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Today’s Small Step, Tomorrow’s Scrutiny

10 October 2008

Today, our federal government acquiesced somewhat to the demands of The Big 5 banks (RBC, TD, Scotiabank, CIBC, and BMO) to make the Canada Mortgage and Housing Corporation (CMHC) a term lending facility. Finance Minister Jim Flaherty announced that CMHC is buying $25 billion worth of pooled mortgages from the banks.

Canadians have approximately $773 billion in total outstanding mortgage debt, so this is only about 3.25% of the total – far less than the banks wanted to sell. The aim of today’s move is to free up the banks’ money, so they can lend it to Canadian consumers at a reasonable rate of interest.

For two weeks, Canadians have had difficulty refinancing their homes, taking out new mortgages, or obtaining credit at a fair rate of interest because international financiers are reluctant to lend.
CMHC already insures the mortgages in this pool. Mr. Flaherty did not reveal how much interest the government will earn on the mortgages.

Today’s move is a short-term solution. Tomorrow, Minister Flaherty will meet with finance ministers from France, Germany, Italy, Japan, the United Kingdom, and the United States in Washington, DC to coordinate their monetary policies. They need long-term solutions to remediate the global economic slowdown initiated by U.S. lenders.

For five years, U.S. lenders allowed too many unqualified borrowers with no down payment to take out mortgages they could not hope to repay on properties of inflated value, and then duped investors into assuming the risk by selling them the doomed mortgages as asset-backed securities. Perhaps the ministers should tackle these root problems that created the current financial crisis:

  • Stock market transparency – The global crisis could have been averted in August 2007, if Americans selling asset-backed mortgage securities had been required to clearly show who owned what.
  • Predatory lending practices – If American home owners had been made to qualify for their mortgages in the same manner that Canadians have always done, this crisis could have been avoided.
  • Influencing factors – Home owners seldom default on their mortgages solely because of high mortgage interest rates. Other causes tip home owners over the edge, such as unemployment and exorbitant oil prices that in turn raise food, heating, and transportation prices.

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