No Soup for You

Steve Saretsky -

In a mad dash to keep the financial system from seizing up, Canadian policy makers were busy working around the clock to ensure the credit spigots don’t run dry.

Here’s a brief summary of recent liquidity operations.

  1. OSFI lowers capital buffers for banks from 2.25% to 1% of risk-weighted assets.
  2. Bank of Canada to begin purchasing Canada Mortgage Bonds in the secondary market. As a starting point, the Bank will target purchases of up to $500 million per week.
  3. Insured Mortgage Purchase Program (IMPP) returns. This is the same program the government used during the 2008-2009 financial crisis. It will soak up C$50 billion in government insured & previously uninsured mortgages through the nation’s housing agency.

The IMPP will allow mortgage lenders to pool previously uninsured mortgages into the National Housing Act Mortgage-Backed Securities program for CMHC to then purchase these securities. In simpler terms, banks can effectively offload some of their unwanted mortgages to CMHC. This reduces the banks risk, clears their balance sheet, and allows them to continue issuing new mortgages. LIQUIDITY.

“These are extraordinary times and we are taking extraordinary measures. As a result of this measure, banks and lenders will have more liquidity—which, in turn, will enable them to work on a case by case basis with Canadian businesses and individuals who face hardship at this time. A co-ordinated approach is critical for making sure our economy remains strong and stable. The government will do whatever it takes to support Canadians and we are prepared to take further action as necessary to meet the challenges ahead.” Noted finance minister Bill Morneau.

Obviously continued to access to credit remains vital for a nation smothered in debt, particularly for households which are the most indebted in the G7. Household debt to GDP sits at 101%.

Adding insult to injury, households are obviously facing a major shock. A whopping half-million jobless claims were filed this past week, representing 2.5% of the entire labor force, and we are only a couple weeks into this. Remember, for most Canadians there is no rainy day fund. These liquidity measures are absolutely necessary.

However, that still won’t prevent banks from being extremely cautious on the lending side of things. It is rumoured they will begin to scrutinize the sustainability of your employment. In other words, even though you might be employed today, if they feel your job is at risk, as many are, no soup for you.

This is obviously a net negative for housing, which fundamentally relies on continued credit growth.

Now, there are a few things worth pondering. Job layoffs are mounting, and access to mortgages will become increasingly difficult. So:

1. Will pending real estate transactions be able to close?
2. Pre-sale condo closing risks have never been more elevated, how do developers cope with this?
3. Private lending makes up about 10% of new mortgage originations, how will this space manage a surge in delinquent borrowers?

While I can not definitively define the outcome, I can only assure you of two things. One, the system will be pushed to its limits. And two, more stimulus will be needed.

Three Things I’m Watching:

1. EI claims reached 500k this past week. By far the most ever recorded in Canada.

2. Canadian households carry the highest household debt to GDP ratio in the G7.
3. COVID-19 cases in Canada and select provinces as of March 21, 2020.

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The Saretsky Report. December 2022