Flaherty announces measures to stabilize lending industry

10.10.2008 14:06 Shopping - Source: cbc.ca

The federal government plans to buy $25 billion in Canadian mortgage-backed securities in a bid to ease a growing credit crunch faced by the country's banks and other financial institutions, Ottawa announced Friday.

Finance Minister Jim Flaherty said the government's plan is to buy the securities through the Canada Housing and Mortgage Corporation and provide much-needed cash to financial institutions that sell the so-called "National Housing Act mortgage-backed securities."

Flaherty announced the new measures in an attempt to assuage concerns over the burgeoning global financial crisis and defuse criticism that the Harper government was ignoring the spreading lending crisis.

Dealing with Armageddon

Governments in many countries have been grappling with how to stop the deterioration in the health of financial institutions as companies are forced to write off billions in losses from holdings of now worthless asset-backed commercial paper.

Canada's market for insured mortgage pools, however, still functions.

‘Didn't Harper just say we would never need this kind of thing? Isn't he supposed to be an economist?’

--R Gerald

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In addition, many of the mortgages that are bundled together to make up these securities are not in default, unlike the situation in the United States.For instance, in the second quarter of 2008, the percentage of American mortgages that were more than 90 days in arrears — a measure of the level of home defaults — stood at a gaudy 4.5 per cent. In Canada, that same figure stood at 0.3 per cent.

The specialized housing securities, both in Canada and the United States, generate cash based upon the stream of payments from the underlying mortgages. High default rates mean these bonds cannot produce a sufficient amount of cash for investors.

That was what caused the asset-backed market in United States to collapse.

Canada does not face the same problem, Flaherty insisted.

Instead, the country's financial companies are having trouble getting money to borrow because banks and other lenders in other countries are not offering up enough money — a classic credit crunch.

Greasing Canada's financial system

Under the government's proposal, the $25 billion will flow back to the banks and other institutions as a way of injecting cash into the country's mortgage market.

The federal government anticipates that few of these mortgages will default and most are guaranteed by the CMHC. Thus, Ottawa actually expects to earn a profit from its holdings of these securities.

"This program is an efficient cost-effective and safe way to support lending in Canada that comes at no fiscal cost to taxpayers," he said.

Flaherty said the action would "make loans and mortgages more available and more affordable for ordinary Canadians and businesses."

On Thursday, Flaherty said he had no doubts over the health of Canada's banks, adding the government has no plan to undertake a massive government bailout similar to those mounted by the United States and other Western countries.

He reiterated that theme on Friday, saying the problem the country's financial institutions face is not solvency but the availability of credit.

"It is important to underline that Canada’s banks and other financial institutions are sound, well-capitalized and less leveraged than their international peers. Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S," Flaherty said.

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