OTTAWA - Ottawa's emergency mortgage purchase program, which Finance Minister Jim Flaherty is expected to extend next week in an effort to help Canadian banks, could be very profitable for the federal government.
Economists estimate Ottawa could reap as much as $5 billion if chartered banks access the entire $125 billion that's available to them through a mortgages-for-cash swap facility put in place last October at the height of the financial crisis.
After almost a year, the banks have swapped only $64.2 billion in mortgages for cash, most in the early stages of the program when it was difficult for lenders anywhere in the developed world to obtain funding from private sources.
The Globe and Mail reported Thursday that Flaherty has decided to keep the program in place after its original expiry date next week.
The story, based on unidentified sources, came after the U.S. central bank announced Wednesday that it would continue a program for buying up to US$145 trillion in mortgage-backed securities from three major quasi-government lenders through to the end of March, instead of letting it expire at the end of 2009.
An exact number on how much Ottawa could profit is difficult to calculate because terms the government charges banks are fluid, but economists estimate the profits will be in the billions since the federal government is able to borrow at a lower cost than private institutions.
And unlike most lenders, the Canadian government takes on no additional risk because the mortgages are already insured by Canada Mortgage and Housing Corp. a federal Crown corporation..
"The government can borrow on a lower rate than the rate it earns on mortgages and because these mortgages have already been insured by the government, for an additional fee, the government is taking on no additional risk," explained Avery Shenfeld, chief economist with CIBC World Markets.
Finance officials would not speculate Thursday on how much Ottawa could clear after the five-year period of the longest running mortgages expire.
According to government figures, Ottawa is earning a 0.86 per cent differential on about $43 billion in fixed-rate mortgages purchased from the chartered banks. On an annual basis, that could amount to a profit of $372 million a year for Ottawa, 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.
The department said $2.95 billion of the mortgages have already been repaid. It reports no defaults.
"We've always said we'd make a profit, I don't think we've put a number to it," said Jack Aubry, a Finance spokesman.
The government's expected announcement to extend the program beyond the Sept. 30 expiry date was welcomed by economists and the Canadian Bankers Association, which said it remains useful although not essential.
Canadian credit conditions have improved considerably in the past few months and earlier this week the Bank of Canada announced it was ending two of its emergency programs to inject liquidity into the system.
Nancy Hughes Anthony, president of the bankers group, agreed that sources of financing for banks have now become much more available, but noted that in the last auction this week, chartered banks still accessed $2 billion of the $4 billion available.
"We're not out of the woods yet, so I think it's premature to take this away at this particular time," she said. "And given that we are not bumping up in any way against the total allocation ($125 billion) and the fact it's a commercial program anyway, why not keep it in place until we are really sure?"