MONTREAL ― When the COVID-19 lockdowns arrived last month, Canada’s central bank and top financial regulators didn’t wait to see whether the massive economic disruption would crash the housing market. They saw the first signs of trouble, and got busy putting the whole market on life support.
In just the past few weeks, the federal government and the Bank of Canada have announced they will be injecting at least $150 billion ― and probably much more ― into Canadian banks and mortgage lenders, to ensure they have the cash to keep lending.
According to the Bank of Canada, signs were emerging that the country’s mortgage lenders were headed for a credit freeze ― the usual channels by which they raised cash for mortgages were malfunctioning.
Watch: What’s happening with Canada’s housing markets in the pandemic? Story continues below.
Left to its own devices, a credit freeze would have made the current economic crisis much worse. With no mortgage lending possible, home sales would have collapsed and prices would have been in free-fall. And at a time when Canada is more dependent than ever on housing for its economic growth, the impact of a crash like that would be particularly painful.
Here’s what Canada is doing to pre-emptively rescue the housing market, and what it means for you.
Flooding the banks with cash (and nationalizing mortgages)
There’s a not insignificant chance that the government will own your mortgage in the coming years, but you might not even know it.
Canada Mortgage and Housing Corp. (CMHC), the government-owned mortgage insurer, has launched a program to buy $150 billion-worth of mortgages from lenders.
Mortgage lenders often package together the loans on their books and sell them on to investors, as a way of raising cash to lend more mortgages. This process is invisible to mortgage payers, because typically the lender that first issued the mortgage keeps administering it. Most people never realize the bank they’re making payments to doesn’t own their mortgage.
In a reprisal of a program it ran during the 2008-09 financial crisis, CMHC is going to buy $150 billion of these “securitized mortgages.” In essence, it’s a debt-for-cash swap. The banks offload $150 billion-worth of debt onto CMHC, and see it replaced with cash in their accounts.
It amounts to just under 10 per cent of the $1.633 trillion in outstanding mortgage debt Canadians owe today. During the 2008-09 financial crisis, CMHC only bought $69 billion worth of mortgages, according to an analysis from the Canadian Centre for Policy Alternatives.
On top of that, the Bank of Canada will also buy mortgages at a pace of $500 million a week, or more than $2 billion a month, apparently for as long as the Bank deems necessary. So the total mortgages taken off Canadian lenders’ books ― and the cash infusion to banks ― could end up being far beyond $150 billion.
If it works, the banks will now have money to keep lending mortgages. But it’s more than that; it makes the entire banking system more stable by giving lenders a huge windfall of cash they can use to offset the inevitable losses they are now going to see, as people and businesses stop paying their debts.
Incidentally, mortgages aren’t the only debt the BoC is buying from banks ― they’re taking corporate debt, too, and they’re buying up to 40 per cent of the debt provinces take on during this crisis. By increasing demand for provincial debt, they are keeping interest rates low for the provinces.
Importantly, that $150 billion that CMHC is spending to buy these mortgages will never appear on the federal government’s books as part of the deficit. It’s an investment, essentially, and not an expenditure. These are assets that the government owns through CMHC. It will collect the interest on those loans, and will get the capital back when the mortgages mature, typically within five years.
10% of Canada’s mortgages are already in the deferral process
That $150-billion-plus cash infusion is probably one major reason why Canada’s banks have seemingly agreed so selflessly to defer mortgage payments for households that have been hit financially by COVID-19. All of the big six banks have instituted mortgage deferral programs, and one in 10 mortgages are now in the deferral process.
Ordinarily, writing off non-performing loans looks very bad on the balance sheet, but with all that cash on hand to replace those loans, the banks’ books could stay in the black.
Are taxpayers on the hook for bad mortgages?
Now that the government owns mortgages directly, there is a risk that it will be on the hook to cover bad loans that households can’t pay in the pandemic crisis.
But the fact is the government has been on the hook for bad mortgages for decades, ever since CMHC’s predecessor was created in 1946. The agency insures a majority of mortgages lent in Canada ― meaning it was already liable to cover banks’ losses when those mortgages went bad. Canada’s banks were never very exposed to the risk of mortgage lending.
Now, CMHC won’t just collect insurance premiums on those mortgages, it will collect the mortgage payments as well ― Canada’s very own behind-the-scenes, state-run mortgage lender.
Is it working?
It’s too early to tell. We are just getting preliminary housing market data for March, and it shows many housing markets were overheating right until the lockdown came, thanks to falling mortgage rates.
But all that changed in the second half of the month, and sales have plunged to the point where Toronto is now a “buyer’s market,” according to a report from real estate portal Zoocasa last week.
Royal Bank of Canada forecast in a recent report that the housing market will bottom out in June, with a 70-per-cent year-on-year sales drop, before rebounding in the second half of 2020.
But looking at the speed and intensity with which policymakers responded to a potential threat to real estate, one thing is clear: The people in charge see Canada’s once-hot housing market as too big to fail.