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CIBC Weekly Market Insight - April 1, 2010 - Benjamin Tal,Senior Economist
NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS
1. It seems that the Bank of Canada is signalling that it will begin raising rates in the summer, if not sooner.
What is the expectation for the overnight rate for the next 24 months?
By now it is clear that the Bank will move by June or July. However, we expect that the first leg of
tightening will be moderate (only 75 basis points in Q3 of 2010) and the bulk of the tightening will be in
2011. Look for the overnight rate to reach 2% within 24 months.
2. How do you see the Canadian yield curve reacting to that forecast?
We expect some flattening in the yield curve in the next six months as short-term rates catch up with-long
term rates. But we also expect to see a steeper yield curve down the road; the need to raise short-term
rates will be limited by a softening economy in the second half of the year, deleveraging by consumers
and government policies that will start acting as a negative for the economy. At the same time, we expect
some upward pressure on long-term rates due to fiscal consideration and some inflationary fears.
3. Some of your peers have commented on the Bank of Canada raising the overnight rate while the Federal
Reserve Bank maintains a near-zero target for the federal funds rate. Is this really a sustainable course of
action for the Bank of Canada and how do you see this playing out?
No. That's why we expect the first wave of tightening to be limited. There is a limit to what extent the
Bank can fly solo without the Fed. Note that it happened in the past-1992 and 2002-where the Bank
moved independently of the Fed only to reverse these moves a few months after. We think that most of
the increase in rates will be in 2011 when the Fed starts moving.
4. Briefly, what is your thesis on the outlook for the US and Canadian housing markets?
Over the past two years, the degree of volatility observed in the Canadian housing market has been
unprecedented. Within this short time frame, house prices fell by almost 13%, only to rebound by an
impressive 21%. Meanwhile, resale activity is now rising by close to 67% on a year-over-year basis after
falling by close to 40% in 2008. Housing starts are presently 33% higher than in April 2009, despite
dropping by more than 50% earlier in the recession. In fact, no other segment of the economy has
rebounded as quickly as the housing market, making it one of the real surprises of this recession.
This rapid uptick in housing activity, in the face of recessionary conditions elsewhere in the economy,
raises concerns about its sustainability. It's causing some to wonder whether house prices are rising too
quickly given current economic fundamentals. Using a recent International Monetary Fund (IMF) housing
valuation model as a base, and updating it to reflect the most recently available Canadian data, we
estimate that the Canadian housing market as a whole is beginning to overshoot its 'fair value.' At just
under $350,000, the current average price of a home is estimated to be roughly 7% over what would be
consistent with current housing market fundamentals, including interest rates, income growth, rents and
demographics. However, that modest overshooting is far from uniform across the country. Those figures
are skewed to western Canada, which has seen the most dramatic swings in house prices over the past 24
months. That market now appears to be overvalued by roughly 10% to 15%, suggesting that the
imbalance in the rest of the country is much more modest.
Note, however, that overvaluation does not necessarily mean a bubble or a dramatic price correction.
Given that the current overvaluation is occurring in a context of historically low interest rates, what we are
most likely witnessing is a temporary period of exuberance that is 'borrowing' activity from the future;
households are taking advantage of lower rates, and accelerating their borrowing and home purchasing
activities. To the extent that current activity is simply a redistribution of sales from the future to the
present, the housing market of tomorrow may be in store for a more muted level of activity. Housing
starts will also catch up with the sudden spurt in demand, with the increase in supply helping to moderate
price trends. Rather than plunging, house prices are more likely to stagnate in coming years (or fall
modestly in the most overheated markets) as fundamentals catch up with a market that has gotten ahead
of itself.
As for the US, its economy may be on the mend, but a full-fledged recovery in the residential real estate
market is still years away. After an unprecedented multi-year collapse, most housing indicators have
stabilized. Yet, whatever signs of improvement do exist are more a function of a badly damaged market-
and the distorting effect of temporary tax incentives-than evidence of a sustainable rebound. Starts,
sales and prices look okay now, but we anticipate further weakness ahead as supply continues to outpace
demand, mortgage rates head higher (with the Fed ending its purchase of MBSs) and the government's
generous home buyer's tax credit finally expires. That will have significant implications for related equities
which have already priced in a steady recovery in the US housing market.
In the final analysis, the end of unprecedented government tax support for housing, along with the
looming overhang of supply and a higher cost of borrowing, will keep new home building activity
trudging along at historic lows over the next two years. We could see prices drop again by 5% to 10%.
5. More generally, how do you see the US and Canadian economies faring from 2010 through 2012?
No economic recovery goes in a straight line and the current one will be the most non-linear of them all.
As in the US, many of the chief drivers of the Canadian recovery will run out of fuel by mid-year and will
give way to sub-par growth in the second half of the year. In both countries, we will see GDP growth of
close to 3% in 2010-this number will mask above-potential growth in the first half and below-potential
growth in the second half. As for 2011, we also do not see a very strong economy. We will have a few
negative factors such as the end of the inventory cycle, deleveraging by consumers, a stagnating
residential housing market and a government that will be acting as a negative for the economy as a
whole. This will limit the need to raise rates to the sky but it also means that both economies will probably
grow below 3% in 2011.
6. What sectors appear poised to outperform in this environment and why?
Timing is very important here. We expect some damage to interest rate-sensitive stocks following the first
move by the Bank, (as is always the case) we will then see the market start upgrading its expectations
regarding future rate hikes. This will provide a buying opportunity since we believe that actual rate
increases will be less than what the market will end up discounting (for the reasons mentioned earlier).
Also remember that the market as a whole tends to move higher during the first six months of monetary
tightening. If you look at the average of all the tightening cycles since 1958, you see that during the six
months leading to the first rate hike, the market on average rose by 22% (annualized) and during the first
six months after the first move, the market rose by 8% annualized-an interesting statistic. As for specific
sectors, based on past sensitivities to interest rates changes, look for apparel and consumers durables,
technology and health care to outperform in the coming six months. Beyond that, switch to interest rate
sensitive sectors such as financials, capital goods and utilities. From a long-term perspective we are still
bullish on commodities since we think that demand from emerging market will surprise on the upside in
the coming years.
7. Do you have any other advice for equity investors in 2010?
Here we want to focus on the nature of demand. We are already in the midst of a significant
redeployment of cash into the market. We are talking about cash that was sitting on the sidelines for a
while and now is finding its way into the market-roughly $120 billion of cash that is being redeployed. It
is 'conservative' money since most of it is held by people age 55 plus. Thus we think that this situation is
positive for defensive, dividend-paying stocks. And if we are right and rates do not rise significantly during
the first wave of tightening, these stocks will remain very attractive. So we think defensive investment
with the focus on high-paying, dividend stocks will be the winners in the next two to three years.
Fixed vs. Variable Rate Mortgages
The first question people often ask is: "Where do you see rates going?" Consumers believe we as mortgage specialists know.and of course we don't. No one does.
We can, and do, present a variety of possible rate scenarios based on:
where we are in the rate cycle
how rates have performed after past recessions
and other available research.
But you never know for sure where the rate setters (the Bank of Canada and bond traders) will take the market.
Aside from reading the tea leaves on rates, the best thing a borrower can do is measure his/her ability to handle rising payments. To gauge that, there is a handy acronym called IDEAS as suggested by the Canadian Mortgage Trends Blog.
IDEAS stands for Income, Debt, Equity, Assets, Satisfaction With Risk.
Income -- Is the borrower's income stable and reliable?
Is there a low chance of income interruption? (You don't want payments to soar if there's a chance you'll be out of a job for a while)
Does the borrower earn enough to pay his/her variable-rate mortgage as if it were a 5-year fixed mortgage? (i.e., Can he/she afford to set his/her payments higher to offset the effect of rising rates?)
Debt -- Does the client have a reasonable debt ratio?
Is the person's total debt ratio under 40% based on the posted 5-year fixed qualification rate (so that his/her budget isn't crushed if prime rate jumps to 6.25% or more)?
Can the borrower withstand 50% higher payments if rates rocketed up 4%?
Equity -- Does the client have enough equity?
Is the loan-to-value under 80-85% so the person could refinance if absolutely needed?
Assets -- Does the client have enough assets?
Preferably 6 months of living expenses (in liquid assets) to act as a payment buffer if needed.
Does the person have a credit line as a backup source of liquidity?
Satisfaction With Risk -- Can the client accept risk?
If rates increase 2.50%, can he/she handle payments rising over 30%? What if rates jump 4%?
Does he/she understand that a fixed rate will save him/her more money up to 23% of the time--according to popular research? (Fixed or Variable)
If most, or all, of the answers to the above are yes, a variable rate is something the homeowner can entertain.
After evaluating someone against the IDEAS measure, you should then discuss (among other things):
Future interest rate scenarios, and how rising rates could impact payments and amortization time.
The tools that variable rate holders can use to deal with payment risk, like "skip a payment" feature or taking a hybrid mortgage to reduce the risk.
The pros and cons of getting a guaranteed conversion rate (lock in rate) in writing.
The cost comparison of variable versus fixed terms, based on future rate assumptions.
For most people, the decision between fixed and variable will either save them thousands or cost them thousands. The goal is to try and take as much of the gamble out of the equation as possible.
Just released from CMHC - March 5, 2010
On February 16, 2010, the Government of Canada announced new parameters regarding the application of the government guarantee supporting the Canadian mortgage insurance industry. The purpose of this note is to provide clarification on the qualifying interest rate to be used for borrower qualification purposes on a CMHC-insured loan as well as advise on policy changes relating to the CMHC Self-Employed Product.
Clarification on Qualifying Interest Rate
Effective April 19, 2010, the qualifying interest rate used to assess borrower eligibility will change only for loans with a loan to value ratio (LTV) greater than 80% as follows:
Fixed Rate Mortgages and Variable Rate Mortgages: For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate and the contract interest rate. For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.
Mortgages with Multiple Interest Rates (e.g. Multi-Component Mortgages): Each component must be qualified using the applicable criteria defined above.
CMHC defines the benchmark rate as the Chartered Bank - Conventional Mortgage 5-year rate that is the most recent interest rate published by the Bank of Canada in the series V121764 as of 12:01 AM (Eastern Time) each Monday, and which can be found at: http://www.bankofcanada.ca/en/rates/interest-look.html <http://www.bankofcanada.ca/en/rates/interest-look.html> .
Policy Changes to CMHC Self-Employed
CMHC is also announcing policy changes to the CMHC Self-Employed Product Without Traditional Third Party Validation of Income. Effective April 9, 2010, self-employed borrowers with more than 3 years in the same business and commissioned-income borrowers will be required to confirm their income and will not be eligible for the Self-Employed Product Without Traditional Third Party Validation of Income. This product is intended for a small portion of borrowers who find it very difficult to document income - in particular, recently self-employed borrowers. For the majority of self-employed borrowers, income validation is readily available through financial statements, contracts, T4s and other third party income validations. The changes will ensure that self-employed borrowers with third party income validation will benefit from a lower premium. Furthermore, the maximum loan-to-value ratio available under the CMHC Self-Employed Product Without Traditional Third Party Validation of Income will be reduced from 95% to 90% for purchase transactions and from 90% to 85% for refinance.
Sincerely,
Mark McInnis ,Vice-President
CMHC Insurance Underwriting, Servicing and Policy
Ottawa - Globe and Mail Update Published on Tuesday, Feb. 16, 2010 8:17AM EST Last updated on Tuesday, Feb. 16, 2010 11:18AM EST
Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is healthy and there's no solid evidence of a bubble, the moves are needed to "help prevent negative trends from developing."
Under the new rules, all borrowers will need to meet standards for five-year fixed-rate mortgages regardless of whether they're seeking a loan with a lower rate and shorter term.
Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on "speculative" investment properties.
"There are no definitive signs of a housing bubble," Mr. Flaherty said. "We think we're being proactive in the three steps we're taking today."
Scotia Capital economist Derek Holt said the tighter criteria for mortgages could cause the housing market to ``really heat up" over the next few months as buyers try to get approved before the stricter rules come into force.
``This all leads to short-term price scrambling," Mr. Holt said in an interview, noting that the Harmonized Sales Tax due to take effect in Ontario and British Columbia on July 1 is already causing some buyers to rush into the market in a bid to close deals in advance. ``It could really heat up in the near term and then cool off in the back end of the year. With the HST in Ontario and B.C. and these changes, they have dramatically altered the home-buying decisions of Canadians."
The three new changes to the mortgage insurance guarantee rules are intended to take effect on April 19, according to a statement.
Mr. Flaherty stressed that some lenders are already applying stricter standards when approving buyers for mortgages, but said today's announcement was needed to ensure others start doing so.
``I prefer not to give direction to lending institutions about what their practices ought to be and what their standards ought to be," he said. ``We are now providing direction in what they ought to do.''
In reference to the tightening of refinancing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash.
"This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up," he said. ``We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash."
In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high.
"We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers," he said.
"We're not aiming here at investment properties," Mr. Flaherty added. "What we're getting at is the speculation in multiple-condo markets, in particular."
A backgrounder circulated by Finance Department officials explained that the change won't apply to borrowers who buy residential properties where they plan to live but which also include some rental units.
``The problem is this multiple-unit, non-owner-occupied situation," he said.
At the same time, Mr. Flaherty acknowledged that even though most lenders already ask mortgage-seekers if they plan to live in the home they're trying to buy, they're not always sure they get an accurate response. The new rule is ``not easy to administer but it's not impossible either," he said.
The Canadian Real Estate Association said in a report last week that low interest rates will push home resales and prices to records this year.
The new rules are meant to ``have some stabilizing effect" and encourage ``moderation" in the market, Mr. Flaherty said. When asked if that means the moves will push home prices lower, the minister said the main purpose was to curb the type of ``excesses" that helped fuel the subprime-mortgage meltdown in the United States.
``You can see people starting to use the equity in their homes as if it were cash and the assumption that took hold that housing prices only ever go up," Mr. Flaherty said, adding the government is worried about ``the tendency for those who have limited credit to speculate in the market," because ``they're the first ones to get into trouble in the market when interest rates go up.''
The moves send an appropriate message to borrowers about debt, said CIBC economist Avery Shenfeld. While the rules don't take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said.
"It may be part of a cooling that we'll see in house price appreciation," he said. "We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals - not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks."
Jeremy Torobin and Bill Curry
An interest rate hike this summer? Globe & Mail - Jan 27 by David Rosenberg
Don't count on it. For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast
Canadian market watchers will get some good news this week. The predictions for a "blowout" reading on fourth-quarter GDP are already out there and it is likely to be an abnormally strong number. But for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.
This is critical to the outlook for Canadian money market and bond yields since futures have priced in nearly 100 per cent odds of a 25 basis point rate hike this June, and another 25 basis points by September. (A basis point is 1/100th of a percentage point.) The central bank has already told us that its base case is for 2.9 per cent real GDP growth this year and 3.5 per cent next year, with the starting point on the "output gap" being 3.7 per cent ("output gap" is the gap between the actual level of real GDP and where real GDP would be if the economy were at full capacity). Remember that an output gap that big in any given quarter classifies as a 1-in-20 event. Moreover, baselining these expected growth rates against the latest estimates of potential growth puts the output gap at a smaller level of 1.55 per cent this year, narrowing further to 0.25 per cent in 2011.
The history of the Bank of Canada is such that - outside of when it had to defend the Canadian dollar - it typically does not embark on its tightening phase until the output gap is close to closing. Even during the aggressive John Crow era, the bank's modus operandi was to time the first rate hike just as spare capacity was being eliminated, and not much before. On average, the first central bank rate hike following a recession takes place one quarter before the output gap closes (there is still a gap, but it is small at 20 basis points). If such a strategy is replicated this time around - and the cause for being on pause longer in the context of a historic deleveraging cycle is certainly quite strong - then the very earliest the bank will move is the second quarter of 2011.
Under this scenario, based on some back-of-the envelope calculations I just did, the unemployment rate at no time declines below 7.5 per cent through to the end of 2011. The peak in the jobless rate was 8.7 per cent in August, 2009. Going back to prior recessions, the central bank does not begin to tighten rates until the jobless rate is down an average of 150 basis points with a range of 130 basis points to 170 basis points.
Unless the bank wants to be pre-emptive - highly unlikely when it acknowledges in its economic outlook last week that "the recovery continues to depend on exceptional monetary and fiscal stimulus" and that "the overall risks to its inflation projection are tilted slightly to the downside" - then to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast. More to the point, while bored Bay Street economists analyze every word to see if the bank is more or less "hawkish" than in its previous outlook, what is important for investors is to assess the bank forecast and decide what it means for the degree of excess capacity in the economy and what that implies for the future inflation rate.
The bottom line is that even with the fragile recovery, the bank sees more downside than upside risk to its inflation projection, and, to reiterate, for it to start tightening policy until the jobless rate falls below 7.5 per cent would be a break from past post-recession actions.
And whatever future "policy tightening" is needed could also come via the overextended loonie, limiting any need for an interest rate adjustment in the time horizon that the markets have discounted. This is a source of debate on Bay Street, but the bank is still sensitive to the growth-dampening impact of an exchange rate too firm for its own good. To wit: "The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada," the bank says.
In a nutshell, the Canadian market is already braced for 50 basis points of tightening from the Bank of Canada by September. With that in mind, it is difficult to believe that there is any significant rate risk here; if anything, the surprise will be that the bank is on hold for longer. If that proves to be true, then there is actually more downside than upside potential to Canadian bond yields, particularly at the front end of the coupon curve.
The reason the markets think the bank may pull the trigger is because of this one sentence that shows up in every press statement: "Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
So the central bank has really only given a pledge to keep rates where they are until mid-year. But June is only five months away and so one would have to think that at one of the next three meetings, the Bank is going to have to update this particular sentence or cut it entirely and leave the market without a de facto time commitment. Either way, the moment the bank changes this sentence is the moment the market will put on hold its expectations of a new rate-hiking cycle coming our way.
Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.
David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
Recent Mortgage Statistics Mortgage Professional News December 2008
CAAMP has released its annual mortgage report and it's chock full of mortgage stats. Here's a rundown on the more notable ones:
5,250,000: The number of Canadian home owners with mortgages.
29%: The percentage of Canadian homeowners who got a new mortgage in the last 12 months.
86%: The percentage of people renewing or refinancing that stayed with their existing lender.
$136,000: The average mortgagor's equity. This equity equals 51.7% of their home value on average.
22%: The percentage of mortgagors who took equity out of their homes in the past 12 months. People are spending more because last year it was 17%.
$41,000: The average equity that borrowers took out of their homes this year. That's up 16% from last year. The most common reason for borrowing this equity? Debt consolidation.
50%: The ratio of new mortgages taken out in the last year with amortizations greater than 25 years.
5.41%: The average Canadian's mortgage rate. Last year it was 5.56%.
0.40%: The average interest rate improvement realized by people who refinanced in the past year.
1.59%: The average discount off of bank-posted rates.
1.96: The average number of quotes people get when shopping for a mortgage.
0.28%: The percentage of Canadians who are 90 days or more past due on their mortgage. That's up just slightly from last year.
10%: The approximate decline in mortgage approvals that CAAMP foresees in 2009.
36%: The percentage of Canadians who are aware that insured 40-year and 100% LTV mortgages have disappeared.
Peoples' favourite mortgage terms:
1-3 years: 29% of borrowers
4-5 year: 61% of borrowers
Over 5 years: 10% of borrowers
CAAMP says there's a noticeable trend in borrowers taking shorter terms when compared to last year.
There's also a big trend towards variable rates. 40% of mortgages were variable in the past year. In CAAMP's 2007 report the number was just 21%. CAAMP says that's because "consumers may be expecting interest rate reductions." We'd also like to think they're becoming more educated about the long-term advantage of variable rates.
Where did people get their new mortgages this year?
Major banks: 47%
Mortgage brokers: 35%
Credit Unions: 11%
Other: 6%
Facts gathered by The Mortgage Group Ontario
Bank of Canada Lowers Rate
Mortgage Industry News December 9, 2008Bank of Canada lowers overnight rate target by 3/4 percentage point to 1 1/2 per cent
OTTAWA - The Bank of Canada today announced that it is lowering its target for the overnight rate by three-quarters of a percentage point to 1 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 1 3/4 per cent.
The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.
While Canada's economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses.
All of these factors imply a lower profile for core inflation than had been projected at the time of the last Monetary Policy Report in October.
Several factors are helping to counterbalance the negative drag from the global economic and financial developments. The depreciation of the Canadian dollar will continue to provide an important offset to the effects of weaker global demand and lower commodity prices. As well, money markets and overall credit conditions in Canada are responding to significant and ongoing efforts to provide liquidity to the Canadian financial system.
In light of the weakening outlook for growth and inflation, the Bank of Canada lowered its policy interest rate by a total of 75 basis points in October and by an additional 75 basis points today. These monetary policy actions provide timely and significant support to the Canadian economy.
The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent inflation target over the medium term.
Mortgage Industry News November 2008
Billions To Be Added To Mortgage Markets - 13 Nov 2008, The Vancouver SunThe federal government and Bank of Canada have dramatically stepped up their efforts to manage the financial market crisis with promises of further multibillion dollar injections of liquidity into domestic mortgage and credit markets.
But neither the measures here, nor the announcement of a shift in U.S. government efforts to ease the credit crisis there, reassured investors. Bay Street's benchmark S& P/ TSX composite stock index plunged more than 500 points to under 9,000 points which also helped knock 2.77 cents off the dollar, leaving it at 80.81 cents US. That marks the longest losing streak for the currency in three weeks, as oil fell to the lowest in 22 months.
The Bank of Canada announced "measures to provide exceptional liquidity to the Canadian financial system" consisting of an additional $8 billion in short-term loans, and the Finance Department said it is prepared to purchase $50 billion more in mortgages from financial institutions.
Further, deputy bank governor Paul Jenkins, in a presentation to business leaders in Toronto, revealed the central bank will "likely be required" to cut interest rates further.
The additional measures by the Finance Department, meanwhile, triples, to $75 billion, the maximum value of mortgages that will be purchased by the government through Canada Mortgage and Housing Corp.
"At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer term funding," Finance Minister Jim Flaherty said.
"This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy," he said, adding it will also earn the government a modest rate of return with no additional risk.
The action was applauded by Dominion Bond Rating Service, Canada's major bond- rating agency.
"While the Canadian banking industry remains strong, today's announcement further reinforces DBRS's assessment that the largest six Canadian banks would be expected to receive external support, given their importance to the Canadian financial system, if these institutions were to become distressed."
The action came as U.S. Treasury Secretary Henry Paulson said the U.S. government was changing tactics in dealing with the financial crisis and will divert half of the $700 billion US that was to go into buying up bad mortgages and to increasing credit market liquidity.
Eric Beauchesne reporting
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