first because it helps me, and second because it should also help the economy as a whole. What’s the downside again?
    Is this blog called “Canadian Economy Talk”? It’s about mortgage trends — mortgage rates go up, people are bummed, mortgage rates go down, people are happy. And I’m not going to feel guilty about being happy that my mortgage is now cheaper than it was. Sorry if I didn’t post on the topic you wanted me to post on.
    But of a bigger concern, doesn’t it bother you that the banks appeared to hold the government “hostage”, refusing to lower their rates until the gov’t injected 25 BILLION DOLLARS!!!
    No, the Bank’s actions don’t bother me at all. Unlike some, I don’t think that they were being “greedy” by not passing on the full cut. I think that they are truly under the squeeze at the moment because of the overall credit crunch — largely caused by factors out of their control. And I certainly don’t believe that the Government should have forced them to cut their rates. The Government should not control the Banks. They are private companies and should remain so.
    As for your suggestion that Banks could just have simply sold their mortgages on the open market. Are you serious? First, who’s buying? Nobody. Second, mortgages in Canada are government secured and can’t just be auctioned off — how would you like it if you woke up and found that your RBC mortgage was suddenly owned by XXXX from China? Get serious.
    Now if you want to talk about the Government’s actions — fine. I’m not sure this is the best venue, but whatever. If you think that Government should have no role in the economy, then you should be ticked off at Harper for using taxpayer money to influence the economy. If you think Government has a role to play in managing the economy, then I think that this was a reasonable solution. It is highly secure, thus exposing taxpayers to little risk, and it has apparently been pretty successful in increasing credit availability. You may disagree.
    As for the timing & lack of discussion. Sorry, but I can’t agree there either. First, speed was necessary. Did you see how long it took to get things done in the States? Their solution was a day late and a dollar short. Second, I’m pleased the government acted the way they did without the ridiculous horse-trading, pork filled nonsense that the US “meetings” resulted in. My goodness — McCain even proposed that taxpayers should pay to buy up all of the BAD mortgages. Insane.
    The good news is, there is an election on, and if you don’t like what Harper did, vote against him.
    Speaking of election:
    I’m sorry, where did this talk about Harper calling an election come from? I was trying to make that point that the US bailout of 700B had to be approved by passing through 3 bodies (congress senate and president) whereas Flaherty, operating under a minority government, was able to conduct this 25B bailout (sorry, market transaction) with no debate?? That is ridiculous, in my opinion.
    It came from this sentence in your previous post:
    Let’s focus on the big picture people….we are witnessing history here, and we have an election around the corner. Can someone please explain how Harper can just announce this with no recourse? He doesn’t even have a majority government????????
    I assumeed the “this” in your second sentence was referring to the subject of the previous sentence (i.e., the election), as English Grammar requires. I see now that you were likely trying to refer to the “bailout” rather than the election. My fault, I guess . . .

  7. Toronto Bear:
    You are never going to get Canadians to agree that we have the same fundamental problems with over-leverage and over indebtedness as they do in the US. We have the smugness disease. Europe had it too and there was much snickering in the press over the American sub prime situation – until their banks started failing.
    The best thing for you to do is recognize that our government and banking officials are going to continue to follow their American counterparts in every material way since the problems are the same. You saw the bailout for what it was and probably noticed CIBC’s resort to death spiral financing last week as well. Of course, our huge surprise interest rate cut doesn’t mean anything either. It’s all just a coincidence.
    Oh, and if there are problems, it’s not with us. It’s because the market is “irrational” or “crazy” right now that no one wants this garbage paper. This is why taxpayers are gonna make a killing when all this stuff skyrockets back to it’s true value in a few years – because only the government knows what this stuff is really worth, not the market.
    The Canadian government is going to commit to spending *any* amount of taxpayer money to stop our house prices from falling like they are in the US. That $25B is a small down payment on what is to come. The fact that it cannot work is “just one of many economic theories” to most people.
    The CMHC is walking dead. But as you implied earlier, when it finally becomes obvious, the government will just move money from taxpayers over to the CMHC to prop them up. There will be no debate and no admission of failure and when you complain you will be told how this just proves again how much better our system is than the one in the US.
    Best to learn to live with it because it’s coming.

  8. Tom,
    You called that 100%….Canadians and their “smugness disease”! I love it. Ted appears to be like the cheerleaders on MSNBC who constantly smirked and laughed at people like Peter Schiff for the last 2 years while he was stating exactly what was going to happen (and now has obviously happened).
    I travel around various housing related forums and it’s amazing how those with similar interests tend to congregate with one another and support each other with their ideas. As soon as somebody else comes into their little world with a contrarian opinion you get people like Ted who try to make things personal.
    Anyway, Tom you are right. People are going to focus on what they want to focus on and I guess we can all be happy living in our make believe little worlds.
    But you folks are delusional if you think this 25B is not a bailout. Ted, if someone cannot sell something on the open market for what it’s worth…then let me give you a hint….it’s not worth what you think it is. This has been proven time and time again and has been the source of the massive writedowns financial institutions in the US have taken over the past year. I guess by intervening now, the Cdn government will get to spare some of the Canadian banks of having to make these same humiliating writedowns, at least publicly. Instead the taxpayers will take the writedowns. Socialism for the rich.
    Anyway, no matter what one’s opinion is on such matters, I think we can all agree that these are extremely intersting times we live in. We are witnessing one of the turning points of modern history, IMHO.
    Good luck to everyone over the coming while. Hope for the best, but prepare for the worst.

  9. Calling this CMB purchase a bailout is ignorance. The government is injecting liquidity into the system in a fashion that is similar in principle to how the Bank of Canada adds liquidity. Furthermore, the government is getting an above market rate of return. Tax dollars will NOT be lost here.

  10. As a Sr Lender who underwrites mortgages for a living, I can assure you the 25 million is not a bailout. It is merely injecting liquidity into a severely restricted lending market. The mortgages that are packaged and sold into the NHA mortgage backed security program are A rated mortgages. These are in no way subprime mortgages. We currently have millions of dollars in mortgages that would have normally been packaged and sold into the CMHC program, but guess what?….no one is buying them. Is this surprising given the current market conditions…no. The gov’t did what they did because they want to free up the credit market, this was NOT a bailout.

  11. Marnie,
    Thanks for your insight. It is good to get some information from those people that are more informed on the inner workings of these types of things.
    That being said…why should we trust these so called A ratings? Do you know how many triple-A rated securities turned out to be absolutely worthless in the states. There was serious collusion bordering on malpractice with the ratings agencies in the US (Fitch, S&P, etc). Maybe all these market shenanigans have made me overly mistrustful, but rating something A means nothing to me at this point. These crooks are making up the rules as they go along. No shorting financials, liquidity injections, the US treasury taking ownership stakes in the banks.
    My question is this….what happens IF the Canadian housing market tanks like it did in the US?? I’m not saying it will, I’m just asking you to consider what happens IF it does. (Personally I think it will, but that is beside the point for now). What happens to the value of these 25B securities? If they are buying something worth 25B in today’s dollars, and the housing market crashes by 30%, won’t taxpayers thus be on the hold for the 30% difference?
    Your insight is appreciated.
    Cheers,
    TB

  12. The market is not “gummed up” or “irrational” or “frozen”.
    The securities in question just aren’t worth what the holders want them to be worth. The holders refuse to accept what is being offered so they play games with definitions.
    That’s why CIBC recently came out in support of Canada suspending “Mark to Market” accounting rules (once again following America’s lead). There are actually people out there who think it’s outrageous that banks should be forced to value their assets at the prices that the market is giving them.
    You go to a doctor who says, “you have cancer”. And you say, “no I don’t and your fired!”. But you still have cancer and this paper is almost certainly worth a lot less than we are being made to pay for it. There are trillions of dollars in cash being held by hedge funds who would be all over this paper if they could get it for less than the banks say its worth.
    As one example, there is ABCP that has been frozen for over a year in Canada. The market cannot be “temporarily insane” for that long. Eventually we have to admit that it’s the book value of these assets that was “insane” and that they have since returned to values that are “more sane”.
    I think reasonable people can support government intervention in the markets to prevent or cleanup after a “total collapse”. But for God’s sake, call it what it is. Say that we need to intervene to prevent a meltdown. Don’t tell me that I am about to get rich because as a taxpayer, I’m suddenly on the hook for some guys home loan.

  13. MCAP’S VIP rate is now 5.5
    MCAP Prime 4.5
    BMO Prime 4.5
    I wonder if anybody with a
    pre-approved guaranteed rate that is near expiring will be pushed to purchase a house soon.

  14. You’re all clueless – no offense intended.
    CMHC is already counterparty to all 25B of these mortgages because they are ALL INSURED. If they go worthless on anybody’s books, Canadian government is still on the hook for the loss, regardless of the holder. This is not a bailout.
    I’m happy you give seminars Toronto Bear.

  15. ” You’re all clueless – no offense intended.
    This is not a bailout. ”
    Thats a good thing because, as of today, taxpayers are not on the hook for another $225 Billion.

  16. Hi Reb,
    First National has not yet announced what they are doing with Prime. Regardless, their policy is to change Prime on the 1st of the month following the rate cut announcement so nothing would change until November 1st anyways. That being said, they have not confirmed whether they will be following the .5% reduction. They would be very foolish not to….

  17. whistler,
    There is more to it than defaulting or not. What is the purchase price based upon? What happens to the value of these mortgages if interest rates go up or down? Who pays to maintain the property and auction it if the mortgage defaults? I haven’t seen any detail that would answer these questions, but the government is likely taking on more risk than just the default risk they’re already carrying via the CMHC.

  18. I’m happy too 3.24% til January for me if this rate sticks. I signed up last spring 1.01 below prime for 9 months then .25% below. Wish it would stick though! perhaps I could look at freedom 65 LOL

  19. Any news from TD or CIBC today? I don’t think so. Not that 0.1% is huge, but for me it’s still $600 over the year. That’ll still be in my mind come renewal time.

Your email address will not be published. Required fields are marked *

More Stories
Average home prices rise in March 2021, says CREA
Average Home Price Hits a Record $716,828. Is Another Policy Response Coming?
Copy link