IMPP Expected to Continue

IMPP-canada-mortgage-program Last fall, when the credit markets were in near-panic mode, the government threw lenders a lifeline called the IMPP (Insured Mortgage Purchase Program).

The IMPP allowed the government to buy up to $125 billion of insured mortgages.  The goal was to add liquidity to Canada’s mortgage market.  At the time, lenders (and borrowers) were suffering from unprecedented interest-rate premiums due to perceived mortgage default risk.

That IMPP program is set to expire this week. However, there were various media reports last week with word that the government will renew it.

For those unfamiliar, here’s how the program works:

  1. Lenders lend mortgage money to homeowners
  2. Those mortgages are pooled together and sold to investors
  3. The government issues treasuries
  4. CMHC (a crown-corporation) takes that money and buys set amounts of the above mortgage pools—using auctions
  5. In those auctions, lenders tell CMHC what they’re willing to pay in interest
  6. CMHC buys the pools from the lenders with the best bids

The IMPP is expected to generate $372 million in profit for Ottawa this year.  In doing so, the government has minimal risk of loss because the mortgages are high quality and already insured.

Reports say the government is earning a 0.86% spread on the fixed mortgages it’s bought so far.  Apparently the spread is fatter on variable-rate mortgages, at 1.02%.

The Finance Department says about $3 billion of the $64 billion of mortgage purchases have already been repaid, with no reported defaults.

Observers had lots to say about the IMPP in the news last week. Here’s a sampling:

  • “The government can borrow on a lower rate than the rate it earns on mortgages and because these mortgages have already been insured by the government, for an additional fee, the government is taking on no additional risk,” – Avery Shenfeld, CIBC chief economist (Winnipeg Sun)
  • “It still is useful, it makes a profit for the taxpayer, there is no or extremely low risk for the government, it lowers the cost of funding for the banks, and that in turn lowers costs of borrowing, so it's hard to figure out what's wrong with it.” – Don Drummond, TD chief economist
  • “It would be premature to cancel it at this point until we really see that we’re out of the woods.”  – Nancy Hughes Anthony, CBA CEO (Bloomberg)
  • “We’ve always said we’d make a profit, I don’t think we’ve put a number to it,” – Jack Aubry, Finance Dep’t spokesman (Winnipeg Sun)
  • “While circumstances have changed for the better, the program remains valuable. It lowers the cost of funds for the banks. Yes, not as much as at one time, given that spreads have come in, but it still helps.” – Don Drummond, TD chief economist (Globe)
  • "The program is not a focal point for anyone. "It is a placeholder of sorts." – Eric Lascelles, TD strategist (FP)

As Lascelles implies, lender interest in the IMPP has waned over the last six months.  That’s because it’s now cheaper to get lending capital elsewhere in many cases (i.e.,  in the private sector)—and that’s to be expected in a healthy credit market.

  1. It’s a shame that CMHC doesn’t get credit more often. That’s a seriously good program.
    The Rental Residential Rehabilitation Assistance Program is one of the best programs out there.
    Makes it hard to believe they’re a crown-corporation.

  2. It’s a great program. There is nothing bad about it.
    The government makes money
    There is no risk to taxpayers
    It helped avoid more of a panic
    Canadians get much better mortgage rates than they might have otherwise.
    What’s the problem?

  3. @ Mike – Some people wear tinfoil hats and think that anything the government does is automatically bad.
    But it seems like a win-win for all involved. Taxpayers win, mortgage shoppers win.
    Al R

  4. Al R–work in the government for a while, and it’s not hard to get that perspective! ;)
    This program, does sound like a good thing all around.

  5. Oh common, really? What if prices decline, then what? Fanny Mae/Mac anyone. Socialize the risk and privatize the profit…where have we seen this before? Government bailout is exactly what this is…and for subprime at that. Are all you guys mortgage brokers or what? You sound like you profit from moving loans off bank books and onto the books of private citizens. And yeah, all is well until we get massive defaults and please explain why the government needs to be in non-affordable housing???

  6. Chris L. do explain:
    1 – How does IMPP socialize the risk? These mortgages are ALREADY government insured!!!!
    2 – The government (and we the people) are making hundreds of millions from IMPP. Let’s be serious for a minute. Is “privatizing” the profit TRULY a valid concern?
    3 – Do you think using the word “bailout” helps make a better case for yourself? This isn’t GM or Chrysler. This is a no-risk for-profit business for the government!!
    4 – How are loans being offloaded on private citizens? Did I mention, these mortgages are ALREADY government insured!!!
    5 – The WORST default rate in recorded Canadian history was under 1% in the 90’s. What are defaults going to be 1.5%?? Ooooooooo! Wow!!!
    6 – The government needs to stand behind housing. Otherwise Canadians would be paying more for their mortgages…more in taxes…have greater risk of losing their jobs…and have less of a retirement fund. I can’t remember the statistic but thousands of Canadians have ONLY their house as a significant retirement asset.
    Think about that next time before you spread all your fertilizer.

  7. Total nonsense! It’s cheap money that is causing RE to rise and taking crappy loans off bank books means they can re-lend money, package them up, sell them back to the people and repeat with zero consequences. CMHC IS the problem i.e. lending people money that can’t afford to repay it. What didn’t we learn from the US example…everything. The fact that these are already insured IS the problem. I don’t want to insure them anymore. If you don’t have 25% or 15% to put down, you simply need to rent or stay at home in your parents basement or real estate needs to become more affordable. I could care less what we’re making off these loans now. One hiccup and we’re going to have the bottom fall out from underneath and it will hurt everyone, homeowner or not. We’re in a bubble right now and this can’t continue. It’s a bailout… just like the US bailout of the banks to make them more liquid by taking money off their books so they can re-lend. If these loans were so peachy, why don’t the banks keep them and continue to collect??? Answer is because they suck, they are the bottom of the barrel, from people with ZERO equity and hence little to lose. Government interference is WHY housing is so expensive and why this recession will continue to drag on. Cheap money has been sighted many times to explain the recent upswing in real estate values. Cheap money has to go, it’s a disease. Housing is not an asset, it’s a liability.
    Fertilize that.

  8. And why now, why is this program so important now? Why hasn’t it always been in place? Why do banks need to offload their less than 20% down mortgages all of a sudden?
    Too many, bogging them down with crappy loans…what I thought. Why wouldn’t the bank and mortgage brokers like this program…
    Banks need to collect from the same people they loan the money to and take responsibility for their own actions and decisions. This free market is getting ridiculous.
    Government insured loans is a recipe for disaster, there’s no repercussions! Approve everyone!!!!

  9. @ Chris L – Or maybe it was because the global financial system was unable to price risk because financial instruments became too opaque, so economic actors could only borrow money at huge risk premiums.
    Gov’t of Canada steps in and is able to borrow money at cheaper rates, because it is viewed as a safe bet. The treasury wins, and Canadians looking for mortgages win.
    Maybe Drummond and Shenfeld are in on the conspiracy, but their opinions carry more weight than mine or yours.
    Al R

  10. “First time home buyer” seems to be the only voice of reason in this forum. CHMC is going to be the biggest scandal in this country 2 to 3 years down the road. People in this country have a huge attitude problem to houses and untill they understand that a house is a home nothing more nothing less the bubble will continue. People who have all their retirment in their house deserve no retirement and should be working till the end, if they can find a job…

  11. Two good last points. If the government got out of the way, things would look more transparent and the economy could work again. Housing is just a place to live! Leave investing to the experts and stop blowing this thing up. Why do people buy high? No patience anymore, more suckers everyday.

  12. “People who have all their retirment in their house deserve no retirement and should be working till the end, if they can find a job…”
    That’s a bit harsh, no? I completely agree with you on not putting all your investments into one asset class, by the way, but wishing fiscal nastiness on people is a bit much.
    You must admit that the societal pressure to put one’s resources in real estate has been historically high compared to other asset classes. I don’t think this is necessarily a good or reasonable state of affairs, but changes in societal sentiment don’t come quickly. Also keep in mind that the average Joe/Jane does not have the financial resources to put serious investment monies in anything but real estate, nor is the government subsidizing them to do so (via securitized lending/fiscal policy). Surely this is not a reason to wish suffering on people, casanova.

  13. Christ L.
    First you are right in your thinking. But market is all about timing…Most people like bubbles when they are inflating. It is only when they burst then people scream.
    As you make clear, this will end bad, really bad.
    And for those that think there is no risk as it is already government guaranteed…the guarantee is as good as the guarantor itself. NO?
    BTW, great site.

  14. CMHC is such a farce. I pay the premium to ensure the bank gets their money? What ever happened to the person that needs the security paying the premium?

  15. YOU need the bank to have that security. Otherwise YOU would be paying 5.95% instead of 3.95% for a 5 year mortgage.
    It is not the bank’s obligation to pay for your insurance. The bank does not NEED to lend YOU money. YOU are asking the BANK for money.

  16. All of the glowing observer comments in the article are from bank economists and strategists. Isn’t that a bit one-sided ?
    According to this article, the lenders (banks) tell the government what they are willing to pay in interest for their mortgage pools, and the government chooses the best bids, and buys using borrowed money. So far, the government is earning less than one percent interest from this these pools? That’s about the same as a crappy savings account. What kind of investment is that? And who the hell is lending the government $125 billion dollars at less than one percent interest ?
    Another piece of information left out is what the banks continue to earn from those mortgage pools. The borrowers are paying a lot more than 1% interest. So the government buys the mortgages, gets less than 1% interest, and the banks pocket the risk-free difference. What a sweet deal !

  17. The IMPP allowed banks to keep making reckless insured loans, thereby increasing the size of the eventual loss to taxpayers.
    Taxpayers were already on the hook for the stupid CMHC insured loans made through 2008. Now we’re on the hook for the stupid 2009 and early 2010 loans too. Joy.
    That the CMHC and government have made relatively small gains on a massive mortage portfolio during the upside of a housing bubble is nothing to brag about. As we saw in the USA with Fannie/Freddie, those small gains will be wiped out many times over once house prices start falling and homeowners in financial trouble default because they can’t sell for enough to pay off their debt.
    The IMPP is a great program if you’re a banker or a real estate pumper. It’s a disaster for taxpayers and all those that it enabled to buy a house beyond their means and who will ultimately default.

  18. wjk you offer no support for your conclusions and they should be dismissed completely.
    You seem like nothing more than a housing bear that likes to incite discontent with government policies for you own ends.
    If you want any respect on these boards you better come to the table with specific evidence when you make damaging assertions.
    Otherwise, don’t bother posting.
    What data do you have to prove that IMPP-funded mortgages are reckless?
    They are anything but. CMHC has made significant profits for taxpayers for years from safe insured mortgages. They face only 1/2% default rates. Meanwhile, they stress test for default rates many times higher than that.
    If you think default rates are going above 2.5% in Canada you are crazier than you sound. Remember, defaults were 1% maximum during the 20% interest rates and bear housing markets of the 80s. That was the worst Canadian real estate climate of all time.

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