Banks sell $5-billion of mortgages

BOYD ERMAN Globe and Mail Update October 16, 2008

Canadian banks sold $5-billion of mortgages to Canada Mortgage and Housing Corp. at a price that indicates the government will indeed make a big profit on its program to help banks jump-start lending.

CMHC will earn an average yield of 4.24 per cent on the mortgages it bought from banks Thursday. At the same time, the government sold $3-billion of five-year bonds to finance the purchase at a yield of 3.24per cent. The 1 percentage point spread means the government will make $50-million a year in profit from the interest-rate differential on this batch of loans.

The federal government designed the program to help banks raise money for new loans, by taking old home loans off the balance sheet. The government plans more purchases totalling $20-billion, though many bankers would like Ottawa to ratchet up the program.

The loans the federal government is purchasing are insured, meaning the government shouldn't be putting taxpayer money at risk.

For the banks, getting funds at an interest rate of 4.24 per cent will be a big relief, given that interest rates from other methods of raising money are much higher in the credit squeeze.