Canada Buys First C5 Billion of Mortgages From Banks

The Canadian government bought C$5 billion ($4.2 billion) of mortgages from banks, the first installment of a plan to buy up to C$25 billion worth to ease the higher borrowing costs that have crippled lending.

Canada Mortgage and Housing Corp., a state-run agency, announced the purchase today on its Web site. The transaction aims to help the banks fund new loans to consumers and business. CMHC didn't give a date for the next auction.

The agreement is for five years and the government will earn an average yield of 4.24 percent. That's higher than the cost of borrowing money for five years, with today's yield on five-year government bonds at 2.89 percent.

Borrowing costs for lenders such as Royal Bank of Canada have soared during the global credit crisis, so they've become less willing to lend to each other, let alone to customers. The difference in yield between Canada's three-month treasury bill and the three-month dollar London Interbank Offered Rate rose to the highest since at least 1990 this month.

After Finance Minister Jim Flaherty announced the mortgage plan on Oct. 10, commercial banks cut their prime rates. Earlier, the lenders for the first time since 1997 resisted matching all of an Oct. 8 Bank of Canada interest-rate cut.

The mortgage purchase measure won't cost taxpayers any money and the housing agency isn't taking on troubled assets, Flaherty said when he announced the plan.

Canada's stock of residential mortgages is about C$773 billion, according to the Finance Department. Subprime mortgages represent less than 5 percent of all outstanding mortgages in the country, compared with about 20 percent in the U.S., the Finance Department said.

Ottawa-based Canada Mortgage and Housing insures home loans and sells mortgage-backed securities to help keep mortgage costs low for consumers.

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Canada Buys First C5 Billion of Mortgages From Banks