Finance Committee on March 24th, 2009

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

The second question is just to go around this insuring and then buying back. So the CMHC or the government would secure a mortgage with a bank that a bank holds or has issued, and then you would buy it back within this $125 billion program or in some of the other programs.

Is all this being done free of charge? Who is making the money? Initially, you're charging a fee for the insurance, so CMHC is making the money. The bank makes the money on the spread.

[Pierre Serré]

I'll talk about the mortgage insurance side again and Mark can take over and talk a bit about the IMPP process.

From the mortgage insurance perspective, we charge a premium on all mortgages whether they're sold into the IMPP program or not, as do the private mortgage insurers. So there is a fee, an insurance premium, for that default insurance.

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

That's what the consumer pays. He pays that separately. It's not included in the mortgage price. Correct?

[Pierre Serré]

Normally, in Canada, the practice is that the borrower will pay the mortgage premium and it is put on to the balance of the mortgage.

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

Okay. So now the bank will sell you back this mortgage and that will represent the fee? Who will make money on that? Is that a discount or is that a premium?

[Mark Chamie]

Well, no. When we purchase the mortgages through this insured mortgage purchase program in the form of NHA mortgage-backed securities, we hold auction processes. So these financial institutions are telling us at what rates they are willing to sell us these MBSs, and hence, for the government, we purchase the MBSs that offer the highest yield and work our way down until the entire auction has been sold.

The government itself, though, sets a minimum rate at which it is willing to buy these NHA MBSs, and this rate is at a--

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

But aren't they matched? You're not buying something that is being lent out at 6% for 10%.

If you're saying, I want to buy only securities that lend out at 10%, but it's actually paying 6% because that's what the bank lent out at.... That's not what's happening?

[Mark Chamie]

No, that's not what's happening.

Just by way of the structure of the NHA MBSs and the prices at which they must sell them to us, the interest rates have to be within a certain band and--

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

What is that band?

[Mark Chamie]

Well, again, it depends on what the actual interest rates are in the marketplace and what NHA MBSs are selling for.

So the price of the NHA MBSs we are looking to purchase is somewhere around par level, but in essence, the yields at which we purchase the NHA MBSs are passed on to the government. As the Department of Finance said at the beginning, these will yield rates higher than their own borrowing costs.

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

Okay. So you're making money on this. Is the bank losing money on this?

[Mark Chamie]

No. CMHC is passing on the yield at which it purchases it to the government. As the government says, this yield is at a rate that is higher than their own borrowing costs.

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

Okay. But is the bank making money on them because they're transferring the mortgage more or less at cost?

[Mark Chamie]

No. They maintain a spread for the servicing of the mortgages, but the yield in which they're selling it to us at then becomes their cost of funds, and they would not look to make a loss on that.

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

They would not look to make a loss and you are not looking to make a loss.

[Mark Chamie]

While CMHC does not make a profit or a loss on this, the yields in which we purchase them at are passed on to the government.

[The Chair, Conservative, James Rajotte]

Thank you.

I just want to follow up very quickly on two points. One is the issue that Mr. Dechert raised about the alternative mortgage market. The government has moved in with the insured mortgage purchase program to inject liquidity into that side of the market, but in terms of the other side of the market, is there anything you'd recommend or anything the government should be looking at in terms of the liquidity in the alternative mortgage market?

Mr. Serré.

[Pierre Serré]

I think I would be outside of my purview on that one because of the recommendation.

[The Chair, Conservative, James Rajotte]

Okay.

Mr. Lee, do you have a comment on that?

[Prof. Ian Lee]

Sorry. Can you repeat the question?

[The Chair, Conservative, James Rajotte]

In terms of the alternative mortgage market, Mr. Dechert raised the issue of someone moving to Canada who, not having a credit history in Canada, would not go through CMHC. They call this the alternative mortgage market. Is there something that could or should be done to improve liquidity in that market?

[Prof. Ian Lee]

Are you talking about new Canadians coming to Canada? Is that what you're referencing?

[The Chair, Conservative, James Rajotte]

It's new Canadians or it's--

[Prof. Ian Lee]

It's actually in the mortgage lending market. People may disagree with me, but let me give you an example. If you walk into a bank with a 25% down payment in cash, not borrowed, you're probably going to get the mortgage. Banks are in the risk management business. The more down payment, the less risk.

That's why I made the comments in my opening about zero down payments on mortgages. That's very, very high risk. Twenty-five percent down is low risk, and a new Canadian can get a mortgage.

[The Chair, Conservative, James Rajotte]

Let me come at this another way, then. What percent of the mortgage market in Canada is covered through CMHC?