Finance Minister Jim Flaherty implemented the Insured Mortgage Purchase Program in October 2008 to increase the flow of credit in banks and keep mortgage rates stunted, as well as to protect against liquidity pressure buildup. It started as a buyout of $25 billion, according to the Canadian Press, and to date, about $64 billion of mortgages have been purchased. In September, Flaherty announced the program would be extended despite signs of an economic recovery.
A lender's side
Boris Bozic, president of Merix Financial, believes that extending the program is good for the mortgage industry because of its stabilizing effect on the market and assistance in keeping interest rates down and boosting consumer confidence.
"Today it's really an insurance policy because the reverse option has been undersubscribed for some time now," he said. "However it is an insurance policy that the government wants to keep in place giving the banks the opportunity in the event that the economy doesn't recover in a timely fashion to insure that there is a lower cost of funds available in the marketplace."
Bozic attributes the program's extension as a sign of not only government concern about the overall economy, but also the importance of the mortgage and real estate industries in stimulating said economy. Without this program, he said that everyone would be at the mercy of the banks in terms of making their decisions on what they want to lend on, what that price point would be and how much of a risk would be embedded in pricing.
"I just think [Flaherty] definitely has his thumb on the pulse of what's going on in that segment... I think they've been quick to move. They've worked in conjunction with the lending community as well, so I personally, from my perspective, think they've done a tremendous job and I think they're on top of the issues."
Economists speculate that the federal government will profit up to $1.8 billion from this program within five years, according to the Canadian Press. The government called the program a "lifeline." Bozic called it an "insurance policy." Calum Ross, senior vice-president and mortgage agent at Mortgage Professionals Inc., calls it something else.
A broker's side
"I would call it symptomatic of an oligopoly system where five banks control the government and financial services system," said Ross. "Not to be a cynic - to be a realist. It's largely a political play. It's a good contingency to preserve the integrity of our system, but I mean, come on, you look at some of these bail-out packages and you don't have to be an MBA grad or an economics major to figure out that a lot of people got payouts that didn't need them."
Despite these sentiments, Ross argues that mortgage brokers and lenders will benefit from lower funds because they encourage mortgage applicants. However, he finds that subsidizing institutions like banks showing record profit levels startling.
"I just have to question the ideology behind putting contingencies for institutions that, quite frankly, haven't shown a loss yet. Putting a future contingency in place may actually be a really good idea, but insuring against a risk that hasn't yet emerged might be a little premature," said Ross.
Ross blames the sub-prime crisis in the U.S for Canada's anticipation of a financial turmoil that has yet to materialize, at least not according to property evaluations, default provisions on mortgages and the profitability of loan portfolios.
"I don't think the Canadian mortgage system has been fairly reflected in terms of our impact from the sub-prime. I think we're paying way too much of a price for losses that haven't happened in our country and I think particularly variable-rate mortgage consumers have paid a hefty price for mismanagement of the mortgage market south of the border. And that's completely unfair."
- Melissa Kim
October 2008: Finance Minister Jim Flaherty proposes $25-billion buyout of insured mortgages, later expanded
Annually, this program could mean a profit of $372 million a year for the federal government, or more than $1.5 billion over five years.
The government is also earning 1.02 per cent differential on about $19 billion of floating mortgages.
$2.95 billion of the mortgages have already been repaid, reporting no defaults.
September 2009: In anticipation of its end of the month expiry date, Finance Minister Flaherty had the $125 billion mortgage purchase program renewed
Source: Canadian Press