Finance Committee on Jan. 21st, 2022

[Pierre Poilievre, Conservative, Carleton, ON]

Ms. Bowers, let's go back to the issue of the liability to Canadian taxpayers if there are mass defaults and a housing crash. I'm looking forward to getting from your organization the total dollar value of insurance in force and guarantees. Will you commit to presenting that to this committee in writing soon, at a future date?

[Romy Bowers]

Absolutely.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much. I appreciate that.

When a home buyer defaults and CMHC pays for the default loss to the bank, does the bank currently pay a deductible for claiming that insurance?

[Romy Bowers]

No.

[Pierre Poilievre, Conservative, Carleton, ON]

Does the bank pay the original premium in order to get the insurance?

[Romy Bowers]

The premium is paid by the homeowner and, typically, it's added on to the principal of the mortgage.

[Pierre Poilievre, Conservative, Carleton, ON]

Right. The home buyer pays the premium, the taxpayer pays for the loss and the bank doesn't pay either a premium or a deductible. Can you think of any other person or company anywhere in the economy that gets full insurance against loss without paying either a premium or a deductible?

[Romy Bowers]

I appreciate your concern about the risks associated with the mortgage insurance business. I want to reiterate the belief that CMHC has in our risk management practices and that we take our exposure to Canadian taxpayers very seriously—

[Pierre Poilievre, Conservative, Carleton, ON]

I believe you, but I'm asking if there is any other company or person anywhere in the economy that gets full insurance without paying a premium or a deductible. For instance, if I get into a car accident and I have a claim, I have to pay a deductible. In order to get that insurance, I have to pay a premium. The bank is getting insured without a premium or a deductible.

Are you aware of any other person or company in the economy that would have that kind of a deal?

[Romy Bowers]

Unfortunately, I'm not able to answer that question.

[Pierre Poilievre, Conservative, Carleton, ON]

Frankly, I don't think you're to blame for that. This is the way it's been for a long time. I just think we have a very strange system in this country that dates back a long time, through many parties, where we give these banks the ability to profit off of mortgages while they can pass on the risk to taxpayers.

I'll shift to you, Mr. Routledge. You have something called the “liquidity coverage ratio”, which is that banks must have enough cash or cash equivalents to cover 30 days of expenses. If they have a mortgage that is owed to them, that's not considered cash or a cash equivalent asset. However, if they get CMHC to insure it and securitize it, it becomes cash or cash equivalent asset. Isn't that true?

[Peter Routledge]

Within the liquidity coverage ratio, high-quality, and by that specifically I mean sovereign, assets do have a very high—

[Pierre Poilievre, Conservative, Carleton, ON]

Like securitized—

[Peter Routledge]

—liquidity rating, because you can take a very high-quality AAA asset and liquify it fairly quickly in markets. That is reflected in our rules, as it should be.

[Pierre Poilievre, Conservative, Carleton, ON]

What that means is that if I'm a bank and I am owed a mortgage, I can pay a fee and get CMHC to stamp it and securitize it. I can sell it off and then use the proceeds to lend out another mortgage, can't I?

[Peter Routledge]

The governor for credit creation in the system is “capital requirements”, not necessarily the ability to liquify.

[Pierre Poilievre, Conservative, Carleton, ON]

Right. But if you—

[Peter Routledge]

The advantage of the system is—

[Pierre Poilievre, Conservative, Carleton, ON]

—sell off a mortgage product as a bank, then you can take the proceeds of that sale and relend it out, right?

[Peter Routledge]

Again, the governor is the capital requirements. You have assets and you have capital. The assets can be allocated as the executives of the bank see fit. The capital governs how large that asset group can grow.

[Pierre Poilievre, Conservative, Carleton, ON]

Yes. I know that. But the point is that you can convert a non-liquid asset—that is, the mortgage receivable that a bank has—into a liquid asset by simply getting government securitization of it. The government stamps it through CMHC and guarantees it against mortgage default. You can use that to sell off to another financial institution, get the cash from that sale, and relend out the money.

This is the last time I'll ask the question: Is that true or is it not true?

[Peter Routledge]

The activity of buying mortgage insurance, be it from CMHC or private mortgage insurers, adds to the liquidity of mortgage assets on a bank balance sheet. Net-net, and in a crisis, that is another stabilizer and will benefit the system—and did in the last financial crisis in 2008-09.

[Pierre Poilievre, Conservative, Carleton, ON]

Right.

How much time is left, Mr. Chair?

[The Chair, Liberal, Peter Fonseca]

You have five seconds.

[Pierre Poilievre, Conservative, Carleton, ON]

Well, I guess I'd just point out that this is a real sweetheart deal for the banks, because they get all the profits and the taxpayers get all the risk. These mortgage insurance products increase the amount of cash the banks can lend out, and I think are contributing to ballooning our housing market.

I thank you both very much for your answers.