Conservatives announce partial nationalization of mortgage market

The conservative Minister of Finance, Jim Flaherty, unveiled a plan to nationalize 25 billion of Canada’s 833 billion dollar mortgage market.  Basically the plan involves the government purchasing via CMHC existing mortgages from Canada’s large banks so that they can exchange relatively long term and illiquid (but presumably performing) assets for cash.  That cash is then in turn to be put out in fresh loans to businesses and Individuals.

That sounds great if there is a liquidity problem.  But it proves that there is a liquidity problem and that gives us the first clue that our financial system is not de-linked from global turbulence.

However, Harper is selling this as a no cost to the tax payer play.  But that is a little churlish. It may be that citizens do o.k. on this deal: 25 billion in performing assets.  Although there is the question of where the government is going to get the 25 billion: presumably they will have to issue new debt which will have to be financed so it is not all clear how much the assets will net out at the end of the day to citizens.

Moreover, all things being equal one ought to get a premium for taking on relatively illiquid and long term assets and giving up cash.  As near as I can tell there is nothing in the plan that has the banks paying a premium for this liquidity.  It is all fine if liquidity is being treated as a public good but then something above and beyond the assets ought to be coming to the government.   The actual wording of the agreement suggests that the government might actually pay above fair market value and a little above notional value:

The settlement amount that will be paid for the purchased NHA MBS will be no less than 95% of the principal amount of the NHA MBS.  The price for all of the NHA MBS shall be no more than 101% of the principal amount of the NHA MBS.

Whatever the terms, the Conservatives have just nationalized 25 billion of the mortgage market.  A red rose by any other name is still a red rose.

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5 thoughts on “Conservatives announce partial nationalization of mortgage market

  1. Only fitting given that Flaherty is the source of Canada’s 40yr zero down mortages.

    http://www.taxpayer.com/main/news.php?news_id=2430

    Harper followed Bush’s example and first deregulated credit. June 2006, than again in November 2006 CMHC relaxed its standards. Prior to Harper, government insured mortgage were a prudent maximum of 25 years and with a minimum down payment of 5%. The introduction of dangerous zero down 40yr mortgages fueled already out of control housing prices. Canada is not suffering to the extend the US people are suffering because the Liberals know there is piper to pay and did not follow Bush deregulating credit. Only after Canada felt the growing credit crises did Harper reverse the dangerous zero down 40yr mortgages effective Oct 15 2008 which he earlier introduced in 2006.

    http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2006/2006-06-28-1400.cfm

    Quote:

    Earlier this year, CMHC was the first Canadian mortgage insurer to introduce, on a pilot basis, insurance on loans with extended amortization periods of up to 30 years. Building on the success of this pilot, CMHC is now moving to further facilitate homeownership by making this feature on-going, and is also introducing extended amortization periods of up to 35 years.

  2. Yep and the 40 year zero down is being retracted as of October 15th. If they really wanted to encourage lower income home ownership they could have run right out of the direct loan portfolio at CMHC. You should check out the corporate books over there and see just how paltry the commitment is to public housing.

  3. Pingback: My Blahg » THE THE SOCIALIST FOX IS IN THE CAPITALIST HENHOUSE NOW

  4. Well lets be careful. If we were in the process of nationalizing the mortgage market out of a bigger commitment to transform home ownership into a quasi-public good then I would call it socialism. But what we are really seeing is the liberal democratic state preforming its role as the ultimate back stop to the sanctity of private property. Appearances are almost always deceiving and in times such as these even more so.

  5. Pingback: Conservatives expand nationalization of mortgage market « Relentlessly Progressive Political Economy

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