Finance Committee on May 29th, 2006

[The Chair, Conservative, Brian Pallister]

Sure.

Welcome to our second panellists. Thank you for making yourselves available today.

We'll begin with Madam Kinsley of Canada Mortgage and Housing Corporation, with just a couple of minutes of introductory comments, please.

You've seen the format already. I apologize for the rapidity of it, but I invite you to make your comments. Thank you.

[Karen Kinsley, President, Canada Mortgage and Housing Corporation]

Thank you, Mr. Chairman and committee members.

I am Karen Kinsley from the Canada Mortgage and Housing Corporation. CMHC, as it's most commonly known, was as many of you know founded sixty years ago and has a public policy mandate to improve housing and living conditions for all Canadians.

In the area of mortgage insurance, our public policy objective was and remains to facilitate access to mortgage insurance for all Canadians, regardless of where they live and at the lowest possible cost.

In 1996 we were asked to deliver this public mandate in a commercial manner, and I'm pleased to report that in terms of public policy benefits, over one-third of CHMC's mortgage insurance approvals each year are in areas that are not served, or not well served, by the private sector. We have also led the industry in reducing costs and in product innovation. In terms of our commercial performance we are now profitable and have been able to meet our target for capital reserves. The industry is also flourishing and is now drawing the interest of new entrants into the marketplace.

I'm here to address your questions on vote 10 specifically with respect to the government guarantee of private mortgage insurers. I thought perhaps some context would be useful in your deliberations.

As part of the process of levelling the playing field between public and private mortgage insurers, the government took two significant steps, in our view. The first was, as I mentioned, to require CMHC to follow commercial practices in the operation of its mortgage insurance program. The second was to give the private sector a government guarantee equal to CMHC's, with a 10% adjustment to reflect the fact that CMHC accepts risks in areas and at levels not borne by the private sector.

In closing, Mr. Chairman, we believe in the value of competition where it improves access and affordability for Canadians through both good and bad economic cycles. Healthy competition amongst all suppliers, together with a public sector insurer that also makes sure the gaps left by the private sector are addressed has, I believe, made the Canadian housing system the envy of the world.

Thank you.

I would be happy to answer any questions you may have.

[The Chair, Conservative, Brian Pallister]

Merci, Madame.

The next presenter, from the Canadian Home Builders' Association, is Mr. Kenward.

[John Kenward, Chief Operating Officer, Canadian Home Builders' Association]

Thank you very much, Mr. Chairman and committee members. I'm here to represent the views of the Canadian Home Builders' Association.

Canada has one of the best mortgage systems in the world, if not the best, as evidenced by the high rate of home ownership and high levels of ownership affordability and accessibility enjoyed by Canadians. Mortgage insurance is a critical foundation for the mortgage market in Canada. This is recognized by the federal government. The federal government's guarantee for mortgage insurers reflects its commitment to a mortgage insurance system that supports affordability and accessibility for all Canadians. In effect, the guarantee recognizes that mortgage insurance supports important public policy objectives with respect to home ownership.

The mortgage insurance environment is highly competitive, with both Canada Mortgage and Housing Corporation and Genworth Financial Canada in competition. This competition has benefited housing consumers, lending institutions, and the housing industry by facilitating the creation of a wide range of new products, including low down payment mortgages, portability of mortgages and mortgage insurance, reductions in mortgage insurance premiums, and so on. In short, our present competitive mortgage insurance environment works extremely well for Canadian home buyers in all parts of Canada. The Canadian Home Builders' Association wants to see the continuation of this environment, one that is innovative and produces benefits for home buyers. To this end, the entry of new mortgage insurance providers into the mortgage insurance market is a welcome prospect, as is the extension of the federal government's guarantee to these entrants.

In order to ensure that home buyers benefit from an expanded mortgage insurance market, the Canadian Home Builders' Association strongly recommends that the following conditions be laid down by the government. First, the level of guarantee should depend on the extent to which the insurer provides the same coverage and premium to all home buyers across Canada. Second, the public mortgage insurer, CMHC, should meet the same corporate governance rules for transparency and accountability and follow the same operating principles that apply to private commercial enterprise. Third, competition in the mortgage insurance market should be based on the mortgage insurance product and not on allowances, rebates, or other similar incentives to the mortgage lender.

Thank you very much, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Kenward.

We'll proceed with the representative from the Canadian Real Estate Association, Mr. Ripplinger.

[Dale Ripplinger, Director - Chair, Federal Affairs Committee, Canadian Real Estate Association]

Thank you, Mr. Chair.

Thank you to all the committee members for inviting the Canadian Real Estate Association to appear before you today.

As you know, our membership is composed of more than 85,000 realtors who represent and advise Canadians on the purchase and sale of real estate. Last year our members sold more than 483,000 homes across the country.

Realtors believe that the Canadian market is generally well served by the presence of two mortgage insurers. Our association believes that both CMHC and Genworth do an excellent job of serving the needs of Canadian homebuyers, particularly first-time buyers and those individuals in the secondary market who would otherwise find difficulty in obtaining mortgage financing. I am also pleased to report that our industry has an excellent working relationship with both insurers and continues to work collaboratively with them to serve the needs of our customers.

As a whole, realtors believe that the current premiums are price competitive and feel it is critically important that all geographic markets and income strata continue to be served. This being said, we understand the task before you today is to gather more information to help assess whether the federal government should proceed in altering the existing system by allowing new insurers to enter the Canadian market.

Realtors fully support competition and believe that new entrants will undoubtedly bring benefits to certain segments of our marketplace. As such, we would welcome new entrants into our mortgage insurance market. In addition to bringing price competitiveness to lower-risk customers in the high-ratio market, our membership expects that new players would provide product and service innovations where gaps currently exist. For example, we will be looking to four firms to make mortgage insurance more accessible for investment and commercial transactions.

We also believe that if a policy decision is taken to permit market access, this should be done as quickly as possible and without any undue delays. At the same time, we also have some concerns. We believe that any decision taken must never weaken the soundness of our system nor make it more difficult for mortgage insurance to be obtained, irrespective of region or income strata.

Observers often point to the U.S. experience as an example of success. This is undoubtedly true. However, there are also some problems with their system. We feel it is important for market entrants to serve as many Canadian homebuyers as possible, not just the wealthiest or those living in urban centres.

The issue of government guarantee has also been raised. Realtors understand that the public mandate of CMHC is to provide an affordable and competitive mortgage insurance product for those Canadians who need it, particularly to markets that are not necessarily the most attractive or profitable. Realtors strongly believe that affordable home ownership is a public good and that the federal government must not withdraw from the housing policy arena. For this reason, we believe that the crown corporation must continue to receive a full 100% guarantee.

We also recognize that private sector firms operate under different constraints and should be treated accordingly. For this reason, we feel that the current 90% guarantee is reasonable and should be available to new market entrants as well.

Thank you again for the opportunity to speak before you. I will be happy to answer any questions you might have.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Ripplinger.

Now, from the PMI Group, Mr. Liu.

[David Liu, Vice-President, International Markets, PMI Group, Inc.]

Good afternoon and bonjour, Mr. Chair, members of the committee.

I am David Liu, vice-president of international markets of the PMI Group Inc. Founded in 1972, and based in California, the PMI Group Inc., through its operating subsidiaries, is one of the largest providers of mortgage insurance, reinsurance, and related credit enhancement products in the United States, Australia, New Zealand, Hong Kong, and throughout the European Union.

PMI has filed an application with the Office of the Superintendent of Financial Institutions, OSFI, for a licence to write mortgage insurance in Canada. Upon receiving regulatory approval, we plan to establish a mortgage insurance subsidiary in Canada. We believe our experience in the United States and worldwide qualifies us to speak to the merits of the government's proposal.

Mortgage insurance increases borrower reach by enabling approval of customers who might not typically qualify for a mortgage. Key consumer segments touched by improved lender reach in particular include first-time homebuyers, the self-employed, new immigrants, and consumers with credit blemishes. Increasing borrower reach is especially important given the affordability challenges that today's housing markets present to aspiring homeowners in Canada.

Mortgage insurance can also provide multiple benefits to financial institutions. These benefits include risk transfer, regulatory compliance and capital relief, market expansion, underwriting review, and capital markets access.These lender benefits typically extend to smaller regional lenders and credit unions, as well as to the traditional banking institutions.

As a result of these benefits, mortgage lenders can improve their ability to compete and deliver more innovative and attractive mortgage products to borrowers. Further study or delay regarding this issue, we believe, will only delay the realization of these benefits to consumers.

I would also like to make it clear that PMI supports the role of OSFI to ensure that any company wishing to receive a licence to issue mortgage insurance in Canada meets the requirements that OSFI has established for financial strength, risk management, management experience, and sound governance. Additional competition will diversify the risk that the Canadian government and taxpayers bear through the government guarantee of private mortgage insurance.

In conclusion, increased mortgage insurance competition will indeed benefit consumers and create a win-win situation for borrowers and lenders. PMI's experience from around the world clearly demonstrates that increased mortgage insurance competition will make affordable home ownership a reality for more Canadians.

Thank you. I'll be pleased to answer questions.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Liu.

And now, from the RBC Financial Group, Madam Adams, would you like to proceed?

[Catherine Adams, Vice-President, Home Equity Financing, RBC Royal Bank, RBC Financial Group]

Thank you, Mr. Chair.

I would like to thank the committee for providing the opportunity for RBC to comment on the issue of allowing new competition into the mortgage insurance market. As the largest mortgage provider in Canada, and thus a large consumer of mortgage insurance, we clearly have a keen interest in this matter. From the outset, I would like to emphasize that we are strong supporters of government initiatives to reduce the overall regulatory burden and to promote competition in the financial services sector.

On the issue of mortgage insurance, it is our view that our clients would be better served if the committee were to support the government's proposal to ease the existing barriers to new competition in the mortgage insurance market. Economic analysis consistently shows that eliminating barriers to competition ultimately enhances the interest of consumers in terms of improved pricing, product innovation, and greater access and choice.

The regulatory barriers to competition under the current system effectively result in only two mortgage insurers' supplying of the market. This means that only two sets of relatively similar products are available at relatively similar prices. In other jurisdictions where broader competition is permitted, there have been more extensive product innovations and improved pricing, to the ultimate benefit of consumers. We believe that the same would occur in Canada if the government's proposals to promote competition were permitted to proceed.

In our view, the proposals you have heard to justify either further study or the need for additional regulation in the marketplace do not stand up to review. The conclusion that eliminating barriers to competition and allowing new entrants into the market would somehow increase prices and decrease access for consumers flies in the face of the most basic tenets of economic theory and practice, which hold that precisely the opposite is true. This has been repeatedly demonstrated in the financial services sector where banks' entry into mutual fund and mortgage markets has significantly improved competition in these markets.

We would also note that in the case of the financial services market there is already a vast array of financial regulation and oversight to ensure that any potential concerns with new entry can be addressed. There are quite literally hundreds of legislative and regulatory rules, OSFI prudential oversight, and extensive frameworks at both the federal and provincial levels to ensure that consumers are protected.

Beyond that, periodic parliamentary reviews are possible, such as the current review by the Senate, which is looking back on the last round of consumer reforms to see if they achieved their objective.

Based on all this, our strong view is that the starting point for the committee should be the one proposed by the government. Let the market work for the benefit of consumers and then assess down the road whether isolated concerns are raised, and respond with a targeted regulation to address those concerns.

As one of the largest consumers of mortgage insurance, we strongly believe that our customers will only stand to benefit from better pricing, new product options, and even greater access and entry into the housing market if the government's proposal proceeds. We believe that the committee should follow the government's proposal to open this market up to competition.

I thank the committee for its time.

[The Chair, Conservative, Brian Pallister]

Thank you, Madam Adams.

Would you like to proceed, Mr. McCallum, for seven minutes?

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, and if I'm short perhaps Mr. Savage can take over.

I hesitate to say this because my friend Mr. Loubier might refer to some sort of collusion, but I must say that I think Ms. Adams of the Royal Bank put it very well. I refer to my previous employment with that institution. I was going to say something similar.

I heard nothing to suggest that the government should not proceed in this way. I think the onus has to be on those who would restrict competition. I think three or four or five competitors will do better for consumers than two. If there is a problem of adverse selection--anti-selection--I haven't heard evidence to say that we need studies. It's not really an answer. Why would one expect that to occur? I haven't heard answers to that. And I think that the Department of Finance doesn't proceed lightly on these matters. OSFI is a very heavy regulator in these areas. There are all sorts of other rules and regulations in effect. So I really see no reason not to proceed.

I guess my only question is whether I'm missing something, or whether anybody among the five witnesses would like to sound a note of caution that I have missed something.

[The Chair, Conservative, Brian Pallister]

Who'd like to respond to that?

Yes, Madam Kinsley.

[Karen Kinsley]

Thank you.

Perhaps this is not a direct response, but I will offer these two observations.

In my opening remarks I did point out as a public insurer that over one-third of what we do today we can directly attribute to service to Canadians in areas that are not served by the private sector. There are gaps in the marketplace the private sector doesn't serve, but as we concluded, we believe the combination of our public mandate and our competitive head-to-head competition, the combination of those two, actually serves Canadians quite well.

So I did want to point out that there are some gaps, but we believe the model today actually addresses them fairly efficiently and we don't see any reason going forward why other competitors would pick or choose any differently than the current competitor has. But there are some areas that aren't served.

The second point I might raise around any thoughts of caution, and I'm not sure it's been discussed in the previous panel, is really on the long-term interest the committee might want to have as new entrants enter the market. We've talked previously of having at one point three private sector insurers, and we did; then the 1980s came and they were particularly troublesome in terms of economic times and they no longer stayed. So I guess the question on reflection I would think about or caution is there's lots of interest in good times, but will that interest be there and sustained in Canada in poor economic times?

[The Chair, Conservative, Brian Pallister]

Would any other person care to respond to Mr. McCallum's question?

Yes, Mr. Liu.

[David Liu]

I'd like to respond to the point about a long-term commitment to the marketplace. I think you know that PMI is a participant in the Australian, New Zealand, Hong Kong, and European markets, and we don't take those decisions lightly to enter new markets. It's a significant investment in terms of capital, in terms of human resources, and in terms of management attention. We view these commitments to new markets as permanent because of the nature of the business. Mortgages and home ownership are not something that you turn on and off like a light switch, but it's a long-term proposition. So when we enter new markets we're very committed.

Additionally, because of the prudential standards, the high ratings requirements that capital markets expect from mortgage insurers, we have the highest degree of financial strength. That, additionally, supports the level of financial commitment we bring to the marketplace, and that's further reinforced by parental and group support that we would envision for our Canadian financial subsidiary here.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

If I could follow up, I would assume that Mr. Liu answered, in a sense, the second concern. But in regard to the first concern, about gaps, yes, there are gaps, but I did not hear you say that those gaps would be worse as a consequence of new entrants, or did you say that?

[A voice]

[Inaudible--Editor].

[John McCallum, Liberal, Markham—Unionville, ON]

Okay.

[Catherine Adams]

If I could add to that too, from a lender perspective, we're looking for suppliers who basically go where we're going. If we had a supplier who said they only want to do the urban markets, we're not likely to invite them to join with us. So it's quite important. We are a national lender. We're looking for suppliers who are going to support us nationally, because ultimately we are the ones insured.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

That's it for me.

[The Chair, Conservative, Brian Pallister]

Mr. Savage, do you want to continue? There's about a minute and a half to go.

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

You're very generous, Mr. McCallum, thank you very much.

I'd like to ask Mr. Ripplinger and Mr. Kenward a question. I know both organizations from my own province of Nova Scotia, and people like Paul Pettipas, from the Nova Scotia Home Builders' Association, are strong and fearsome advocates for their industry.

You both have indicated that you support the idea for more competition, but you both indicated.... I think Mr. Kenward strongly recommended some conditions and Mr. Ripplinger in the same way. We have to vote today on vote 10. Do you think we should do that?

[Dale Ripplinger]

Yes, I think on balance we're more supportive than not, absolutely. There are always some reservations. We don't know what this is going to bring to the marketplace. It's all speculation as to whether ultimately this is going to undermine the system. No, we don't think so. We think there might be some problems that have to be addressed, but to be honest with you, I feel a lot more comfortable having heard some of the responses from people like Mr. Liu and others this afternoon.

Unfortunately, we didn't have a lot of time to poll all our members before making the presentation, but I think the vast majority of our members would say that more competition on balance is going to be better for the industry, and that's what we'll support.