Mortgages News

Our federal government will make approximately $250 million in profit from its $25 billion CMHC mortgage deal with Canadian lenders, announced last week by Finance Minister Jim Flaherty. The first $5 billion of the $25 billion will be released by the federal government to lenders today. The plan is to make more money available for chartered banks, co-operative savings and loans companies, trust companies, credit unions, and loan companies to lend to consumers.

Few private investors have been buying Canadian mortgage securities for the past month, as fall-out of the American mortgage meltdown.

Paradoxically, eligible Canadian lenders are not required to start lending more to consumers as a result of this reverse auction deal. The lenders will compete to sell their mortgages to the Crown's Canada Mortgage & Housing Corporation. Lenders desperate for cash will sell CMHC mortgage bonds for a higher return than their competition. The auction has no time limit.

The mortgages at auction are not subprime. They are already insured against default by CMHC, so there is minimal risk involved in the government's purchase. The actual transactions are confidential, but a sales summary will be published. Our federal government will hold the mortgages through CMHC until they mature in 5 years. If Mr. Flaherty decides to increase the mortgage deal to $100 billion, then our federal government will make approximately $1 billion in profit.

The Canadian Imperial Bank of Commerce (CIBC) is the Canadian bank that suffered the most as a result of the U.S. subprime mortgage fiasco, because it not only lent to subprime applicants, but also got involved in toxic derivatives and poor bond insurance. CIBC has had to write down $6.8 billion so far this year. Consequently, it had to raise $2.9 billion in capital this year to stay afloat.

However, the bank's CEO, Gerry McCaughey, has been able to keep CIBC's performance well within regulatory guidelines. Today, CIBC and Cerberus Capital Management, a private U.S. equity company, struck a $1.05 billion deal to prevent problems with CIBC's subprime mortgages. The subprime mortgages total $1.075 billion. CIBC does not want to sell off these weak mortgages, as the consensus is they could still be profitable in the not-too-distant future.

The Cerberus deal is one example of how Canadian banks have anticipated the American mortgage downturn and taken the initiative to prevent a similar crisis here. The Toronto Stock Exchange seems to like Mr. McCaughey's forethought: This morning, CIBC's stock rose $2.08 per share, to $59.90. If you hold your mortgage through CIBC, you can breathe a sigh of relief this afternoon.

"Theresa McCuaig"

Today, Bank of Canada governor Mark Carney endorsed the U.S. government's $700 billion bail-out proposal to remove bad mortgage debt from U.S. banks and restore liquidity. Mark Carney said, "The size and breadth of support provided by this measure will help firms 'right-size' their balance sheets, re-liquefy closed markets and establish market prices for these distressed assets."

The U.S. mortgage recovery is hampered because international banks are now reluctant to lend each other money, and do so only at very high rates of interest. Banks are hoarding cash while they await Congress' decision on the proposed bail-out, which is expected imminently. Mr. Carney showed Canada's support for the U.S. by arranging a $10 billion reciprocal currency-swap with the U.S. Federal Reserve, and by announcing five term purchase and resale agreements (PRAs). The PRAs will add $2 billion in liquidity to markets in October 2008, and another $1 billion up to January 2009. Mr. Carney assured Canadians that the Bank of Canada will "continue to provide additional term liquidity as long as conditions in financial markets warrant". Market watchers expect that if the U.S. banks are relieved of their bad mortgage debt by government intervention, and get a fresh infusion of capital, then they can resume lending for homes. The Bank of Canada's move may help minimize the effects of the U.S. mortgage crunch on Canada. Mr. Carney's support for the U.S. is a sharp contrast to the criticism offered by the German Finance Minister, Peer Steinbruck.

Mark Chandler, a fixed-income strategist at RBC Capital Markets, pointed out there is another way for the U.S. Federal Reserve to fix the American mortgage crisis besides "going up to Congress to champion the bill" Mr. Chandler suggests the Federal Reserve "can work on the broader liquidity measures" to avert recession if Congress does not approve the bill to increase the U.S. Treasury's borrowing limits so it has more resources to help money markets.

Earlier this week, Canadian finance minister Jim Flaherty told the National Post that a mortgage bail-out similar to the U.S. government proposal is unnecessary in Canada, because our mortgage system is more secure and regulated.