Financial Update

· TSX +55.71 2 new indicators released Fri appeared to wash away some of the doom and gloom about the economy that rocked equity markets earlier in the week. Canadian wholesale sales tripled economist’s projections in May, registering the 3rd consecutive monthly increase with all 7 sectors except auto registering gains. Junes composite leading index was unchanged after advances the 2 previous months, while showing 2 key pillars of the economy-consumer spending and average hourly earnings-continued to grow strongly.
· Dow +49.91
· Dollar +.11c to $99.43US
· Oil dropped for a 4th session-$.41 to $128.88US per barrel.
· Gold slid 12.70to $12.70US per ounce

Associated Press US President Bush calls for action on Fannie Mae, Freddie Mac - In his weekly radio address, U.S. President Bush is stepping up pressure on Congress to help restore confidence in the American housing finance industry. The president calls this "a challenging time" for American families worried about rising prices at the pump and declining home values.

He's urging lawmakers to approve a plan allowing the government to extend unlimited lines of credit to Fannie Mae and Freddie Mac and to otherwise help bolster their reserves against losses.

He's also calling for "urgent" action from lawmakers to open up offshore oil exploration. Bush recently lifted an executive ban on offshore oil drilling. He said it's Congress' turn to act. In his words, "the only thing now standing between the American people and the vast oil resources of the Outer Continental Shelf is action from the United States Congress."

The following article has some interesting info on The Canada Mortgage Bond Program…

CMHC not likely to see Fannie, Freddie fate

Paul Vieira, Financial Post -+

OTTAWA -- The pressure Washington is under to save U.S. mortgage finance providers Fannie Mae and Freddie Mac from collapse rekindles thoughts for those with long memories in Ottawa of less-than-prosperous times for Crown-owned Canada Mortgage and Housing Corp.

About three decades ago, thanks to double-digit interest rates, depressed property values and a plan aimed at boosting home ownership that ran amok, claims at the mortgage insurer skyrocketed. It forced CMHC to borrow heavily, more than $200-million, to stem the cash drain.

The controller acknowledged at the time the Crown corporation was in technical bankruptcy.

That was then. In the years following, federal governments tried to right the CMHC ship by, among other things, getting the agency out of the business of building housing units.

What a difference 30 years makes. For the each of the past three fiscal years, CMHC has posted net profit of more than $1-billion, largely the result of an incredible bull market in the housing market that saw more Canadians take out mortgages -- and the required mortgage insurance CMHC sells. And the percentage of Canadian mortgages in arrears for three months or more continues to be at lows not seen since 1990.

Even though CMHC is a different beast compared with the struggling Fannie Mae and Freddie Mac and, for the time being, not under the same financial pressure, questions are nevertheless being asked about the role of the Crown corporation in light of the U.S. housing crisis. Some cite its part in driving people who otherwise couldn't afford a home to buying real estate by offering insurance on mortgages with 40-year amortizations or zero down.

Others wonder whether the government should be in the business of selling mortgage insurance or securitizing mortgages when it could be done, perhaps more efficiently, by the private sector.

"It did a lot of good things, and got into things it shouldn't have," says says Larry Smith, professor emeritus of economics at the University of Toronto.

He was a deputy chairman of a 1979 federal task force that examined future roles for CMHC, and recommended, among other things, that it cease its insurance operations. He believes some of the CMHC's responsibilities should be shifted to the private sector.

"[But] it was very instrumental in removing a lot of the imperfections that existed in the mortgage and credit markets," he said. "So it played a major role."

For instance, he said, there was a time when chartered banks did not issue mortgage loans. But that changed with the arrival of CMHC and its government-backed insurance.

Established in 1946, CMHC is responsible for housing and is the top provider of mortgage loan insurance, which is required under Canadian law if the down payment is 20% or less in an effort to protect lenders from default. It is also the major player in mortgage securitization, through mortgage-backed securities and mortgage bonds, which analysts say has improved the availability of low-cost mortgage funds that the banks can access for prospective clients.

Unlike the CMHC, Fannie Mae and Freddie Mac hold mortgages that they trade in an effort to maximize profit, says Tsur Somerville, a business professor at UBC's Sauder School of Business in Vancouver and an expert in real estate finance.

CMHC, he says, does not undertake such trading activity and, instead, should be compared with Ginnie Mae, the U.S. agency under the Department of Housing and Urban Development, which securitizes mortgages that are insured by the U.S. Federal Housing Administration.

"Freddie and Fannie are private companies with government support. That's the worst possible scenario because you have institutions who have every incentive to maximize profit with guarantees from moral hazard," Mr. Somerville says, referring to the U.S. government's backing.

"The reason you won't find CMHC running into the same problems is because CMHC does not have the structure to go into portfolio trading, and doesn't have the private-sector incentive for profit maximization."

The insurance business is the main profit driver at CMHC, and the corporation is estimated to hold two-thirds of the Canadian market, with $333-billion of policies outstanding. According to its 2007 annual report, it recorded $1.42-billion in revenue from premiums and fees (the premium varies from 0.65% to 2.75%). It paid out $315-million in net claims -- more than the $238-million it expected but less than the $552-million it set aside on its balance sheet as a provision for claims.

In CMHC's forecast looking at the 2008-2012 period, profit from insurance is to grow 28% by the end of that period, to $1.33-billion; the number of approved policies to drop, from 578,000 to a low of 571,000; and claims expenses to increase to a high of $314-million, just below what it paid out last year.

The money CMHC and its long-time private-sector competitor, Genworth Financial Corp., are drawing from mortgage insurance has attracted new players, and over the years competition has been fierce. In reaction to new entrants, CMHC and Genworth introduced insurance for mortgages with amortizations of up to 40 years, and that covered 100% of the home prices, or 0% down.

At the time, the CMHC's move into such products drew the ire of then-Bank of Canada governor, David Dodge, who said the Crown corporation risked stoking inflation and perhaps stoking a housing bubble. Last week, two years after Mr. Dodge's comments, the Department of Finance reacted. It introduced rules that would see Ottawa backstop insurance on mortgages with amortizations of no more than 35 years and a minimum 5% downpayment. Jim Flaherty, the Minister of Finance, said the moves were meant to avoid a U.S.-style housing meltdown, although the department acknowledges the low level of mortgage defaults in Canada.

"They shouldn't be out there competing or discouraging private-sector participation, because when you have a mixture of public sector and private-sector functions intermixed, you will inevitably end up with what the Americans have in Freddie Mac and Fannie Mae," said Mr. Smith, the former member of the CMHC task force.

Moreover, he added, "they are again enticing people into mortgages without a theoretical perspective as to why they should be artificially stimulating housing demand."
Mr. Somerville also questions whether CMHC needs to remain in the mortgage insurance business, and whether that element could be spun off to the private sector at a handsome profit for Ottawa.

Nevertheless, Mr. Somerville said CMHC may be needed because of its role in mortgage securitization. Under its Canadian Mortgage Bond Program, established in 2001, financial institutions originate mortgages, pool them and sell them as packages in the form of mortgage-backed securities to an entity called Canadian Housing Trust. The trust, which is advised by CMHC, issues bonds that pay interest similar to Government of Canada bonds, using the cash flow from the mortgage-backed securities to make the payments. A 2005 Bank of Canada analysis suggested the CMHC-led securitization had "improved the supply of low-cost mortgage funds in Canada" from which lenders can access.

"If you did get rid of CMHC, who would securitize the mortgages?," Mr. Somerville asks. "Would you trust one of the investment arms of the big banks to securitizing the mortgages they hold?"
It's an interesting question, given the state Fannie Mae and Freddie Mac are in.