I appreciate the opportunity to appear before this committee regarding division 11 of the budget bill. I've been a professor of real estate at the University of Guelph since 1993, teaching and doing research in the area of housing and mortgage finance, among other interests. I've written several articles about the mortgage finance system in Canada for the Macdonald-Laurier Institute, which are available on their website.
Canada can be justly proud of our mortgage finance system. Careful underwriting and legislation has allowed us to weather the global financial crisis better than almost any other country. While the system is strong, improvements can be made. The legislation regulating covered bonds in division 11 is important. Many European investors are not permitted to invest in covered bonds in countries where there is no legislation. So this will help the banks market these securities, bringing more money into the mortgage finance system.
On the other hand, financial institutions are prevented from using insured mortgages as collateral in these—and that will have the opposite effect. Investors do prefer secure insured loans in an investment pool. So this does reduce the demand for mortgage insurance—which was the goal of restricting that— particularly that purchased by banks on loans that don't need to be insured. So, overall, I think it is a sensible measure.
The legislation recognizes a major shift in CMHC's focus over the years. Mortgage insurance and securitization compose a large and growing portion of the corporation's activities relative to those related to social housing.
Private mortgage insurers are overseen by the Office of the Superintendent of Financial Institutions, and this moves CMHC into that realm as well. I don't anticipate that the annual reviews by OSFI will raise any alarms. CMHC has been very prudent in their management of their mortgage insurance portfolio and holds twice the reserves recommended by OSFI.
The legislation also places the deputy minister of Finance and deputy minister of Human Resources and Skills Development Canada as ex-officio members of the board of CMHC. It's critical that in an effort to properly oversee the commercial activities undertaken by CMHC, we do not forget their vital role in housing policy and the provision of affordable housing for lower income households and individuals in Canada.
The legislation also requires that CMHC make available to the public the books, records, and information that are required by legislation. It is not yet clear what will be required under this, but I look forward to greater transparency of information from CMHC along the lines of what private mortgage insurers are required to provide.
Despite the positive aspects of the proposed legislation, I have a couple of remaining concerns. The mortgage insurance policies of CMHC, as a result of it being a crown corporation, are implicitly 100% guaranteed by the federal government under the Basel Accord. As a result, CMHC mortgages require no capital reserves by financial institutions. The protection limit for private mortgage insurance companies is only 90%.
As a consequence, the banks, whose loans are insured through a private firm, must set aside some capital reserves against the possibility of default by the insurer, which is not a requirement for CMHC loans. Thus, rates of return are higher on CMHC-backed mortgages, and when profit margins are thin and banks are nervous about capital reserves, as in the financial crisis beginning in 2008, that made a major difference.
CMHC argues that the difference in the guarantee is necessary because of their social mandate and the fact that they insure multi-unit residential buildings. In their latest annual report they state that “46.5% of our total rental and high ratio business addressed gaps in the marketplace left by private sector competitors".
This is where more public access to CMHC data would be helpful. CMHC has a monopoly on the provision of loan insurance for multi-family buildings, including nursing and retirement homes. If the private sector is not permitted to compete in this area, it does not make sense to include these loans in any comparison with them. There's no indication that CMHC does not make a profit on the provision of this insurance. An objective and thorough analysis of the geographic location of privately insured loans relative to CMHC is necessary to back that statement up, and I'd be surprised if there's any material difference. The lender, not the borrower, decides who will insure a mortgage loan—CMHC or a private insurer.
So this is not a competitive marketplace with consumers freely choosing which company will insure their loan, even though they're the ones who pay the large upfront fee. CMHC currently has 70% of the market and one party having such a dominant share, to me, implies inadequate competition.
To conclude, I welcome the introduction of this legislation. I believe that through levelling the playing field for private and public mortgage insurers by giving the same guarantee, consumers will benefit and there will be more private insurers competing for their business, thereby ensuring competitive fees and greater incentives for product innovation.