Mortgage lenders got another boost yesterday from the federal government. The Finance Department announced it will now buy up to $75 billion of Canadian mortgages under it’s recently announced Insured Mortgage Purchase Program (IMPP). Ottawa’s original pledge was $25 billion.
Put simply, the government is selling bonds and treasury bills to raise cash and then giving that money to the Canada Mortgage and Housing Corp. — a Crown corporation — to buy mortgages from the bank. Homeowners still make their mortgage payments to the bank which then passes that money along to the CMHC for a service fee.
In other words, the government is buying mortgages from lenders so lenders can lend that money to the next guy–at decent interest rates.
All the mortgages being purchased are insured and considered “high-quality assets.”
The IMPP has been hugely popular with lenders thus far. Banks have been pushing Ottawa to expand the program ever since it first launched. The reason is simple. Selling to the government is more profitable than selling to other investors.
As a side note, before the IMPP came to town, most lenders were relying heavily on the Canadian Mortgage Bond (CMB) program. The IMPP has essentially become a supplement to the CMB program. (It’s different though because, under the IMPP, mortgages are purchased by CMHC itself and remain on CMHC’s books.)
Interestingly, most Canadians are oblivious to how vital Canada’s CMB program is these days. The fact is, it’s exceedingly tough to securitize (re-sell) mortgages at good prices in our subprime-rattled market right now. Without the CMB program, some lenders we know would probably not survive. The government performs a critical service by supporting the securitization market with the Canadian Mortgage Bond.
Anyway, back on topic. As most people know, money for mortgages has been scarce. Because of this, mortgage rates have been higher than normal. Finance Minister Jim Flaherty knows this and is concerned about how it’s affecting our economy. In yesterday’s release he said: “The Government will not allow Canada’s financial system, which has been ranked as the soundest in the world, to be put at risk by global events.”
He said the IMPP will:
“Provide Canada’s financial institutions with significant and stable access to longer-term funding,” and;
“Earn a modest rate of return for the Government with no additional risk to the taxpayer.”
Point #2 is true enough. The government will make $190 million on its first three IMPP purchases according to the Globe. This profit comes from the difference between the interest the government earns on the mortgages it buys, and the interest it pays on the bonds it sells. The Sun says:
Of the bonds sold yesterday, the government is paying out an average of 2.7% to the bond holder while collecting an average interest rate on the mortgages it buys, of 3.78%.
The Finance Department announced other liquidity enhancing initiatives as well. One of them was to reduce the cost of government insurance on interbank loans. (The original 1.85% premium was too high to begin with.)
In a nutshell, all of these efforts are geared to one thing: keeping money flowing and lenders lending. In the short-term that’s a good thing for borrowers. Then again, we haven’t seen mortgage rates come down very much since the IMPP first took effect. Hopefully that changes in the near future.