The latest move by Ottawa to pull out mortgages valued at billions of dollars from the account books of the Canadian banks is likely to be a fairly profitable venture for the federal government. According to economists, the newly introduced emergency mortgage purchase program may help the federal government to rake in profits to the tune of $5 billion provided the chartered banks are able to ensure the right to use the total $125 billion that is to be had in the course of a mortgage-for-cash swap provision. It may be noted that this facility was introduced by the Canadian federal government in October 2008 when the economic slum was at its nadir.
While introducing the mortgage-for-cash swap program, Flaherty had asserted that the securities being purchased by the federal government were sure to produce more money when compared to the amount that the government would have had to spend in borrowing funds to purchase them. This facility has proved to be worthwhile till now. Up to now, the lenders in Canada have pressed into service $64.2 billion in cash in trade for the mortgages. Incidentally, the majority of this amount rolled in during the initial phases of the mortgage-for-cash program, at a time when it was tough for bankers or venture capitalists everywhere in the economically prosperous regions of the world to acquire finances from private parties.
Even as the mortgage-for-cash swap program had lived up to the tenure it was designed for and eventually was just about to conclude, the Globe and Mail published a report saying the Ottawa had decided to continue with the facility. At this juncture, the Federal Reserve chairman Ben Bernanke announced that the United States Central Bank had decided to extent its parallel agenda to enable the government to purchase as much as U.S. $145 trillion securities supported by mortgages from three foremost semi-government bankers during the period till the end of March 2010 rather than allowing the program to terminate by the end of 2009.
Since the fees charged by the government from the banks are very flexible, it is quite difficult to forecast the precise amount of profit that Ottawa would eventually make from the mortgage-for-cash swap program. Nevertheless, economists have approximated that the proceeds from the program would be in billions of dollars as the program has enable the federal government to acquire loans at considerably lower rates as compared to the private organizations. In addition, distinct from the majority of the lenders, the Canadian government does not undertake any added risk since these mortgages have already been provided indemnity by the Canada Mortgage and Housing Corporation (CMHC).
Putting the issue in simple words, the chief economist with the CIBC World Markets, Avery Shenfeld clarified that now the Canadian government is able to acquire a loan on a lower interest rate compared to the fees it receives on mortgages and since these mortgages have already been provided insurance cover by the government for an extra charge, the government does not have to undertake any supplementary risks.
Data released by the Canadian government reveals that presently Ottawa is making a profit of 0.86 per cent differential on approximately $43 billion in fixed-rate mortgages it has purchased from the different chartered banks. This, in effect, means that Ottawa would be earning a whopping profit of around $372 million annually or in excess of $1.5 billion over a period of five years. In addition, the federal government is as well making a profit of 1.02 per cent differential on approximately $19 billion of floating mortgages. For Ottawa, this earning would actually correspond to $193.8 million annually or almost $1 billion over a period of five years.
The concerned federal government department has already announced that so far it has paid mortgages worth $2.95 billion and there has not been a single case of default.
Recently, Jack Aubry, a spokesman with the Canadian Finance Ministry, remarked that they had always asserted that the mortgage-for-cash swap program would enable the government to earn profits, but they have never talked about the precise amount that could be earned from the facility. Meanwhile, the overall lending circumstances in the private mortgage market have perked up somewhat and the Canadian Bankers' Association president Nancy Hughes Anthony has pointed out that even now the chartered banks in Canada acquired around $2 billion out of the total $4 billion (just about half) accessible in a recent auction.
Nancy Hughes Anthony further admitted that the chartered banks in Canada were still not out of the economic slump and, hence, she considered it to be too early to terminate the mortgage-for-cash swap program introduced by the federal government at this precise point in time. At the same time, she added that considering that they are not augmenting against the entire provision of $125 billion in any manner as well as the fact that in any case it is a viable agenda; they wanted the program to continue till such a time when the Canadian chartered banks were actually certain that they were out of the woods.