March 24, 2009 / 4:24 PM / 10 years ago

Canada mortgage purchase plan may wind down: CMHC

OTTAWA (Reuters) - Canadian banks have less need of a government program to buy up to C$125 billion ($103 billion) in insured mortgages, based on the results of the latest auctions, a senior official at the government’s housing agency said on Tuesday.

“In the last two auctions, the takeup has been less than what we have offered,” Karen Kinsley, president and chief executive of Canada Mortgage and Housing Corp, told the Senate finance committee.

As Kinsley was speaking, CMHC was completing its 10th reverse auction under the plan, and for the third time in a row bank participation was much lower than in previous auctions.

Finance Minister Jim Flaherty first announced the temporary mortgage purchase plan in October 2008 to help cushion banks from the global financial crisis and to counter a scarcity of private-sector lending. The program — which began with plans to buy C$25 billion in insured mortgage pools and was later expanded — aims to provide stable funding to banks so that they can lend more freely.

Kinsley said talks with financial institutions indicated that credit flows have improved due to CMHC’s purchases of insured mortgage pools, which now total about C$55 billion.

“We believe at this point in time there is a fair amount of liquidity in the system,” she said.

“I don’t think we would say that the program isn’t going to be taken up as we go forward but I think that given the pace that we’ve been operating at, we’re probably going to want to slow it down a bit given the needs that lenders have at the moment.”

In the auction on Tuesday, CMHC offered to purchase up to C$4 billion in the mortgage assets, but weak demand resulted in it buying only C$1.6 billion. In the previous two auctions, demand by banks was for less than half the amount CMHC offered whereas in auctions on February 9 and earlier the demand was for the full, larger amounts offered.

Canada’s six largest banks have not needed direct bailouts as have some of their global counterparts due to more conservative lending practices and stronger balance sheets.

But a tightening in both the availability and pricing of credit have forced the government and Bank of Canada to provide extraordinary liquidity through a variety of mechanisms to grease the wheels of the lending market.

Kinsley said CMHC has about a 67 percent market share of the mortgage insurance market, with the Canadian units of AIG (AIG.N) and Genworth Financial (GNW.N) sharing the remainder.

She said it was likely that the mortgages that have been purchased by the government reflect the companies’ respective market shares.

In response to one senator’s concerns about AIG’s solvency and suggestions that Canadian taxpayers were effectively involved in a “bailout”, Kinsley answered that AIG Canada was distinct from its U.S. counterpart.

“They (AIG) will indicate that they are strongly capitalized here in Canada. But also it’s important to note that the private sector competitors have a 90 percent government guarantee on their loans,” she said.

($1=$1.22 Canadian)

Reporting by Louise Egan; editing by Peter Galloway

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