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