Finance Committee on March 24th, 2009

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

But that wasn't my question. Of the 40-year, zero down mortgages, do you have any idea how those particular mortgages are faring in terms of being in good shape financially or not?

[Pierre Serré]

I can't disclose all of the details of all the different product lines, but they are not performing dissimilar to what our expectations were when we launched them in the marketplace at the premiums they were launched at back in 2006.

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

Okay.

On another subject, Professor Lee, you quoted David Dodge. I'm also a fan of David Dodge. I think he's a gift to Canada in terms of his ability and experience, including his statement of last week. He proposed counter-cyclical mortgage rules, such that when housing prices are rising fast, conditions be tightened, and in a slump they be loosened. What do you think of that proposal?

[Prof. Ian Lee]

I completely endorse it. My criticism was at the micro-end, if you will; that is, at the individual mortgage end. You're facilitating huge increases in losses. David Dodge's criticism is at the macroeconomic end, and it is also very compelling. He's saying that by reducing the down payment required when the economy is rising and charging forward, you're throwing gasoline on the fire and making the economy move towards if not hyper-inflation then much stronger inflation, and you should be doing exactly the opposite at that period. I completely agree with David Dodge.

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

So do I, and I think, as you just said, the two things are not incompatible. You want prudence in terms of not having these 40-year, no down payment mortgages, but at the same time the conditions could vary counter-cyclically for macro reasons, right?

[Prof. Ian Lee]

Absolutely. In fact, David Dodge suggested that and urged that, and that is one of the things I'm recommending to the committee, and that's why I think CMHC needs outside scrutiny by a government agency such as OSFI.

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

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

We'll go to Mr. Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chairman.

Good morning to everyone.

My first question is for Mr. Arnold and Ms. Bose.

At the end of your intervention, you made some recommendations that we have not often heard at the Standing Committee on Finance. I find your recommendations particularly interesting. You represent consumers who, in the final analysis, are the hardest hit by the current crisis. These are the people who are losing their jobs and dealing with major credit problems. In addition, they're the first ones to be stung, either by banks or businesses offering various consumer items and advertizing in an effort to get their money.

It is clear that you want the government to define clear rules for the government itself and banking and financial institutions that receive assistance. I find that quite relevant. There is also another side to the coin. There should be accountability rules for consumers. Did I understand you correctly?

[Michel Arnold]

We represent consumers but we also represent taxpayers. So we think that the $75 billion that has been loaned and the guarantees provided to the banks come from taxpayers' pockets. Accordingly, we are asking for transparent rules regarding these various programs and we are also asking that the institutions that benefit from this assistance comply with a clearly established accountability process that is in the public domain so that consumers, individuals, can be aware of the rules and, if need be, be able to ensure that their rights are being respected under these same rules. That, essentially, is what our message is all about.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

The third recommendation pertains to some type of support from the government.

[Michel Arnold]

We are recommending that the government ensure that the Canada Deposit Insurance Corporation have the means to ensure that investors are protected should these financial institutions go bankrupt.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you very much.

I have a question for Mr. Lee.

In your testimony, you compared what happened in the United States to what happened in Canada. Based on what you have said, Canada was protected by a number of systems, in a way. You referred to the Department of Finance, the government, members, to almost everyone, actually. Everything seems fine and dandy in Canada, even the regulatory system.

However, further on you recommend that there be one single securities commission. Well, you must know that that is an area of provincial jurisdiction, and that has always been the case. In other words, you are prepared to see the government engaged in a constitutional war. You know that in Quebec, there was a great outcry in reaction to the government's expressed intention. Do you think it would be productive to go that route? We have got good performance, but you want to stir things up, at the risk of creating a furor. In fact, it is already the case. I'm having a hard time understanding your arguments.

Could you give me further explanations?

[Prof. Ian Lee]

I'd be pleased to.

First, I'm certainly not, and I don't think anyone else is, advocating a constitutional battle by forcing it on any province. It will be a voluntary proposal, and those provinces that want to joint in will because it is in their self-interest. That's the first argument.

In terms of the underlying logic of why we should do it, we are the only country in the G-7, and I believe the only country in the G-20, that does not have—let's be blunt—a grown-up, mature, sophisticated financial regulatory system. We have 13 provincial regulatory systems—

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

You said that Canada was the only country in the G7 or even in the G20 that did not have this type of regulatory system in place, but that in the U.S. there was a single system. Well sir, it has not worked. We all agree that this crisis started in the U.S. The system did not prevent the major problem we now have from occurring, the current recession. For one thing, there is the issue of bad debt related to mortgage loans. You yourself demonstrate in your document that things did not go well in the United States where there is a single regulator.

[The Chair, Conservative, James Rajotte]

Mr. Lee, just a brief response, please.

[Prof. Ian Lee]

Okay.

I want to, if you will, correct you. I did not say it was due to the SEC; I said it was due to Congress, who failed, in fact encouraged, Fannie and Freddie to go over the cliff in making mortgages that should never have been made.

But in terms of the larger issue, Paul Krugman has noted accurately that many of the failures in the financial markets occurred in the shadow banking sector that is not regulated. So the problem is not that there was a failure of regulation, it was a failure of the absence of regulation.

[The Chair, Conservative, James Rajotte]

Okay.

Merci, Monsieur Laforest.

We'll go to Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Thank you to our witnesses for enlightening us on some very interesting discussions that we've started on our access to credit process at this committee. My first question might be to flesh out some of the answers that weren't quite finished by Monsieur Serré. I know Mr. McCallum was quite focused on what he wanted his answers to be, and I know you were trying to get in a bit of an explanation.

Please clarify for us if you can, could you have a 40-year mortgage at 100%? We removed that in July. You can confirm that for us, if you would.

You had suggested that 8% of those 40-year mortgages.... I think we need to note that comparison of 8% with the statement by Mr. Lee that nearly 60% of the mortgages in the U.S. were subprime or near prime. We recognized the uncertainty in that and got rid of it.

So perhaps you could finish the answers that Mr. McCallum wouldn't provide you the opportunity to.

[Pierre Serré]

Thank you.

In terms of the 8%, yes, in fact that includes people who had either 40 years or 100%, and in some cases they would have had 40 years and 100%. But again, just to be clear on the 100%, there was a minimum requirement on that, which meant that people really had to demonstrate proven behaviour in managing their debt in the past in order to access that.

[Ted Menzies, Conservative, Macleod, AB]

So that would be different from a U.S. subprime?

[Pierre Serré]

That is exactly where I was heading. From our perspective, the subprime is characterized by a lack of creditworthiness on behalf of the borrowers. For all of our products, including 40-year amortizations, and especially on 100%—because we're very careful in introducing and managing that one—we had stringent requirements for creditworthiness, which, by definition, means that these types of products were not subprime.

Comparing it to the U.S. is extremely difficult in that what happens in the U.S. is very different from what happens in Canada. The systems are completely different, right from the mortgage interest being deductible to other significant parts of the process. Comparing one to the other is very difficult.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

I might also mention that in a number of our pre-budget submissions that we had in the lead-up to this budget, Canadians were still recommending mortgage deductibility, despite what has happened. So I guess that just goes back to financial literacy, people not understanding what got the financial institutions and homeowners in trouble in the U.S.

[Pierre Serré]

Perhaps I could add that also in Canada we don't have non-recourse lending as they have in many states in the U.S. That makes a big difference. Canadians don't want to lose their homes. They don't buy a home in order to lose it, nor do the lenders or the insurers put people in that position.

[Ted Menzies, Conservative, Macleod, AB]

Good.

Mr. Lee raised some concerns with CMHC. We want to be certain that you have the required oversight or that there is required oversight over CMHC. You will be delivering a large amount of our extraordinary financial framework through the $125 billion in this insured mortgage program. I see there's another offering again today. The last offering was not completely taken up. Can you provide a bit of reassurance to this committee on how that's going to be handled and whether the proper instruments are in place to make sure that's handled properly?