Finance Committee on March 24th, 2009

[Mike Wallace, Conservative, Burlington, ON]

I want to thank the guests today.

I'd be highly shocked if Mr. Lee has RRSPs that don't have any bank stocks in them at all.

I'll start with Mr. Lee. I appreciate your presentation today; it was very good. Following up a little bit on what Massimo was saying on the regulation of the secondary lending market, do you think the consumer of these products actually understands that these lenders are not under the same financial regulation as the banks? Do you think there's a role for us to have the consumers understand who they're borrowing from and what the risks are?

[Prof. Ian Lee]

Certainly, I've always advocated transparency. To use the technical jargon, financial markets are more efficient when there is more disclosure of information because consumers can then make informed choices.

In terms of vehicles, such as structured investment vehicles and derivatives, the people buying these products are not “ordinary” consumers. For most consumers, average Canadians deal with a credit union, a bank, or a credit card, but do not deal with a structured investment vehicle. They're certainly not buying credit swaps, which is a different market. Some sophisticated investors were getting around the regulators and regulations by going outside them, because they could run up the leverage ratios and make more money, but it then blew back into the regulated financial system.

[Mike Wallace, Conservative, Burlington, ON]

You're saying that, in your opinion, they understood the risks they were taking.

[Prof. Ian Lee]

No, I don't think so. I'm sorry. There is in fact a real criticism of how some wealthy people in the U.S. took everybody for a ride. But most of the CEOs with these huge bonuses have lost money because they thought the system was going to keep on going.

[Mike Wallace, Conservative, Burlington, ON]

Okay. I appreciate that.

I'm going to ask the same question in English that was asked in French, to make sure everybody understands. I'm going to go to Mr. Serré. In the current budget that has recently been passed, there is a facility for CMHC to buy mortgages that are insured. To be clear, and for the public's edification, you're buying mortgages that banks have offered to people. They lent them the money. Those mortgages are insured. They are covered by an insurance program. They bundled them together. For the banks to have more money or to have money to actually lend, you're buying the bundles and giving them cash for those bundles. Is that an accurate way of putting it?

[Pierre Serré]

Yes, that's accurate.

[Mike Wallace, Conservative, Burlington, ON]

The money that the banks get should then in turn ease the credit crunch, as they call it, to allow them to again lend that money to somebody else who is creditworthy. Is that correct?

[Pierre Serré]

Absolutely, that's the intent.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

I have another question on a different line. I have a summary of the recent corporate plan for your organization. On one of the lines it says more than one-third of CMHC's business is in markets that private mortgage insurers do not serve or that are less active, including low-cost mortgage financing. You take some risks in some areas, I would say, where others don't take risks. Do you have a competitive advantage over the private sector because you're a crown corporation?

[Pierre Serré]

As a crown corporation, we have a mandate to be everywhere in Canada. We have a mandate to offer all the products to all Canadians across the country. We also do rental housing. That is our mandate.

Mortgage insurers in the private sector do not have that requirement imposed on them by OSFI, which would regulate them. We are required to have a reasonable rate of return on a level playing field in a competitive marketplace. The expectations of CMHC are slightly different from that of the private mortgage insurers in that we have a mandate to serve all Canadians everywhere. As I mentioned in my opening statement, it includes rental housing, nursing and retirement homes, chattel homes, which are mobile homes up in the north, single industry towns, and rural areas. We are everywhere.

[The Chair, Conservative, James Rajotte]

Mr. Wallace, you have about 15 seconds left.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

I only want to say one thing to the folks from the Canadian Foundation for Economic Education. That was excellent material. I'm hoping to call them to come to Burlington to give a presentation to the public.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you.

I believe Ms. Bose wanted to briefly comment on your first question.

[Anu Bose]

I only wanted to say that when we had our seminar or colloquium in Montreal, Ira Rheingold, who was one of the speakers, said credit is a product that is sold to consumers and it is not a contract between the parties. Disclosure is therefore no substitute for clarity and caveats.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Pacetti again.

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

Thank you, Mr. Chair.

Mr. Serré, were you saying that the private sector insurers are not regulated?

[Pierre Serré]

Yes, they are regulated. The private mortgage insurers are regulated by the Office of the Superintendent of Financial Institutions.

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

Can we just go over the amount you seem to be picking up in mortgages? It says here that in 2008, $43.5 billion of CMBs were issued, and then you have the $61 billion of NHA mortgage-backed securities, and now you're going to have another $125 billion? As you just responded to Mr. Wallace, you're trading mortgages for cash, so you no longer have cash? Is that it? How much of those mortgages that you're buying pose a risk for you? I guess ultimately that would be the question. What is the difference between now and last year,let's say? All of a sudden the government is giving you an extra $125 billion to spend, which you didn't have before?

[Pierre Serré]

We've had the Canada mortgage bond program since 2001. It issues securities to the public--large and small investors. That money goes to the banks for them to lend more money. In terms of the insured mortgage purchase program, the recent program was introduced late last fall. We borrow money from the government and in turn buy the mortgages from the lenders.

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

And then the $125 billion will work in the same fashion? Is that correct?

[Pierre Serré]

Yes, to date--

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

So you won't have any cash. You'll have $125 billion of mortgages?

[Pierre Serré]

In the first instance, we did not have cash necessarily. We borrowed from the government. They provide the cash, and then that cash is flowed to the lenders in return for the mortgages that we would be purchasing on behalf of CMHC.

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

How much of that would be at risk if the real estate market were to decline by, say, 10%? Would you be at a 10% exposure rate or would you be at a bit higher rate? Are we looking at another Fannie Mae and Freddie Mac?

[Pierre Serré]

Now that gets into the other side of the house, which is my side--the mortgage and insurance side of the house as opposed to the securitization side, which is where all these programs exist. All of these mortgages are already insured. As I said before, if we rerun our mortgage insurance program, just as any private insurer would, we price for the long term. Pricing for the long term means that our price includes provisions for economic downturns like the one we're experiencing now, the one we experienced in 1990, and so forth. So we are adequately provided for from a reserve perspective. We follow the Office of the Superintendent of Financial Institutions' capital rules. We have a target of 150% of their minimum, and we're actually well above 200%. So we are very well positioned to weather these economic storms. And the key drivers from our perspective--although you are quite right that house price declines are a driver--would be jobs. Unemployment rates would be a key driver.