Department of Finance Canada
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Archived - Backgrounder
Support for Canadian Credit Markets
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Financial institutions in Canada hold a substantial amount of residential mortgages on their balance sheets. These mortgages include a large volume of mortgages that are insured against default by the Canada Mortgage and Housing Corporation (CMHC) or by private sector firms that are backed by the guarantee of the Government of Canada.
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National Housing Act Mortgage-Backed Securities (NHA MBS) are comprised of pools of these insured residential mortgages. These securities are high-quality assets that are backed not only by the overall strength of Canada’s housing market, but also by the Government’s guarantee of the insured mortgages.
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NHA MBS carry CMHC’s guarantee of timely payment and thus entail no credit risk to the investor (see NHA Mortgage-Backed Securities | CMHC). NHA MBS issuers are approved by CMHC and include chartered banks, trust companies, insurance companies, credit unions, loan companies and caisses populaires.
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The NHA MBS Program and CHMC’s related Canada Mortgage Bond (CMB) Program support the continuing flow of financing from Canadian financial institutions to borrowers.
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The CMB Program has recently been expanded, including a record issue in June of this year. Nonetheless, because of the protracted and severe credit turmoil that originated in the U.S. and spread to Europe, the ability of financial institutions in Canada to continue to provide mortgages and other credit to qualified borrowers has recently become constrained by the disruption of global credit markets.
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In recent weeks, the Bank of Canada has taken steps to offer liquidity to the domestic market to alleviate persistent pressures in funding markets (see Home-Bank of Canada). NHA MBS are eligible collateral for these operations. Most recently, the Bank has increased to $20 billion the volume of liquidity that it will provide banks and has widened the range of collateral it will accept, using the expanded statutory authorities provided in the 2008 budget legislation.
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Under the initiative announced by the Minister of Finance today, the Government will help Canadian financial institutions raise longer-term funds by purchasing up to $25 billion in NHA MBS insured mortgage pools through CMHC.
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CMHC borrowings from the Government of Canada will increase to fund this operation. The Government of Canada will increase its issuance of treasury bills and bonds to finance these loans.
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The purchases of NHA MBS will be conducted at market prices through a competitive auction process. As the NHA MBS are already guaranteed by the Government through CMHC, there will be no material risk to the Government through this program.
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The auction process will be designed to ensure that the rate of return that the Government earns on its investment in these NHA MBS exceeds the Government’s cost of borrowing. As a result, the increase in public debt charges arising from the additional treasury bills and bonds that the Government will issue will be more than offset by the return that the Government earns on the investment in NHA MBS.
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The first operation is planned for October 16, with a purchase amount of up to $5 billion. The Government will announce a schedule of future purchase dates to take place over the coming weeks. CMHC will shortly announce further details of the competitive process for the information of potential participants. The Bank of Canada will announce supplementary borrowing operations that will fund this initiative.
