Finance Committee on March 24th, 2009

[Pierre Serré]

Are you referring to IMPP itself?

[Ted Menzies, Conservative, Macleod, AB]

Yes.

[Pierre Serré]

Maybe just as a preamble to that, I will say that we are a crown corporation. As set out in the Financial Administration Act, there's a very stringent regulatory framework that governs us, including annual audits by the Office of the Auditor General, as well as a special examination every five years of all of our systems and practices at CMHC. From a mortgage insurance perspective, we have external actuaries that opine on the adequacy of all of our reserves every year, so there is in fact a very stringent regulatory process in place for us as a crown corporation.

While we're not regulated by OSFI, by virtue of being a crown corporation not existing under any acts that OSFI regulates, we do follow their capital requirements with regard to mortgage insurance. In order to conduct our business properly, we capitalize ourselves and have the same systems and practices that a private mortgage insurer would have. Really, that's one of the things that underpins, I guess, the insured mortgage purchase program, in that all of the mortgages purchased through that program are already insured. That insurance is provided either by CMHC, which follows OSFI, or by private mortgage insurers, which are regulated by OSFI.

So already in terms of comfort to this committee, the established procedures are stringent, and the IMPP is only able to purchase already insured mortgages. As the committee knows, there's government backing of those mortgages. There's no purchase in that program of non-government-backed insured mortgages.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Ted Menzies, Conservative, Macleod, AB]

Just to follow up on some comments of Mr. Rabbior over Rentcash, I know you're picking out one individual corporation, but I have a quick comment. We're looking at financial literacy. What do we do to make Canadians aware that there are better ways to get a hold of cash than through some of these facilities that are taking advantage of Canadians?

[Gary Rabbior]

Part of the problem is that increasingly as a society we're transferring more and more responsibility to Canadians for their financial decisions. They're planning for their retirement, paying for their kids' education, and managing their debt, yet at the same time we didn't do anything particular through our education system to prepare Canadians for the responsibilities that they're increasingly having to assume. We're paying a price for that now.

I'm pleased to say Manitoba has just agreed to collaborate with us to integrate compulsory economic and financial education into their core curriculum. We're in discussions with Ontario right now to do the same. We're hoping to have discussions with other provinces. So increasingly, there's a chance to build for the future.

Right now, one of the things the U.K. is doing is setting up a national network of what they're calling “financial guidance”--non-profit guidance that British people can go to and get help from in understanding their financial affairs before they go to commercial companies for their financial products. To my mind, there are many Canadians out there who are desperately trying to understand the financial products being offered to them in increasingly complicated language. As well, the products are becoming more complicated. Even Tony Fell and Ed Clark, from the TV, have admitted that they haven't been able to understand some of the products that have come their way and they therefore haven't offered them to clients. That's part of the challenge we face.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Menzies.

We'll go to Monsieur Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

I would like to thank Mr. Serré for nuancing his response appropriately. Mr. McCallum seemed to be in quite a rush to ask a number of questions without giving Mr. Serré the opportunity to respond in full. Well, these nuances needed to be made, given the circumstances. There is a huge difference between the situation in Canada and that in the U.S.

Nevertheless, I would like to ask Mr. Serré a question on this point. At this point in Quebec, some financial institutions, including the Mouvement Desjardins, are offering open mortgages at a 1% or 1.5% rate. That happens frequently. However, if people want to convert them into closed mortgages for a four- or five-year period, the interest rate is rather high when compared with the market rate, in other words 6% or 7%.

Is your organization currently looking into this situation? I am less concerned about a 40-year mortgage or a 0% rate, for the reasons suggested by Mr. Serré, than I am about the 1% or 1.5% rate. Oftentimes, and that was implicit in Mr. Arnold's comments, people who are purchasing homes are less concerned about price than they are about monthly payments. That is what concerns me somewhat. Are you following the situation? Is this something you would normally be concerned with?

[Pierre Serré]

Thank you for your question.

That is not something that we follow closely from one day to the next. Rather, it is governed by competition among lenders in the mortgage market. We mainly deal with loan-value ratios over 80% in the market. Borrowers generally opt for fixed rates. Certainly, buyers prefer fixed rates for the first term.

This is not something we examine in great detail. However, we see that the market managed the issue through competition among lenders.

[Thomas Mulcair, NDP, Outremont, QC]

Let's face the fact that the only way to reimburse trillions of dollars is through inflation. If we were to draw a lesson from the Vietnam war, which ended in 1975, we'd see that the only way to pay down the debt was through inflation in the late 1970s and the early 1980s. We are going to go through the same thing. The only way to reimburse the trillions of dollars that went into the Iraq war, based on the way in which the United States is trying to absorb the “toxic debt”, would be through inflation.

Do you not fear the worst, if we were to allow a large number of variable rate mortgages at 1% or 1.5%? If, all of a sudden, the rate were to rise to 13%, which is far from unthinkable, would we not be creating our own sub-prime crisis? Not for the reasons raised by Mr. McCallum, but rather because we would have granted too much credit to people attracted by rates which are simply unsustainable.

[Pierre Serré]

That is speculation. To my knowledge, borrowers always have the opportunity to convert their variable rate into a fixed rate in difficult times.

[Thomas Mulcair, NDP, Outremont, QC]

If at first you are offered a variable rate of 1.5% and then it jumps to 8%, it does make a slight difference in your monthly payments.

[Pierre Serré]

Absolutely, but I'm not sure it is such a...

[Thomas Mulcair, NDP, Outremont, QC]

The difference is already in that order. You can get a 1% or 1.5% rate, but if you try to set it for five years you get a 6% or 7% rate. That is the situation today.

Mr. Lee, I would like to get back to a point you raised earlier on with respect to the mark-to-market accounting rule. Four or five weeks ago, when the United States was considering striking this rule, did you see the stock markets skyrocket, as we did? You are a university professor. In your opinion would that support the striking of this rule or is it not rather an indication of the fact that the very striking of the rule is perceived as another way of making money very quickly in the market? Would we not be better advised to stabilize accounting rules over the long term by maintaining the mark-to-market practice rather than eliminating it, as you suggest?

[Prof. Ian Lee]

No, I don't support the elimination of mark-to-market accounting. It has been supported by all the major accounting bodies in the western world; FASB in the United States and CICA in Canada support it. It simply argues that assets should be valued at market value, not historic value. So in principle there's nothing wrong with that.

My and others' objection to mark-to-market accounting in a financial crisis is that you have market failure at this moment where the assets cannot be sold at any price. So any price you impose on it for recognition on the balance sheet is arbitrary and, if you will, fictitious. It's not a real market price. To restate it, you cannot establish a market price when we're in a situation where the markets have failed, as we have right now. So the rule has to be applied prudentially and possibly even suspended at this moment, whereas in the States there is no market for many of these assets.

[Thomas Mulcair, NDP, Outremont, QC]

If it is already fictitious, what would be the market price?

[Prof. Ian Lee]

Currently that's precisely the point. At this moment the American price for a lot of these toxic assets cannot be established. In other words, we have what I would characterize as temporary market failure.

[Thomas Mulcair, NDP, Outremont, QC]

Then, what are you suggesting? If at this point we cannot set a price without it being fictitious, what would you propose we replace mark-to-market accounting with? What type of change are you suggesting?

[Prof. Ian Lee]

We're getting into an area called business valuation. It's a course we actually offer in my MBA program. It's a very tactical area because there are different methodologies to measure. There's replacement value, there's historic cost, there's market, and so forth.

I am not a professional accountant, but what is being proposed right now is using an estimate, a judgment by professional accountants of the corporation or organization that would look at the historic values and the current values and basically pick a price. It may sound capricious, but when you have a failed market where there is no market price, any price that is chosen is arbitrary.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Chair, I want to follow along with Mr. Lee here. I take it, in effect, that this mark-to-market modification you're proposing is like a rolling valuation, and that at certain intervals, whether it's monthly, quarterly, or whatever, the folks decide this is what it's worth.

What does that mean for financial institutions in Canada?

[Prof. Ian Lee]

I think the impact would be far less severe in Canada than in the United States. Again, I will come back to my comments about the prudential nature of Canadian banking. And this isn't meant to be any kind of propaganda, as I don't have any relationship to the banks any longer. I don't consult to them; I don't own shares in them.

Nonetheless, the culture in Canadian banking is very different from the culture in American banking. It's much more cautious. It's much more pragmatic. It questions. Certainly on their balance sheets, if you look at their published financial statements, they do not have the kinds of losses that American banks have. Canadian banks are solvent.

So to answer your question, I think it would be much less dramatic.

[John McKay, Liberal, Scarborough—Guildwood, ON]

How would that then impact on the 20:1 ratio that you're proposing be maintained in your next bullet point? The reason that valuation is going down...you're going to have to put some more cash up.

[Prof. Ian Lee]

Indeed. I put that in because the British just released their proposal for reregulating financial services two days ago. They came out quite strongly against a raw metric. I haven't talked about this in my slides, but although the American banking situation is in very bad shape, Europe is in far, far worse shape. Their banks are running a 40:1, 50:1, 60:1 leverage. American banks are running at 28:1. We're at 18:1. We are underneath the 20:1 ratio. I don't think it would have a big impact, because again, the Canadian banks, although there is a regulatory framework, are self-regulating. They make sure they don't go right up against the limit, which is why they're at 18:1 now.