At the beginning of the month, Mark Carney (Governor of the Bank of Canada) held a conference call with the leaders of The Big 5 Canadian banks (RBC, TD, Scotiabank, CIBC, and BMO). The Big 5 are headquartered in Toronto, so their concerns strongly reflect the Toronto mortgage market. They discussed what solutions Canadian Finance Minister Jim Flaherty should present this weekend in Washington, when he meets with the other G7 finance ministers to discuss how to minimize the impact of the ongoing U.S. credit crisis on world markets.
There are two promising Canadian proposals on the table:
1. Increase the deposit limit guaranteed by the Canada Deposit Insurance Corporation (CDIC) from its current $100,000 to $250,000 to reassure depositors and make them more comfortable with leaving their money at the banks.
2. Make the Canada Mortgage and Housing Corporation (CMHC) a term lending facility.
Let’s explore item 2 further. You probably already recognize CMHC as one of two Canadian agencies that offers mortgage default insurance. (The other is Genworth Financial.) CMHC guarantees mortgages where the applicant has only a 5% down payment. These ‘weak’ mortgage applicants account for only 24% of the current Canadian market, or $190 billion. The Big 5 want CMHC to substantially increase the amount of its guarantees by extending them to many other properties.
Canadian bankers are experiencing problems borrowing international money to lend to Canadian consumers this week.
Short-term international loans are extremely expensive because financiers are wary of getting involved with ‘iffy’ North Americans who may not pay them back. The Canadian bankers’ strategy is to obtain cheaper funding by packaging together more of their mortgages for CMHC to absorb – not just those with minimal down payments. CMHC would give the banks securities in return.
CMHC already sells securities as government guaranteed mortgage bonds to investors through the Canada Housing Trust.
The banks want a bond sale and repurchase agreement with CMHC called a term repo. The banks hope to use the securities as collateral for short-term loans obtained through international financiers. If Canadian banks can obtain international money at a reasonable interest rate, they can lend it to you, the Canadian consumer, at lower interest than is presently available.(Today’s prime rate is 4.50%.) You can use the low interest loan for crucial costs associated with buying your new home, like repairs, furniture, and moving expenses
