On the Harper government's plan to purchase mortgage securities

The $25 billion purchase of mortgages announced by the federal government was described as follows:

From the Toronto Star: "Under the plan, the government is buying $25 billion of mortgage-backed securities to ease the liquidity problems of Canada's major banks. Harper described the securities as solid, government-insured investments..."

From the Ottawa Sun: ' "This is a transaction in which the government of Canada, the taxpayers of Canada will not lose money," Harper said. "Quite frankly, because the costs of our borrowing are lower than the value of these mortgages, we'll probably make money when this transaction is over." '

I'm not an expert in Canadian mortgage securities but here's my simple risk-return thinking:

Let's suppose these mortgage securities have an expected return that is slightly higher than the interest rate on Canadian government bonds, as Stephen Harper says.

Now Harper says that the Canadian government can buy the mortgages, financing the purchase at the interest rate paid on Canadian bonds, and earning the difference between the rates of return on the two legs. A profit for Canada?

But wait, these mortgage securities are probably insured (presumably through the CMHC) by the government of Canada! In this case, if anybody but the government of Canada purchases them, it's a purchase of insured mortgages. But if the government of Canada purchases them, there is no insurance any more for the purchaser. In fact, there is no free lunch. If the government expects to make a little money from this investment, it's only because it is taking on the risk of mortgage defaults because it is insuring its own investments.

I hope that the government takes a haricut on the price of these mortgage securities to account for how much the CHMC mortgage insurance is worth, and the fact that the CMHC is the government. If not, Stephen Harper's claims might be false and misleading. Again, I would caution the reader that I'm not an expert in mortgage securities - just knowledgeable enough to be worried about Stephen Harper's plan.