Canadian Government Supporting Mortgage Market

Soon after the COVID-19 lock-downs began last month, signs started to appear that the mortgage market was headed for a credit freeze, where mortgage lenders would be unable or unwilling to keep lending to homebuyers. A credit freeze would likely crash the real estate market – if mortgage lending isn’t possible, home sales would collapse and prices would fall off a cliff.

However, the government is aware that the housing market is critically important to the Canadian economy – in effect, it’s ‘too big to fail’ – and so they took aggressive action very quickly to head off the problem.

Canada Mortgage and Housing Corporation (CMHC, the government owned mortgage insurer) will be buying $150 billion worth of mortgages from mortgage lenders. Similar to Quantitative Easing, CMHC will buy ‘packaged’ mortgage loans (basically mortgage backed securities) from banks, providing the banks with cash to keep making mortgage loans as well as providing a cushion against losses due to individuals and business not making payments or even defaulting. CMHC did the same thing during the 2008 financial crisis, but this time is committing more than twice as much money, amounting to about 10% of the total Canadian mortgage debt. The Bank of Canada will be also be buying up mortgage debt at the rate of $2 billion per month for as long as they feel it’s necessary.

That the government is liable for mortgage defaults is nothing new – CMHC has been insuring banks against mortgage defaults for a long time. What’s different is that we now have an actual state-owned mortgage lender.

Full marks to the government for taking these steps – and so far it seems to be working.