Changes coming fast atop shrinking CMHC

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 important,” 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.”