The $25 billion purchase of mortgages announced by the federal government was described as follows:
From the Toronto Star: "Under the plan, the government is buying $25 billion of mortgage-backed securities to ease the liquidity problems of Canada's major banks. Harper described the securities as solid, government-insured investments..."
From the Ottawa Sun: ' "This is a transaction in which the government of Canada, the taxpayers of Canada will not lose money," Harper said. "Quite frankly, because the costs of our borrowing are lower than the value of these mortgages, we'll probably make money when this transaction is over." '
I'm not an expert in Canadian mortgage securities but here's my simple risk-return thinking:
Let's suppose these mortgage securities have an expected return that is slightly higher than the interest rate on Canadian government bonds, as Stephen Harper says.
Now Harper says that the Canadian government can buy the mortgages, financing the purchase at the interest rate paid on Canadian bonds, and earning the difference between the rates of return on the two legs. A profit for Canada?
But wait, these mortgage securities are probably insured (presumably through the CMHC) by the government of Canada! In this case, if anybody but the government of Canada purchases them, it's a purchase of insured mortgages. But if the government of Canada purchases them, there is no insurance any more for the purchaser. In fact, there is no free lunch. If the government expects to make a little money from this investment, it's only because it is taking on the risk of mortgage defaults because it is insuring its own investments.
I hope that the government takes a haricut on the price of these mortgage securities to account for how much the CHMC mortgage insurance is worth, and the fact that the CMHC is the government. If not, Stephen Harper's claims might be false and misleading. Again, I would caution the reader that I'm not an expert in mortgage securities - just knowledgeable enough to be worried about Stephen Harper's plan.
Saturday, October 11, 2008
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2 comments:
My impression is that the mortgage securities that the banks would turn over in this deal are the 40 year 0% down mortgages that Harper and Flaherty allowed starting in April 2006. These are high risk mortgages since the value of the mortgage is now higher than the value of the houses due to a collapsing housing bubble. Previous to this, Canadians had 25 year mortgages with a minimum of 5% down. Flaherty's rotten legislation contributed to the housing bubble and now taxpayers will be responsible for cleaning up the mess.
In June 2008, Flaherty realized that the policy decision was foolish given the experience of the United States with these mortgages so he announced that they will no longer be available after October 15th. Although he only drew it back to 35 years.
Dear Ted,
I am a supporter of the Liberal Party of Canada and of Stéphane Dion. I was very inspired by the classy, substantive campaign that Mr. Dion ran during the election. Although our party did poorly I feel this was not so much a reflection on Mr. Dion as on a number of other factors (lack of election preparation due to snap election; internal dissension within the LPC, collusion between Stephen Harper and Jack Layton against Dion, negative advertising, the politics of fear, etc.)
Now that the election is over and loyal Liberal volunteers are exhausted and inattentive, certain "anonymous senior liberals" aided by a hostile right-wing media are trying to force Mr. Dion out of his leadership position without even giving a chance for ordinary Liberal members to consider whether this is in the interests of our party or Canadian democracy. They present this as a fait accompli. They say that Mr. Dion is isolated and finished politically. What they do not realize though is that Mr. Dion is NOT isolated. Grassroots Liberals were energized and inspired by his campaign, by the Green Shift, by his refusal to play politics as usual. We do not believe that engaging in another self-destructive round of LPC leadership politics will serve our party or the country well. What we need to do now is to serve Canadians by concentrating on our role of official Opposition. We need to think seriously as a party about why we lost this election and how we can better organize ourselves to win the support of Canadian voters next time. We will not let this leadership coup succeed without being heard from.
Go here to learn more about what we are doing and to join the revolt: http://www.facebook.com/group.php?gid=40161095228&ref=mf
Best regards,
Jean Proulx
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