Finance Committee on March 24th, 2009

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

Most of them seem to have been able to pass this basic book. I do wonder, if we sent it to some of our colleagues in the States, whether they'd be able to pass the basics there.

Whenever we've played around with banks and leasing, for all the 11 years I've been in Parliament, there's been a line-up of car dealers out that door on to Wellington Street, saying, “No, you can't do this. It's absolutely impossible.” Their basic argument is that if in fact the banks move in and lease, they will simply occupy the field and destroy the market.

What's your reaction to that?

[Prof. Ian Lee]

I've never bought the argument, although in the absence of any hard evidence it's difficult to say.

From the banks' perspective, they're going to charge more if they get into car leasing because they're not doing it to provide incentives to the consumer to buy a car. They're doing it because it's a financial product on which they want to make money, just like any other financial product, whereas the acceptance companies—and by that I mean General Motors Acceptance and the Honda acceptance company and so forth—are a captive arm of the automotive manufacturer and they're trying to move cars.

I've never understood the dealers' criticism, because they will get better rates and they control who they put the deal through at the dealership.

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

Doesn't that mix your portfolio? The banks pick up the cream and leave the junk to the acceptance corporations. The acceptance corporations are then going to be under some pressure to refinance themselves. Doesn't that put GMAC and the Ford acceptance company, etc., into almost subprime themselves?

[Prof. Ian Lee]

It may. It really depends on whether you, the parliamentarians, regulate the shadow banking. Right now they're not regulated, so they are not subject to the reserve requirements. Therefore, they can be more leveraged and make higher profits in good times--but then we saw what happens in bad times. If they were under the same or a similar regulatory regime, that may be problematic.

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

I buy your basic argument that the shadow banking system is largely a no-man's land as far as regulation is concerned. I buy your basic argument that the banks have moved in. Lending is up in the banking sector, in part because the non-banking sector has abandoned the field. But the irony of the whole thing is that the cost of credit is going up for a lot of people.

[Prof. Ian Lee]

That's only because they're recapitalizing because of this extraordinary financial crisis. The losses are going to continue to rise. I was in the bank in the 1980-81 recession when Volcker was the chair of the Federal Reserve Bank, when people were losing their houses because they had a 10% mortgage and they were rolling up on the renewal at 18% and 19%. That's why I went back to university. I've said this to my students. I got tired of throwing middle-class people out of their homes and I thought there had to be a better way to make money.

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

Don't you wish you'd bought bonds when they were 18%, 19%?

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

My first question will be for Mr. Serré, of the Canada Mortgage and Housing Corporation. The government's $2 billion action plan is rather interesting, except that there is no specific amount for two- or three- bedroom social housing. This is a specific request; there is a major shortage in this type of housing, at least in our ridings. Four hundred million dollars over two years is allocated to low-income seniors, but for families that need a two- or three-bedroom home, there's nothing specific.

We consider this to be a significant shortcoming within the stimulus plan. Obviously, you did not draw up the action plan, but I was wondering whether, at the very least, because you do represent government in the housing field, you had been consulted on the action plan. Were two or three bedroom homes a priority that you would have mentioned to the government?

[Pierre Serré]

Unfortunately, neither affordable housing nor social housing fall within my area of expertise. I am unable to answer your question.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

However, those issues fall within your mandate. The CMHC deals with housing in Canada, and is well aware of the country's housing priorities. Therefore, I do not understand why this is not your area of expertise.

[Pierre Serré]

I deal with mortgage loans and insurance. I was not clear, I apologize. I am the vice-president responsible for mortgage insurance, and I'm not responsible for either affordable housing or social housing. I do not have the knowledge necessary to answer your question.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Your area is rather limited.

[Pierre Serré]

It is well defined.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I have various questions concerning your organization. The government is obliging you to purchase risky mortgages. You have a budget, that is granted by the government, for the Insured Mortgage Purchase Program. This program is managed by the Canada Mortgage and Housing Corporation. Therefore, you have been given a new responsibility.

Would you be able to reply to a question on this subject? I am concerned about whether you have calculated a rate of return on these new purchases. Given that this is a mortgage purchase program, the risks are certainly quite high. Under the mandate that you have been given by the government, is there a fall-back provision for mortgages that are not honoured?

[Pierre Serré]

With respect to provisions concerning mortgages that default, all of the risk is being carried by the insurers. Mortgage insurers cover risk in the case of payment default. The Insured Mortgage Purchase Program run by the CMHC is not forecasting any losses due to default on mortgages. This is entirely covered by the insurers.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

But the CMHC is the insurer.

[Pierre Serré]

It is either the CMHC or private insurers that are operating in Canada.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

If the insurer assumes all of the risks, what is the use of the Canada Mortgage and Housing Corporation buying up mortgages, if there is no inherent risk?

[Pierre Serré]

The key is access to credit. It's essentially a way to increase liquidity for Canadian lenders, so that consumers, Canadians, can access credit, mainly for mortgages.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

All right.

[The Chair, Conservative, James Rajotte]

One minute.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

According to information I received about your corporation, you have accumulated a surplus. According to these figures that I have, the surplus currently sits at $8 billion. Can you please confirm for me that indeed the surplus you have accumulated is of that order?

[Pierre Serré]

Today, I do not necessarily have all of the information on the cumulative surplus, but I can certainly say that for insured mortgages, we have capital reserves that meet the standards of the OSFI. This was mentioned previously. Our reserves amount to $4.3 billion to support insurance operations. Therefore, our surplus is actually above and beyond $4.3 billion.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Didn't the Auditor General say that $2 billion would be a sufficient surplus to maintain your operations?