Finance Committee on May 29th, 2006

[The Chair, Conservative, Brian Pallister]

Ladies and gentlemen, welcome. Welcome to our witnesses today.

Members of the committee, I hope you enjoyed your week back in the riding. We will continue our discussions of vote 10, referred to the committee on Tuesday, April 25, 2006. We have several witnesses today, in two panels. We'll follow with some committee business thereafter.

I would like to welcome our witnesses. We're sorry that because of the shortness of time, we'll just ask you to give you a brief overview of your positions. That will leave the committee the maximum possible time to make its inquiries of you. I believe we're going to start with Mr. Charles, from AIG United Guaranty Canada.

Mr. Charles, I invite you to make a couple of minutes of comments. You may proceed.

Thank you, sir.

[Andy Charles, President and CEO, AIG United Guaranty Canada]

Thank you, Mr. Chairman and honourable members.

My name is Andy Charles. I'm the chief executive officer of AIG United Guaranty Canada. We are part of AIG, one of the world's leading insurers. AIG conducts business in over 130 countries. We've been in Canada since the early 1960s; we currently employ more than 850 Canadians.

Mr. Chairman, we believe that increased competition in mortgage insurance will benefit consumers, financial institutions, and the Canadian economy. At the same time it will make the government-backed insurance system safer by diversifying risk among more participants.

Allow me to highlight a few points. First, AIG has a rock-solid commitment to provide insurance to the entire Canadian market, urban and rural. We intend to provide innovative insurance across all segments.

Second, we are undergoing a rigorous examination process. OSFI is ensuring that we have adequate capitalization to serve the market through all parts of the economic cycle. The requirements for upfront capitalization are stringent, and we will meet them. We are backed by our parent, a company with $800 billion in assets and ranked by Forbes magazine as the fourth-largest corporation in the world.

Third, fostering competition, with well-capitalized insurers creating more choice, will reinforce the strength of our marketplace. New insured mortgages have a value of over $50 billion a year, and the total value of outstanding mortgages is more than $615 billion.

Fourth, as Budget 2006 states clearly, the provisioning change to $200 billion is due to the expansion of the mortgage market, not because another competitor is entering the market. Adding another well-capitalized insurer will diversify the taxpayer's risk.

Finally, increased competition benefits consumers. The entry of the existing private mortgage insurance company generated new products and better service for Canadians. We ask for the same opportunity.

Mr. Chairman, I would like to close with a quotation from a few years ago: “We applaud the government's intention to promote competition in mortgage insurance by levelling the playing field. Healthy competition clearly benefits consumers, lenders, and taxpayers.”

The speaker then was Peter Vukanovich, the president of Genworth Financial Canada. We applaud his sentiments and think what was true then is true today.

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Charles.

We'll move to Mr. Murphy with the Canadian Institute of Mortgage Brokers and Lenders.

[Jim Murphy, Senior Director, Government Relations and Communications, Canadian Institute of Mortgage Brokers and Lenders]

Merci, monsieur le président et mesdames et messieurs. My name is Jim Murphy. I'm the senior director of the Canadian Institute of Mortgage Brokers and Lenders, or CIMBL, which is an 8700-member national association.

CIMBL represents all facets of the mortgage industry including mortgage lenders, mortgage insurers, mortgage brokers, and mortgage agents. We have members in all ten provinces and two of the territories.

You know that the residential real estate market in Canada has done exceptionally well over the last several years. Our industry is a key component of helping Canadians reach their dream of home ownership.

Two studies we have undertaken--one from last fall on the state of the residential mortgage market in Canada, and a second one from earlier this spring highlighting consumer choices in mortgages--show that there is over $615 billion in outstanding mortgage credit in Canada today, and that this total is growing by 10% each and every year. You have copies of these research findings in the packages before you.

Mortgage insurance is a key component of the financial network that helps Canadians own their own home. It is a system that has worked well in Canada. As home prices rise, the ability of many Canadians to have a down payment of 25% or less diminishes. And I should say that this rule applies to federally incorporated deposit-taking institutions under the Bank Act. Our industry and mortgage insurance provide the means for Canadians to own a home.

CIMBL supports competition in the mortgage insurance marketplace. We believe, however, that the committee and the government should be fully aware of the issues related to competition, so that the overall financial integrity of the system is maintained.

I'd like to highlight three issues.

First, there should be a level playing field for mortgage insurance providers in the country. Second, the financial viability of the industry must be insured, particularly if there is any downturn in the market--and we're noticing a slowdown in a couple of the provinces. Last, protection for borrowers and home owners must be paramount.

Merci.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Murphy.

Now, we'll have Mr. Vukanovich from Genworth Financial Canada.

[Peter Vukanovich, President and CEO, Genworth Financial Canada]

Thank you, Mr. Chair.

Hi. My name is Peter Vukanovich. I'm the President and CEO of Genworth Financial here in Canada.

I would like to thank the committee for having invited me here today.

Given I've only got a couple of minutes, I'll try to quickly take you through my points.

The proposed changes to the mortgage insurance industry before this committee may appear to be technical, but they are no small matter. Collectively, they result in the opening of the mortgage insurance marketplace to new entrants, something that's not been seen in our country since 1995. Indeed, they represent significant policy changes to the industry, with far-reaching consequences for Canada's housing market, our financial services sector, and, more importantly, the nearly half a million families per year who get helped by mortgage insurance. Yet there's been virtually no study or analysis that we've seen regarding the practical consequences that these dramatic changes would create.

These changes will hasten the arrival of at least three new players in the marketplace, which has been exceptionally well provided by and served by two players for more than 40 years. To compete, all of these players will be financially guaranteed by the government. This is significantly more complex than letting property and casualty insurance companies into a marketplace. As such, we believe the best advice that we can give this committee is to halt the implementation of these changes and study them. Take the time to understand exactly what it will mean for families looking to buy a home and for the government.

There's one critical thing I'd like explain to you today: it's that homebuyers pay for mortgage insurance but they do not choose the insurer. That's right, it's the lender, not the buyer, who controls the decision over mortgage insurance. That distinction is fundamental for policy-makers to appreciate because it demands that a proportionate set of protections be put in place for homebuyers. I should hasten to add that Genworth Financial supports the government's desire to see increased competition within our sector. We welcome more competition, so long as it results in choice and benefits to homebuyers and companies can sustain volatile real estate cycles.

Increased competition, however, must be accompanied by two further conditions: the kinds of homebuyer protections I just mentioned and a level playing field for new entrants and old players alike. Unfortunately, the policy changes before this committee fail to deliver on either of these conditions and in fact could worsen the framework that currently exists. Without proper market conduct rules, the government's objectives could be undermined and existing public policies and benefits of mortgage insurance could be diminished.

That's why further understanding is required before changes are implemented, and we urge you to require three additional safeguards along with what we're talking about. The first one is for this committee to recommend prohibiting U.S.-style financial arrangements between insurers and lenders. There's ample evidence from other markets that without a prohibition of this sort homebuyers will not be the beneficiary of new competition but it will be quite the opposite. As Moody's rating agency states about the U.S. industry, mortgage insurance is a commodity, differentiating oneself from other competitors is difficult, there's limited competition on the price, and lenders' interests are likely to remain aligned with the mortgage insurance firms. These types of arrangements make the amount of money, that percentage to lenders, the key determinant of mortgage insurance. Of course, this is all legal, but we're just not sure that's what this committee or this government is expecting.

Second, in terms of safeguards, we believe the committee should recommend clear protection against adverse selection, or what is sometimes known in the insurance business as cherry-picking. Simply put, if new market entrants are allowed to ignore most of the market and focus exclusively on the most lucrative parts, then all buyers and lenders will pay more. To add much more rigour to this analysis, we've engaged an internationally prominent consultant and economist to conduct the kind of independent study we believe is required. His full analysis is not concluded yet, but he's saying that he would very much like to get this done in the next couple of weeks and have it ready for your perusal.

Finally, we believe the committee should recommend a level playing field for all participants. As you know, the government guarantee backing up the mortgage insurance industry is unevenly applied between us and the government provider. This creates a permanent price advantage of several hundred dollars per loan, which in a highly competitive mortgage business is one very fat thumb on the scale. With a built-in price advantage, competition based on differentiated products and services is very difficult to achieve.

In conclusion, I want to emphasize Genworth's support for increased competition. We welcome it. However, I cannot honestly say that I'm enthusiastic about the prospects for homebuyers if the current proposals proceed without the additional protections that I just told you about.

Canada's housing market is the envy of the world and there's no reason why it shouldn't continue to be, provided that we don't make a mistake or a series of mistakes that we'll regret later.

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

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Vukanovich.

Now we'll hear from Mr. Tonnesen, CEO of the Triad Guaranty Insurance Corporation.

[Mark Tonnesen, President, CEO, Triad Guaranty Insurance Corporation]

Bonjour.

My name is Mark Tonnesen and I'm the CEO for Triad Guaranty Insurance Corporation. Prior to joining Triad I was vice-chairman of RBC Insurance in Toronto.

Triad is a private mortgage insurance company, headquartered in the United States, and is currently before OSFI with a draft application to provide this insurance in Canada. It was founded in 1987, based on the philosophy of strong risk management, product innovation, and superior customer service. Our products are primarily offered in areas where affordable housing is a priority. In fact, our typical customer is a first-time homebuyer with an average house price of around $150,000.

I am here to support the government's intention to open this market to more providers. This move will create upsides for taxpayers and consumers alike. First, adding more market participants will reduce the risk to taxpayers and increase the stability of the housing market by spreading the risk across multiple providers; reducing the risk assumed by government providers; bringing additional diversified capital into the market; and eliminating the risk where one private mortgage insurance company could pull out of the market, leaving the entire Canadian housing sector in turmoil.

Second, consumers will benefit from increased competition, through better service, lower costs, and product innovation, all of which makes home ownership more affordable. Monopolies, even duopolies, do not provide the same incentives for customer service, product innovation, and price reduction. Why would they, when theirs is a captive market?

Canada has among the highest regulatory standards in the world, and because of this, a competitive market will also be a secure market. Apart from the very rigorous review that OSFI conducts to ensure the viability of MI providers, every province regulates the conduct of the insurance market. Numerous regulations specifically prohibit the types of activities about which some members and competitors are concerned.

It is vitally important for the government to ensure the safety of the market. It is also important to ensure that consumers have a choice, and the choice is not simply between the government and a private sector monopoly. This creates too much risk for the government and too little benefit for the consumer.

I'd be pleased to address any of the issues in more depth at your convenience, Mr. Chairman.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Tonnesen.

Now, Monsieur Roy, Mouvement des caisses Desjardins, s'il vous plaît.

[Noël Roy, chef de produit, financement hypothécaire, Direction du développement de l'offre, Fédération des caisses Desjardins]

Thank you, Mr. Chairman.

My name is Noël Roy and I am responsible for the development of Desjardins' mortgage financing product. I would first like to thank the finance committee for their invitation to appear this afternoon.

With some 5.5 million owner- members, consumers and businesses alike, Desjardins is the leading financial institution in Quebec as well as the largest cooperative financial group in Canada. Elsewhere in Canada, Desjardins is associated with caisses populaires in Ontario, Manitoba, and New Brunswick, as well as with Desjardins Credit Union in Ontario. With a market share approaching 40 per cent, Desjardins is by far Quebec's leader in the residential mortgage credit market. As such, Desjardins has approved approximately 600,000 mortgage loans throughout all regions of Quebec. Close to 30 per cent of our mortgage loans portfolio benefits from a mortgage insurance protection, mainly with the CMHC and to a lesser extent, Genworth Financial. We enjoy excellent relationships with both entities.

As noted in the 2006 budget, the current government program which provides a government guarantee for companies that ensure mortgage loans has contributed to a competitive mortgage insurance market and more affordable housing for Canadians.

We support the government's initiative to encourage competition in the mortgage insurance market. Increased competition in this market will promote greater housing accessibility at more competitive costs. We therefore believe that extending the guarantee program to new entrants will allow a greater number of Canadians to enjoy home ownership.

However, we believe that the following conditions are key to the establishment of a sound competitive mortgage insurance market. First, all participants from the private sector offering mortgage insurance must be subject to the same rules and conditions and must only be allowed to intervene in this particular market. Real competition will only occur if all players operate on a level-playing field. Second, it is critical that mortgages not be subject to an anti-selection process. Such an approach would disadvantage home owners outside urban areas and more particularly rural residents. The framework governing the activities of such entities must therefore ensure that all mortgages will have an equal right to a guarantee.

In conclusion, we wish to reiterate our support to initiatives that encourage more competition in the mortgage insurance market. Thank you again for the opportunity to appear before you today.

[The Chair, Conservative, Brian Pallister]

Thank you, Monsieur.

We'll begin with Mr. McCallum, for seven minutes, sir.

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

Thank you, Mr. Chair. I'll probably need less time than that.

Basically, I'm starting out favourably disposed to what the government wishes to do, because it's also what our government had wished to do. I just discovered recently that we had the same process as well as the same substance. But perhaps more fundamentally, I tend to be on the side of Adam Smith, thinking that more competition is better than less competition and that a duopoly is probably not optimal.

I basically have two questions. The first would be to either Mr. Charles or Mr. Tonnesen, I think, or to Monsieur Roy.

Since I begin with a bias very much in favour of what the government is proposing, I think the onus of proof is on the other side. In the Desjardins submission, one of the conditions given, the second one, is that it is critical that mortgages not be subject to an anti-selection process that would disadvantage home owners outside urban areas, and more particularly rural residents. So I'd like to ask those who propose to enter the competition to explain whether there would be such an anti-selection process and whether there would be any risk for rural people in this new, multi-company, competitive world?

I also have a question for Mr. Vukanovich. I'm not making any accusations—I must stress that—but I think it was Mr. Turner who really pushed this, and then when I read on Mr. Turner's website of March 19 about his friend Peter Vukanovich coming to visit him a few days ago in his riding office, and since he seems to be instigating this, I want to ask what the nature of that relationship is, just for the record and without making any accusations.

Those are my two questions, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Mr. Charles, would you proceed?

[Andy Charles]

Mr. McCallum, with respect to servicing all markets, it's our commitment to be a national provider with a focus in both urban and rural markets. If we can sit back to reflect for a moment, as a third mortgage provider coming into the market with two very well-established competitors—one, we estimate, CMHC, having about a 70% market share, and Genworth having about a 30% market share—clearly our challenge is to make sure we have a value proposition for all markets. Common business sense would say we need to be innovative in our product design to compete aggressively against two well-entrenched competitors.

So to answer your question specifically, Mr. McCallum, there's not a market in Canada where we don't want to be, and we will be in all markets.

[The Chair, Conservative, Brian Pallister]

Thank you.

To participate in response to that first question, we'll hear Mr. Tonnesen.

[Mark Tonnesen]

I just would like to say categorically that it is our intention to service all communities in Canada and to work with the banks as such.

Thank you.

[The Chair, Conservative, Brian Pallister]

Mr. Vukanovich, would you like to reply to the first and/or second question, sir?

[Peter Vukanovich]

I'll take Mr. McCallum's second question, which is with regard to my relationship with Mr. Turner. It is, I can assure you, strictly one of knowing each other for a couple of years. When I saw Garth was elected in the riding that borders right next to where our office is.... In fact, we weren't sure whether we were in Garth's riding or in the one south of us, so we went and just said hello. He wrote later in his blog, and I was actually flattered that he considered me a friend.

[The Chair, Conservative, Brian Pallister]

We'll have the balance of the questions to deal with the substance of the issue.

Are you finished, Mr. McCallum?

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

Yes.

[The Chair, Conservative, Brian Pallister]

Thank you.

Mr. Loubier, please proceed, for seven minutes, sir.

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

Thank you, Mr. Chairman.

When I was listening to Mr. Vukanovich, I had the feeling I was listening to Bell Canada executives a few years ago, when they appeared before the CRTC on the issues of a decompartmentalization project and a long-distance deregulation project. Bell Canada stated that this would spell its demise and that it should not be allowed, that competition in the telephone industry was not a good thing. I have the impression I was hearing the exact same statements from Mr. Vukanovich.

I'm wondering why companies like Genworth and the CMHC should be the only two players. Why shouldn't there be other players? Why are you asking questions about such basic issues as having rules that apply to everybody? I don't think that the bill would result in new competitors being treated differently than Genworth is, or in Genworth being treated any differently from new competitors. It strikes me that competition is a good thing for consumers.

Mr. Roy, how can we avoid the type of anti-selection that you mentioned through regulation? It seems to me that is a fairly simple issue to regulate. It's easy to do an analysis. Competition is always a good thing for the market. Obviously, companies who have held certain privileges for many years — in a duopoly or, of even greater concern, in a monopoly — would want to complicate that type of legislative process. Mr. Vukanovich, one can't be for and against competition at the same time.

[Peter Vukanovich]

I'd like to answer that question.

We're totally for competition, as I said in my comments, as well as I think it's very reasonable that, as a general economic principle, more competition should lead to better things for homebuyers.

The current issue, though, is that there's nothing in the regulatory framework to ensure that adverse selection not be happening, to ensure that there's competition that will benefit homebuyers.

What we're saying is that you really need to look at other markets and how they've operated when there's a financial intermediary in the process, and that means that this is different from just having a direct consumer relationship, because, after all, it's the government's intent to provide benefits to homebuyers and consumers.

So again, I think it's more the regulatory framework that's not set up. It's certainly nothing that we can see to ensure that what we're talking about as being positive would be there. But we're clearly pro-competition.

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

Then what could be done in order to avoid, for example, adverse selection? That is what I am most concerned about. In terms of the rest, I can't really imagine a system where you would be treated any differently from your competitors. We live in a country where regulations, especially with respect to financial markets, are a fundamental component. What are your fears with respect to this issue?

[Peter Vukanovich]

Well, it's not clear to us as to who has the responsibility for market conduct and regulatory compliance in that area when it comes to our situation and our industry. Again, if, for instance, we had a complaint against what we just described as being adverse selection, perhaps something could be put into the guarantee requiring that this adverse selection not be a part of the way competition is.

At the same time, when you have a compliance violation, how is that dealt with? It's not clear to us.