Ottawa To Purchase $25B In Mortgages In Wake Of Global Credit Crunch
Posted October 10, 2008 12:00 pm.
This article is more than 5 years old.
In the face of the global financial crisis, the Canadian government is taking action to protect the floundering lending industry.
Finance Minister Jim Flaherty on Friday announced Ottawa’s decision to purchase up $25 billion in insured mortgages through the Canada Mortgage and Housing Corp. (CMHC). The buy-up essentially takes pressure off the banks and allows for longer-term credit, making loans and mortgages more affordable and available to Canadians.
“In the coming weeks we will inject up to $25 billion of new liquidity into the financial system by purchasing high-quality assets from Canadian financial institutions,” Flaherty said.
“In return, these assets will earn a rate of return for the government that is well above the government’s own cost of borrowing. Moreover, as insured mortgage pools in Canada already carry government backing, there is no additional risk to taxpayers.”
Flaherty believes the move will spur banks to lower their lending rates a further 25 basis points, to bring them in line with the Bank of Canada’s move to drop its rate by 50 basis points earlier this week. TD Canada Trust confirmed not long after Flaherty’s announcement that it would lower its prime lending rate by another 15-hundredths of a point to 4.35 percent, effective next Tuesday. That means the bank will pass along about 80 per cent of the central bank rate cut, or four tenths of a point.
But efforts by Canada and other countries to ease the credit crunch don’t appear to be working, as markets continue to free fall.
“The economy is heading down, how far it goes how long it stays is anybody’s guess,” noted Fred Ketchen of ScotiaMcLeod.
The Finance Minister called the decision an “efficient, cost-effective and safe way to support lending in Canada that comes at no fiscal cost to taxpayers.”
He added that Canada’s banks are “sound and well-capitalized, and less-leveraged than their international peers.”
And though the mortgage system in this country doesn’t even come close to the crisis happening in the U.S., Flaherty says there’s no denying Canadian financial institutions are having more difficulty raising long-term funding given the current credit crunch, which is having an impact around the world.
“Canadians have worked hard to build a dynamic, prosperous economy,” Flaherty said after Statistics Canada announced the economy created a record 107,000 jobs in September.
“The government will never allow those efforts to be put at risk by problems that originate somewhere else.”
Flaherty was set to meet with other G7 leaders in Washington later Friday to discuss the dire situation.
