Finance Committee on March 24th, 2009

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

You mean the person's ability to pay. So even if the prices went down, if the person kept paying his mortgage, it wouldn't really bother you?

[Pierre Serré]

Interest rates are low right now, and they're stable--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

But my first question was if you're getting an extra $125 billion, and you're lending out that whole $125 billion, where's the reserve on that $125 billion? Shouldn't you be taking a 10% or 15% or 20% reserve on that additional...?

[Pierre Serré]

Those mortgages are insured, as I said, so to the extent that there are any reserves, they're maintained by the private mortgage insurers and not as a result of the IMPP program. They are as a result of the mortgage insurance program. For that, OSFI requires you to have fairly large reserves for the insurance you have written.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

My next question is whether the $125 billion you're using to purchase mortgages is being used to purchase good-quality mortgages or just to purchase mortgages that the banks don't want.

[Pierre Serré]

We are purchasing only high-quality assets. The reason they are high-quality assets is that they're already insured, and that insurance is backed by the federal government.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

How do you determine that they're insured? How do we know they're not the same type of instrument as the asset-backed securities, which were just a whole bunch of stuff put in baskets? Do you actually go through each list and say, “Okay, Mike Wallace's mortgage--very good”?

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

It's high-risk.

[Voices]

Oh, oh!

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

He admitted to it last week. I would actually lend him a lot of money.

[The Chair, Conservative, James Rajotte]

Could we have just a brief response?

[Pierre Serré]

I can't comment on any individual's mortgage. However, the program is such that it insures that every single mortgage that is purchased is insured by either the Canada Mortgage and Housing Corporation or the other two private mortgage insurers. So there are processes in place to ensure that uninsured mortgages do not enter the program.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you. I'll just remind the vice-chair that we can always set up a subcommittee to discuss Mr. Wallace's financial predicament.

We'll go now to Mr. Del Mastro, please.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Mr. Lee, I have a couple of questions for you. To begin with, you talked about the NINJA mortgages. I did a bunch of looking into that and, without going too far with this, what really bothered me with the NINJA mortgage wasn't just that they existed in the first place; it's how they mutated and came out the other side as prime paper, so we had the mutant NINJA mortgages.

Somebody is ultimately responsible for that, are they not? Isn't this a failure of the bond rating services and so forth that actually looked into this? It's not just that there wasn't regulation; it's that there wasn't regulation and that the groups that would actually evaluate this totally missed it, didn't they?

[Prof. Ian Lee]

I didn't mean to lay it all on the Congress. What I meant was, that was where it started because they are the referees. They have to set the regulatory framework. However, Fannie and Freddie then made some absolutely colossal errors. They are bankrupt; they were bought and nationalized. And then the bond rating agencies failed to rate them properly.

So there were failures throughout the mortgage creation value chain, if I can use a technical term. I don't absolve them. I think there are very serious problems in the whole credit rating...and I'm referring now not to the banks that are evaluating the individual mortgage, but to the bond rating companies that evaluate. There's no due diligence there right now, or, I should say, there's no oversight.

[Dean Del Mastro, Conservative, Peterborough, ON]

I agree. Let me actually go one more step on that before I change topics. Your graph showed the demand for housing, the price for housing, ramping up very, very rapidly. There have been an awful lot of economists who have come forward and said, listen, there will be no economic recovery in the United States until they stabilize the banks first and then the real estate market.

There must be a bottom in the real estate market. Where's the bottom in the U.S. real estate market? Does anybody know that? Are we there? Are we getting there?

[Prof. Ian Lee]

I have seen a couple of very good estimates and they are wildly different. They're from two very respected people: Don Drummond, in a presentation he gave last week from TD Bank, estimates that they're about 10% away from the bottom. However, the analysis from Schilling in the States, who is a well-known mortgage and realty economist, estimates there's another 20% decline, so it's somewhere between a 10% and 20% decline. He's predicting a 37% decline on average across the United States from peak to trough. These are staggering numbers.

[Dean Del Mastro, Conservative, Peterborough, ON]

So I would expect that where we really saw the huge fluctuations, it was regional, and that you could see properties at half or even lower value—

[Prof. Ian Lee]

Indeed. I have many more slides. I have a map of the United States showing the degrees of foreclosures and failures. The two coasts of the United States have overwhelmingly received the worst. They have been affected the worst. The inland or the heartland, or the states in the interior, had a much more modest housing bubble and a much more modest decline. Therefore, they had much more modest losses.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay.

[The Chair, Conservative, James Rajotte]

You have about a minute and a half.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

A single securities regulator.... I can't for the life of me understand why any region in the country wouldn't want to move towards a better system of securities regulation. What message would you give to those areas that are actually pushing back and saying no, this is a provincial jurisdiction? This is really about protecting consumers. It's really about protecting Canadians.

I think the potential is there for our financial system to move ahead and buy assets at a bargain price and really step forward and make Canada a financial leader with a huge financial industry, much bigger than what it was going in. However, we've got to get this single securities regulator in place. What would you say to those areas that are pushing back on this? I don't understand it myself.

[Prof. Ian Lee]

I should have said this in my earlier response. I believe it's in the self-interest of every region. It's in the self-interest of every Canadian that we have a single national regulator because it will insure much greater safety of financial investments and financial securities. That will minimize or mitigate the potential losses to people whether they're living in Alberta, Quebec, or Ontario, and it will enhance our competitive advantage. I do not understand any argument against a single securities regulator, and I've looked at this for a long time.

[The Chair, Conservative, James Rajotte]

We will go to Mr. McKay.