Evidence of meeting #134 for Public Accounts in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was cmhc.
A video is available from Parliament.
Conservative
The Chair Conservative Kevin Sorenson
I'll let him finish, but I can't let you come back in, Mr. Arya.
Managing Partner, Ernst and Young LLP
It's really a kind of prospective signal. Let's find an event that would incur a capital problem and then look at how to resolve such an event and have a defined action plan. It's more an ad hoc additional stress testing policy in terms of being proactive for future events, but there are stress testing policies in place.
Conservative
The Chair Conservative Kevin Sorenson
Thank you. We'll now move into the second round.
The bells are ringing. I see that. It's about three minutes after 10. There was a motion to go to orders of the day, which means a 30-minute bell. If it's okay, we'll go for another 20 or 25 minutes. Then we can run upstairs and still make the vote.
Mr. Kelly, please, go ahead.
Conservative
Pat Kelly Conservative Calgary Rocky Ridge, AB
Thank you. I
want to allow Mr. Kmiec to continue the line of questioning from the previous round, but before I split my time with him, I want to address or perhaps ask for clarification for Mr. Siddall. This is in response to one of Mr. Kmiec's questions on whether or not insurance premiums were set too high, given that you had excess capital. After many years of concern being expressed by the finance department about capital reserves and public risk in the insured mortgage business, CMHC in fact had excess capital to be paid back to the Crown. It seemed like you were trying to have it both ways.
If the premium was set correctly and the business cycle just happened to be positive—and you prepare for good times or bad—then it would seem that homebuyers are paying a tax when times are good. If times just turned out to be good and that meant you had excess capital that would be turned over to the Crown, how is that assessing the correct level of premium to account for good times or bad times?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
We can't predict the future when we set pricing, and we set that pricing in anticipation of a business cycle over the life of a mortgage, which could be 25 years. On average, it's about seven. In fact, in our annual report, we publish an alternative view of the world that could result in a downside scenario. This is in addition to our stress testing. We've had an extended boom time in economic cycles. In hindsight, it is true that if the economy is consistently growing, the presumption associated with the insurance premium de novo—at the beginning—was too high. The proceeds have gone back to the Government of Canada, and in the case of our private competitors, to their shareholders too.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
They weren't set too high at the time, sir. They were set too high with the benefit of hindsight.
Conservative
Conservative
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
I want to continue partially on what I was asking about before, specifically the FTHB incentive. You said it was going to come from general revenue and it doesn't impact the reserves. Therefore, the weakness identified by the Auditor General in the capital management practices won't be impacted. Is that borrowing or are the funds going to come from the Crown borrowing program?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Yes, they would.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
My next question then is about internal stress testing in scenario planning that you undertake right now. It's to understand the vulnerabilities that the institution has as you issue insurance. You've done some work, I'm guessing, a risk analysis on FTHB and the incentive and how it impacts your regular business. Was the risk analysis on the reserve that you hold done based on the new models, post-AG report, or on the previous models?
I'm trying to understand how much actual risk assessment you have done specific to the FTHB incentive that the government proposed, based on the AG's report, which said that you had a weakness or you continue to have a weakness internally on capital management.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
To be clear, they have stated that it is not a significant deficiency. I just want to address that.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
It's an insignificant deficiency.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Sorry. Mr. MacLellan, do you assert an “insignificant deficiency”?
Assistant Auditor General, Office of the Auditor General
That is not a term we use. I'll just explain very briefly. If it's a significant deficiency, we will raise it. Anything else is a recommendation for a weakness that we identify as needing improvement.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
We did assess the impact on our business as a result of some $1.25 billion in mortgage insurance activity moving away from ourselves and our private competitors into—potentially—this new incentive. Yes.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
My next question is regarding paragraph 24. The AG identified a weakness at the board level in its management of financial reporting and internal control. There was concern expressed that the depth of competency wasn't there.
I'd like to know when the board of directors was told or when they told Mr. Siddall that this FTHB incentive was going to be managed by the CMHC.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
That's a question mainly for me.
Do you want to do this?
Chairman of the Board, Canada Mortgage and Housing Corporation
You can answer.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
The first-time homebuyers incentive was a budget confidential matter that was confidential to our board until the moment of the budget. That's how a budget policy is derived.
We did have conversations with the board about a range of housing affordability policy options including shared equity mortgages in general, back in October, I want to say, for the first time. On the particulars of the program itself, I briefed our board the night of the budget.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Okay.
So you had the information for it and then you briefed the board...?