Changes coming fast atop shrinking CMHC
THERESA TEDESCO AND GARRY MARR FINANCIAL POST 13/05/13
Canada Mortgage and Housing Corp., the country’s national housing agency, is finally on the
path to being operated like a significant financial player which it has morphed into during the
past decade.
A new chairman of the board, a soon-to-be unveiled chief executive and a new reporting
structure that will overhaul its operations are the tangible indications of the fundamental changes
playing out behind closed doors at the Crown corporation that have been set in motion by the
federal government.
In March, Finance Minister Jim Flaherty tabled legislative changes in the federal budget to
toughen oversight of CMHC by placing it under the auspices of the Office of the Superintendent
of Financial Institutions (OSFI), the highly regarded regulator that oversees Canada’s banks and
insurance companies. Sources say the banking watchdog is expected to conduct an extensive risk
management review of CMHC, and require the housing agency to continue reporting its
financials quarterly, which it began in 2011, like all the other banks and insurance firms under its
purview. First quarter results are scheduled to be released May 30.
In the meantime, a house cleaning is already underway. CMHC unveiled former Wall Street
banker Robert P. Kelly as chairman and will soon announce a replacement for outgoing chief
executive Karen Kinsley, who is stepping down after a 25-year career at the country’s dominant
mortgage insurer. A source familiar with the internal activities at the housing agency says the
structural shakeup is embodied by Mr. Kelly, a Canadian and a veteran financial services
executive who was chairman and chief executive officer of the Bank of New York Mellon, and
formerly with Toronto Dominion Bank. “Bob Kelly is not a grandpa in a rocking chair, he has a
lot of intelligence and energy and market street smarts. You don’t bring him in as chair unless
you want him to do something,” said the source who asked not to be named.
Changes to way the mortgage insurance is administered in Canada are afoot,” said Finn
Poschmann, vice-president of research at the C.D. Howe Institute. “There is no question this
means tighter oversight and better reporting.”
Amid sharply rising defaults in housing markets in some western European countries, greater
scrutiny of CMHC and its operations has assumed a greater urgency. “Housing finance risks
emerged in the past half decade as big and said Mr. Poschmann. “They were the proximate cause
of a major market meltdown in the U.S., less in other countries, but a major contributor.”
In Canada, the federal government and policy makers are scrambling to engineer a soft landing
for the country’s overheated housing market. As the largest provider of mortgage insurance in
the country with about 75% of the mortgage default insurance market, CMHC plays a critical
role in Canada’s housing market. In fact, the agency has been at the forefront of changes that
made it easier to get a loan, much to the chagrin of the Finance minister, who has expressed
concerns about the role CMHC has developed from its historical mandate to advance housing in
Canada.
“Looking back over the last decade, I see an unbelievable mandate creep where CMHC was
doing things that would infuriate taxpayers and running a massive, potentially public liability in
the process,” says Ben Rabidoux, analyst and strategist with U.S.-based Hanson Advisors. To
that end, Mr. Flaherty has attempted to curb CMHC’s growth and reduce taxpayers’ exposure by
making it prohibitively difficult to obtain an insured mortgage backed by the federal government.
For one, amortization terms were trimmed from a high of 40 years to a 25-year maximum.
Furthermore, Ottawa capped the amount it is willing to backstop at $600-billion in an attempt to
curb the amount of bulk insurance in CMHC’s portfolio. It is noteworthy that, according to
CMHC’s annual report released Monday, it reported that it is insuring less mortgages in dollar
terms, roughly $566-billion, in 2012, than it has in recent years.
Having reined in its lending activities, Ottawa also moved to tighten control and oversight of
CMHC “to ensure its commercial activities are managed in a manner that promotes the stability
of the financial system.” Mr. Flaherty criticized the extent to which CMHC’s commercial
functions had commandeered its lending capacity and core functions, most notably CMHC’s
willingness to provide default insurance on conventional mortgage loans with more than a 20%
down payment, which is not required by law because they are considered low-ratio mortgages.
“If there’s ever been a time to be cautious with giving out mortgage debt, now would be that
time,” said Mr. Rabidoux. “What they are doing at CMHC is finally forcing it to act in the best
interest of the general public.”
http://business.financialpost.com/2013/05/06/cmhc-robert-kelly-karen-kinsley/?__lsa=cf11–
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