Canada buys up mortgages, central bank lends more

By John McCrank

TORONTO (Reuters) - The Canadian government will buy up C$50 billion ($40 billion) more in insured mortgages from banks as part of a series of steps announced on Wednesday to improve the availability of long-term credit.

The move came as U.S. Treasury Secretary Henry Paulson said he was backing away from buying troubled mortgage assets using a $700 billion bailout fund. Canadian officials said the key difference between the two approaches is that Canadian mortgages are not in distress.

Other measures taken by Ottawa included making it cheaper to use government insurance to guarantee bank borrowing, loosening regulations for banks to allow them more sources of funding, and boosting the borrowing authority of the government's Business Development Bank by C$1.8 billion.

The Bank of Canada also set up a term loan facility to lend C$8 billion to banks in four tranches, using their non-mortgage loans as collateral.

The measures were aimed not only at easing the credit crunch but at ensuring that domestic banks are able to compete on an equal basis with those in other countries.

"The government of Canada is prepared to take whatever steps are necessary to ensure that Canada's strong financial system is not put at a competitive disadvantage by developments in other countries," Finance Minister Jim Flaherty said.

"The government will not allow Canada's financial system, which has been ranked as the soundest in the world, to be put at risk by global events."

Flaherty said Ottawa would triple to C$75 billion the amount of insured mortgage pools it would buy by the end of the fiscal year on March 31. The assets are already insured by the the government's Canada Mortgage and Housing Corp.

Most Canadian mortgages are not in default nor are they worth more than the underlying properties, unlike many in the United States. But there is still not a strong market for mortgages in the current crisis, so when the government buys them it moves funds to the banks, which they are able to use to lend again.

"This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy," Flaherty said. "In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer."

Looking ahead to the weekend G20 summit in Washington on the crisis, Flaherty said countries should make sure their regulations and financial systems are in good order rather than engaging in a grand reorganization of capitalism.

"I think, quite frankly, that the regulatory approach of getting one's own house in order first is the right approach... because we are in the midst of this and we're probably not that close to the end," he told a business round-table.

Among Wednesday's announcements, Flaherty said the government would charge less to guarantee borrowing by Canadian banks. The guarantee facility was introduced on Oct. 23 to ease the lending crunch and to put the banks on an equal footing with foreign competitors. It has not been used so far.

The lowest price for insurance under the facility will now be 110 basis points rather than the 160 basis points as announced on Oct. 23, making it more attractive to banks.

The move to increase the borrowing authority of the Business Development Bank, which lends to Canadian businesses, was another attempt to improve credit availability.