The Canadian government’s plan to buy up to $75 billion in mortgages might not have been the flashiest stimulus measure announced by Finance Minister Jim Flaherty in his recent budget, though it could turn out to be one of the most expensive. But the salient point about the mortgage bailout might end up being this: it’s not necessary.
That, at least, could be the takeaway from a reverse auction of mortgage securities held by the Canadian Mortgage and Housing Corp. During the weeklong auction that ended on Feb. 20, the CMHC failed to attract many sellers for its offer to buy billions in mortgages. The Crown corporation purchased about $2.34 billion in five-year variable-rate mortgages, far short of the $7 billion it had offered to purchase. That contrasts sharply with a similar auction in January, in which CMHC had no trouble finding sellers for an offer to buy $7 billion in similar mortgages. A $5-billion auction held in October was also fully subscribed.
Why the decline in interest? It could be that the mortgage market is stabilizing, says Roger Quick, director of fixed income research at Toronto-based Scotia Capital. “This is a reasonably positive sign that Canada’s banks don’t seem to be in dire need of financing,” he says. That’s a sentiment backed up by the strengthening of the market for Canadian bank bonds, as well as a significant drop in the Canadian Dealer Offered Rate, says Quick. The CDOR is the interest rate Canadian banks charge each other for short-term loans, and it tracks both the cost of borrowing and the willingness of banks to lend money to one another.
Unlike the toxic assets clogging the balance sheets of U.S. financial institutions, most of the loans the CMHC has purchased were already guaranteed by its own mortgage insurance program. Rather than take distressed assets off banks’ balance sheets, the purchase is intended to inject liquidity into the mortgage market. “At a time of considerable uncertainty in global financial markets, this action will provide Canada’s financial institutions with significant and stable access to longer-term funding,” Flaherty said when he announced that CMHC would buy $50 billion in mortgages back in November. He expanded the program to $75 billion in the recently passed budget. (Federal liquidity efforts go beyond mortgages; they’re trying to address the drying-up market for auto loans, as well, earmarking $12 billion to purchase securities backed by auto loans and leases. The department of finance is now asking for submissions on how to structure the purchase of those loans.)
While the U.S. government is debating whether to buy toxic mortgages at higher prices than the banks could get in the current depressed market, Ottawa is actually charging the banks a fee to take mortgages off their books. To sell mortgages to the CMHC in the most recent auction, banks had to pay an average interest rate of 76 basis points above CDOR. That’s down from an average of 112 points last month, but it still may not have been to the banks’ liking. “It’s also about the pricing,” says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, which represents mortgage lenders, brokers, insurers and other industry players. “Some of the lenders may not have found the pricing of this to be very attractive.”
Despite what appears to be waning interest, Quick suggests that it’s unlikely the mortgage purchase program will disappear anytime soon, since it’s still an inexpensive way for lenders to raise money. Next month CMHC is expected to offer to buy several billion dollars in fixed-rate mortgages. If the lack of interest continues, it might be time for the government to figure out something else to do with its billions.