Finance Committee on May 29th, 2006

[The Chair, Conservative, Brian Pallister]

A brief question, if you would, Mr. Savage.

[Michael Savage, Liberal, Dartmouth—Cole Harbour, NS]

I'd like to hear from Mr. Kenward, who'll use up the last of my 90 seconds.

[The Chair, Conservative, Brian Pallister]

Mr. Kenward.

[John Kenward]

Thank you, Mr. Chairman.

Yes, the Canadian Home Builders' Association is not in favour of delay. We have set out what we believe are conditions that should be focused on very carefully. We're hearing today very strongly from at least one member that he believes those conditions, one way or another, are covered off effectively: the Department of Finance, OSFI, and so on. As long as we're on record that these conditions concern us and that they will have a focus as time goes on, then we will not sit here making any recommendations to cause a delay.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Kenward.

We'll proceed with Monsieur St-Cyr's round now. You have seven minutes, sir.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

We have spoken at length with you — and with other previous witnesses — about competition and its benefits in terms of services and prices for borrowers. When we were in school, competition meant natural selection. In this case, we see competition at work when less successful businesses disappear because they've gone bankrupt, having been unable to compete.

Do you think that the possibility of there being more bankruptcies in the mortgage industry represents a financial risk for the government who, is ultimately responsible for guaranteeing these loans? Do you think the government might end up paying for competition in the marketplace?

[David Liu]

I'd like to address that question. If I understand correctly, could new competition increase the level of risk in the marketplace, and will that increase the level of risk the government has to pay out on its guarantee?

Clearly, there are many safeguards in the current system today. The degree of oversight from OSFI and the requirements to establish a company to compete, to maintain capital and to maintain operating standards, are very high, as established by OSFI. We clearly envision complying with and exceeding all those requirements, as we do in all the countries in which we compete. So ultimately, even though there is this government guarantee mechanism, it is viewed only as a backstop, as a contingency, and not something that would ever be called upon in reality.

[The Chair, Conservative, Brian Pallister]

Madam Kinsley.

[Karen Kinsley]

I have a slightly different answer. I see two risks to the government with respect to the guarantee as a result of new entrants. First, depending on the nature of competition, if the competition either doesn't serve all markets equally or tends to serve those that are perhaps more profitable, either geographically or in terms of borrower risk, there is a very good chance that, as a public mortgage insurer who has a mandate to serve all Canadians, we may end up having a slightly riskier portfolio. That, in turn, may cause a cost to government, as a crown corporation.

The second area where cost could come into play is in a down cycle. While we wouldn't actually see them being bankrupt, given the strength of these entities as they've described it, there is a possibility, notwithstanding the investments they will make in Canada, that they may decide to leave and go back to other markets. Again, in that case, because we're a public mortgage insurer and Canadian, we would remain and be one or perhaps one of two insurers in particularly bad economic cycles--and we've seen that happen. That, again, may adversely affect the government's risk.

It's a little bit different from the question you posed, but in the area of risk there are some possibilities.

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

I have a supplementary question, Ms. Kinsley.

Let us assume that ten businesses enter into the marketplace and compete with Genworth Financial Canada and the Canada Mortgage and Housing Corporation. Let us then suppose that three of those ten new competitors go bankrupt or decide to leave the market after two or three years. In that case, those businesses would sell their client list to other competitors. The Canada Mortgage and Housing Corporation would not be on its own and the government would not have to pick up any pieces, under those types of circumstances.

What then are the risks of allowing new players into the marketplace, including from the consumers perspective?

You say that you would have to shoulder the greatest risks, but if those other risks were shared between Genworth and other competitors, then it strikes me that consumers would be much better served than they are now. In fact, on the one hand you shoulder the greatest risk and on the other, Genworth, besides being alone in the marketplace, only shoulders the smallest risks.

[Karen Kinsley]

To answer your question, as I mentioned earlier, one-third of our business is not served at the current time by the private sector, almost 25% of that in rural and remote areas of the country. That area of our business has a claim rate about 45% higher than in urban centres. That is the natural process of selection today between the private sector and the public sector.

With more private sector entrants coming into the marketplace, if they followed a similar pattern we wouldn't expect to see any different results. If, however—and there is no guarantee—new entrants were to select even the better portion of the market, somebody is going to have to be able to serve all Canadians everywhere they exist. We don't have evidence—

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

That is why I mentioned this. CMHC's situation has not changed and regardless, it has a social mandate, that is, for example, to assist those families who have a harder time in saving enough money for a down payment. You require a lower percentage of the mortgage than Genworth does. The situation wouldn't change for you but it would certainly be fairer for those wishing to enter into the market place and compete with Genworth, and even offer more innovative products than those currently being offered, with premiums going down over time, for example. What does the fact that other businesses would like to have access to a share of the market change for CMHC? It changes absolutely nothing. It would, however, improve the chances of making a profit for those businesses which, too, would like to benefit from the same treatment Genworth benefits from. Furthermore, there may be more interesting products and better rates for those markets that you are not currently involved with. Is my analysis correct?

[The Chair, Conservative, Brian Pallister]

There is time for only a brief response, Madam Kinsley.

[Karen Kinsley]

I think the risk we would see is that where we compete for more profitable business, this pool would be diminished, and we need that pool in order to be able to pay for the one-third the private sector doesn't support. So the issue isn't that our situation would change, but that our ability to cross-subsidize good markets and bad would diminish; that would be all.

But we still believe competition is the right answer.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Loubier.

Ms. Ablonczy.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Just to finish up on that one issue, Ms. Kinsley, I understand in the 1980s in the U.S. there were 14 mortgage insurance companies. There were high interest rates. Eight of those companies actually exited the industry, but the risk was spread across the 14 participants at the time, so there was no call on the insurance.

When the same thing happened in Canada, there were four participants, and they felt it too. How much did the government have to kick in to make up for any losses in that time?

[Karen Kinsley]

CMHC was obligated to go to the Government of Canada, and in fact the Government of Canada, because of our large deficit situation, was obliged to put in over $200 million to bring the fund back up to an even slate. So there was a substantial investment.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

If there had been more participants, that risk would have been spread among a greater capital base of all the participants. Is that correct?

[Karen Kinsley]

Under the current regime, all of those participants would be government-guaranteed, so presumably it would at the end of the day add up to pretty much the same, although with a difference in government guarantee levels.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I understand from a number of the witnesses here that there are concerns that there be proper regulation of a number of issues, including adverse selection and splitting up the market. From your experience with OSFI, which is at arm's length from government—it's the Office of the Superintendent of Financial Institutions—do you have any reason to suppose that OSFI would not be on top of these kinds of issues to adequately regulate them? Are you suggesting the committee make recommendations to OSFI because you're not sure they're going to be able to deal with the issues that would come up if there were further competition?

[Karen Kinsley]

I think, as mentioned in the previous panel, it really wouldn't be OSFI that would deal with competitive issues. They look at the financial stability of the entity entering the market place and the robustness of their business plan. They're really not a body that's going to intervene depending on market conduct, as has been mentioned before.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Are you suggesting that financial stability issues are not tied into the competition factor?

[Karen Kinsley]

I think they're two different issues. Financial stability is well managed by OSFI. The nature of competition today is probably going to be more regulated by the marketplace than any current body that exists. I would certainly pick up on the point made by my colleague from the Royal Bank. It's very true that if you don't serve the customer in all areas in which the customer requires service, you're going to be at a disadvantage.

So again, we don't believe that heavy regulation is required in this environment. The marketplace will dictate where we have to go, and the government will have the further benefit of a public insurer to pick up in those areas where they don't.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Mr. Kenward, you mentioned that a number of new products have come on the market. Can you briefly tell us what they are?

[John Kenward]

The more recent ones are the low down-payment mortgages, portability of mortgages and mortgage insurance, coverage for the self-employed, speedy approval processes for potential borrowers, longer amortization periods, and reductions in mortgage insurance premiums. There are others, as the other panel members mentioned, all of which we attribute to having a pretty healthy competitive environment between the public insurer and the private insurer.

On this question of regulation, the Canadian Home Builders Association is not advocating heavy regulation here. We've referred to conditions and the fact that there needs to be a focus on these matters. With a government guarantee that has a public purpose, the CHBA doesn't think it wise to simply leave the field. There should be some oversight somewhere in government.

You've heard about cherry-picking. You've heard about kickbacks, or whatever people are concerned about, to the lender in respect of the mortgage insured. You've heard about the questions of the level playing field. We say those are not concerns that should be taken lightly. They don't necessarily lead to heavy regulations, but as another member mentioned, they should be looked after, monitored, and have a focus somewhere in government if government is going to have a guarantee, for public purposes, for mortgage insurance.