Ottawa to reap billions from emergency mortgage 'help' to banks

OTTAWA - It was advertised as a lifeline to drowning banks during lastyear's financial storm, but Ottawa's emergency mortgage purchaseprogram is turning out to be a big cash cow - for the government.

OTTAWA - It was advertised as a lifeline to drowning banks during last year's financial storm, but Ottawa's emergency mortgage purchase program is turning out to be a big cash cow - for the government.

With the federal government widely expected to announce an extension of the one-year program next week, economists say Ottawa stands to gain more than $2 billion as the program currently stands and possibly double that amount if it's extended.

That's because the government is benefiting from the spreads between the money it is borrowing to finance the program and the value of the mortgages it has acquired from the banks.

TD Bank chief economist Don Drummond said the government stood to gain as much as $5 billion if the entire $125 billion offered to the banks in exchange for mortgage assets on their books had been drawn down.

But in the year since the program was first offered at the height of the financial crisis last fall, banks swapped only $64.2 billion in mortgages for cash, most in the early stages of the program when it was difficult for lenders to get money in the credit markets to finance their mortgage lending.

Several sources familiar with the issue say the minister has all but decided to extend the program to allowing chartered banks to access the remaining $61.8 billion.

Drummond said it makes no sense for the government to wrap up the program now.

Credit conditions have improved considerably since last September, so much so that earlier this week the Bank of Canada announced it was ending two of its programs to inject liquidity into the system.

But Drummond said the bank's emergency funding programs are aimed at short-term financing of less than one month, whereas the government mortgage asset swap initiative carry up to a five-year term, where markets are still squeezed.

"It still is useful, it makes a profit for the taxpayer, there is no or extremely low risk for the government, it lowers the cost of funding for the banks ,and that in turn lowers costs of borrowing, so it's hard to figure out what's wrong with it," he said.

"The banks, the taxpayers and ultimately the clients of the banks all win."

Canadian Bankers Association head Nancy Hughes Anthony noted that in the last auction this week, chartered banks still accessed $2 billion of the $4 billion available.

"We're not out of the woods yet, so I think it's premature to take this away at this particular time," she said. "And given that we are not bumping up in any way against the total allocation ($125 billion) and the fact it's a commercial program anyway, why not keep it in place until we are really sure?"

The U.S. also announced an extension of their mortgage asset program, worth US$145 trillion.

Unlike most lenders, the Canadian government takes on no additional risk with the program because the mortgages it is acquiring are already insured by Canada Mortgage and Housing Corp. a federal Crown corporation.

"The government can borrow on a lower rate than the rate it earns on mortgages and because these mortgages have already been insured by the government, for an additional fee, the government is taking on no additional risk," explained Avery Shenfeld, chief economist with CIBC World Markets.

Finance officials would not speculate Thursday on how much Ottawa could clear after the five-year period of the longest running mortgages expire.

According to government figures, Ottawa is earning a 0.86 per cent differential on about $43 billion in fixed-rate mortgages purchased from the chartered banks. On an annual basis, that could amount to a profit of $372 million a year for Ottawa, or more than $1.8 billion over five years.

The government is also earning 1.02 per cent differential on about $19 billion of floating mortgages.

The department said $2.95 billion of the mortgages have already been repaid. It reports no defaults.

"We've always said we'd make a profit, I don't think we've put a number to it," said Jack Aubry, a Finance spokesman.

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