TORONTO (Reuters) - Canada plans to buy up to C$25 billion ($21 billion) in insured residential mortgages to help cushion banks from the global financial crisis and address a “scarcity” of private-sector lending, Finance Minister Jim Flaherty said on Friday.
While details of the plan were slim, Flaherty stressed the program is not a bank bailout because the government is not buying equity, and that the mortgages are “high-quality assets” that are already insured by the Canada Mortgage and Housing Corp. (CMHC), a government-owned agency.
The plan differs from the $700 billion rescue plan in the United States in which the government announced it would purchase toxic assets from financial institutions.
“Our mortgage system is sound,” Flaherty said at a news conference in Ottawa. He said the “severe and protracted” credit crunch is beginning to affect the availability of mortgage loans and other types of credit.
The plan was announced days before voters go to the polls on October 14 to decide whether to return the ruling Conservatives to power. Prime Minister Stephen Harper has faced growing criticism about his response to the financial crisis, with his opponents accusing him of being complacent while Canadians grow increasingly anxious about their financial futures.
The prime minister, maintaining a lead in the polls, told reporters the move represented no cost to government.
“This is a market transaction that will cost the government nothing ... we are simply exchanging assets that we already hold the insurance on and the reason we are doing this is to get out in front,” he told reporters in Brantford, Ontario.
“We have a range of measures that we can take, that we have been taking, and we will continue to take,” he said, declining to give further details.
Canadian housing data has been in stark contrast with the state of the housing market in the United States, hit by a crisis that began in the subprime mortgage sector and spread across other parts of the market and the broader economy.
Analysts generally predict the Canadian housing market to ease but not slump into a U.S.-style meltdown, largely because risky mortgages are not a large part of the market.
Financial institutions welcomed the government plan, saying it was a safe way to aid credit markets. Several analysts said the action was a positive step in aiding the pressure felt on the financial markets but the impact was uncertain.
“It’s a very positive move. Canada is not immune from what’s happening in the rest of the world and I think we need some assurance that liquidity is readily available for Canadian banks,” said Patricia Croft, chief economist at Phillips, Hager & North.
The government hopes the plan will help banks raise longer-term funds, increasing their own ability to extend credit to consumers.
The move comes two days after the Bank of Canada chopped its benchmark overnight rate by half a percentage point to 2.5 percent, and builds on other steps by the central bank to increase liquidity in the system.
After the central bank cut, major Canadian banks cut their prime rate, which influences borrowing rates on consumer and business loans, but only by a quarter point to 4.5 percent.
But the savings may yet be passed onto the consumer. At least three banks announced a second cut their prime lending rates this week, citing the benefits of the government plan.
Toronto-Dominion Bank and CIBC said it will lower its prime lending rate by 15 basis points to 4.35 percent, while Bank of Nova Scotia cut by 25 basis points to 4.25 percent. Other Canadian banks are likely to follow, if past patterns hold.
“We believe that this initiative will be put into effect in a way that will reduce our overall cost of funds,” Tim Hockey, president and CEO of TD Canada Trust, said in a statement.
Flaherty said the budget surplus would not be threatened by the plan. In fact, Canada expects the securities will earn a rate of return that is above the its own cost of borrowing.
The finance minister said the first operation, which is planned for October 16, would amount up to C$5 billion. Further dates will be announced in coming weeks and the Bank of Canada will announce supplementary borrowing operations to fund this plan, the government said.
Additional reporting by Scott Anderson, Jennifer Kwan, Richard Valdmanis, Lynne Olver, David Ljunggren; Editing by Frank McGurty