MNI POLICY: Canada Swoops Into Strained Mortgage Market

--Government Launches CAD50 Bln Purchase, BOC CAD500 Mln Per Week

By Greg Quinn

     OTTAWA (MNI) - Canada will bring in a major housing market backstop by

purchasing up to CAD50 billion of insured mortgage pools while the central bank

targets up to CAD500 million of mortgage bonds a week, underpinning what policy

makers long called the most vulnerable part of the economy.

     The government purchases, announced Monday, revive a package brought in

during the 2008 financial crisis aimed at freeing up cash on bank balance sheets

so they could continue making home loans in Canada. The nation not only survived

bank collapses but went on to see growth led for a decade by debt-fueled

consumer spending, a trend that has left the economy at risk.

     The government stressed the mortgage securities are already backed by the

taxpayer and the purchases will earn a rate of return above its own cost of

borrowing. Global financial markets are under pressure as investors see a

recession linked to the virus outbreak, and on Sunday the Fed was forced to

intervene after seeing illiquidity in the bedrock Treasury market.

     Canada Mortgage and Housing Corp. President Evan Siddall said the federal

housing agency "exists in part to buffer the effects of events such as the

COVID-19 virus pandemic, which affect the health and stability of Canada's

financial system. This is what we do. We are part of a federal team that is

working hard together to ease the impacts on Canadians."

     The CMHC and the Bank of Canada said they are both ready to further support

liquidity and the stability of the financial markets as necessary. 

     The BOC took three steps Monday to keep markets moving. At noon it expanded

the collateral accepted under its term repo facility and said it stood ready to

buy Canada Mortgage Bonds in the secondary market. At 3:30 p.m. it changed other

collateral rules and raised daily settlement balances to CAD1 billion from

CAD250 million, and at 4 p.m. announced twice-weekly operations to buy the

mortgage bonds. The BOC also said the CAD500 million purchase target may be

adjusted as needed.

     Governor Poloz said as he cut rates 100 bps this month that risks from

coronavirus and plunging exported crude oil prices overwhelm past concerns about

imbalances in household finances. The BOC resisted a wave of global rate cuts

last year in part because of the potential long-term cost to the economy of

feeding a housing market boom and consumer debts. 

     Households devoted a record 15% of their income to debt repayment in the

fourth quarter, another sign of the side effects of low-for-long interest rates.

Household debts have climbed to CAD2.31 trillion or 102% of GDP. The

closely-watched ratio of debt to disposable income of 176.3% is close to a

record of 178.5% set in the first quarter of 2017.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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