Mortgage News

"The sky is not falling," said Bank of Canada Governor Mark Carney yesterday, as he and Finance Minister Jim Flaherty introduced a "backstop measure" to guarantee amounts Canadian banks borrow from foreign sources through the Canadian Lenders Assurance Facility. Mr. Carney emphasized that, although the Canadian banking system is already quite sound and in no danger of collapse, the move will keep Canada competitive with other countries that already offer the same guarantee. He said the guarantee will make it easier for the average Canadian "to obtain a mortgage and car loan at a reasonable rate of interest".

Some bankers are disgruntled that the Canadian federal government will be making a profit up to 1.85 percentage points from the guarantee. The better the bank's credit rating, the lower the risk of default, and hence, the lower the rate of interest -- the same formula that applies to Canadian loan applicants now applies to the lenders.

Canadian bankers muttered over the high profit of the Feds. "We don't need this," a spokesman from Toronto- Dominion Bank said. Peter Aceto, CEO of ING Direct, said, "Of the various options that we have to cost-effectively fund our business, this is not something we would probably be interested in." Canadian Western Bank's CEO, Larry Pollock, said, "If this plan had allowed the banks liquidity at a lower cost, then that lower cost would have spilled through to general borrowing clients."

Yesterday, Canadian banks auctioned off $7 billion in secured mortgages for a five-year term to CMHC, an arm of the Canadian government that will make $464 million in profit from the purchase. Two weeks ago, Finance Minister Flaherty raised deposit insurance at banks through the Canada Deposit Insurance Corp. to $100,000, far less than the banks wanted. Mr. Carney told reports yesterday that no further measures are necessary to help Canadian banks, because the tremendous bail-outs in other countries are efforts to bring their banking up to Canadian standards. Canadian banks do not need subsidies. It's important to place the bankers' complaints in the context of their 2007 profits: A record $19.5 billion.

As Canadian consumers pay the banks mortgage interest, so now the bankers must pay Canadian taxpayers for using a government guarantee to make them more attractive to foreign lenders. Canadian banks have been making a 13% to 15% return on their lending for many years. The government's profit of 1.85 percentage points is reasonable by comparison.

The first $5 billion round of government mortgage purchases from Canadian banks through the Canada Mortgage and Housing Corporation (CMHC) was very successful, so tomorrow there will be another $7 billion mortgage auction. Thirty mortgage lenders are eligible to offer mortgages for sale to the government. The aim of the auction is to take old mortgages off the banks' books and give them a new infusion of cash to lend to Canadian consumers. The Canadian federal government originally planned to buy up $25 billion in mortgages altogether, but is now under pressure from the financial community to increase purchases to $200 billion.

Finance Minister Flaherty told reporters the first round of purchases have freed up credit somewhat for consumers, so you may find it a little easier to get a mortgage loan or line of credit this week.Ian de Verteuil is an analyst for BMO Nesbitt Burns. He is satisfied that the mortgage auction will improve the availability of mortgages in the short term. However, Mr. Verteuil wants a review of CMHC's powers, to prevent it from becoming too Americanized. He is concerned that we could be headed towards a government bail-out of lenders on the scale of the U.S. Fannie Mae and Freddie Mac rescue plan.

Mr. Verteuil writes, "Mortgages should be provided to consumers on the basis of affordability and the ability to repay, not simply because a government-engineered scheme provides cheap, excess funding." Since Canadian mortgage applicants are already scrutinized and required to produce identification, proof of assets, job verification, and a down payment, his fears seem groundless. CMHC has not announced that it will slacken the requirements for obtaining a mortgage.

If you get your news online you've likely seen a rash of contradictory headlines about the health of Canadian mortgage lenders and the real estate market lately. It's enough to make your head spin.

Here's a couple of items that came off the wire in the past 24 hours: from BC Local News, "Ritzy real estate could wilt", and from the Regina Leader-Post,"High demand for high-end homes in Regina".

Granted, the first article is talking about the stratospheric Vancouver luxury market, where high end homes start at $2 million, and the second is discussing the considerably more modest Regina market, where "expensive still means under $1 million. But still, the contradictions remain.

Another example includes the Globe & Mail, with "Housing market at risk" facing off against the Montreal Gazette's "Not as bad as it seems".

The latter article provides ample statistical evidence to show that things are better than you probably think. Economic fundamentals are strong, including in the U.S. In fact, the writer claims that about 97% of American mortgages are "in good order".

For news junkies, the bottom line is this. Get out the salt shaker. You need a massive dose of sodium to swallow some of this stuff.