Bank regulator to watch over CMHC

Scrutiny on mortgage insurer ensures stronger system: minister

By Gordon Isfeld, Financial Post

The federal government is putting Canada's housing agency under tighter scrutiny amid concerns over a red-hot housing market and rising consumer debt.

Finance Minister Jim Flaherty announced Thursday responsibility for Canada Mortgage and Housing Corp. will be handed over to the country's banking regulator, the Office of the Superintendent of Financial Institutions.

The measure, contained in new legislation tabled Thursday, will "enhance the oversight framework for CMHC to ensure its commercial activities, particularly its mortgage insurance and securitization programs, play an important role in the housing market and the financial system," Flaherty said.

"These proposed changes are part of the government's continuous efforts to strengthen the housing finance system," he told reporters.

"They will contribute to the stability of the housing market and benefit all Canadians."

Flaherty said OSFI would now be responsible for reviewing and monitoring CMHC's commercial activities. Until now, the agency was overseen by Human Resources Minister Diane Finley. "I've been concerned about the CMHC for some time in the sense that it's become an important financial institution in Canada, and it was not subject to the same supervision by the Office of the Superintendent of Financial Institutions," he said. "So I think this is an important step forward."

The government has tightened mortgage-lending rules three times in the past four years as the housing market heated up, and Flaherty said he will again "take action as necessary."

"We watch the market closely, and I particularly watch the condo market in Vancouver, Toronto and to some extent in Montreal."

CMHC's function is to insure consumer mortgages and guarantee mortgage-backed securities issued by banks. The Crown corporation currently has a $600-billion loan limit, which the government increased three years ago from $450 billion. Ottawa guarantees the full value of mortgages insured by CMHC and 90 per cent of loans insured by private firms.

The changes were alluded to in the government's March 29 budget.

On Wednesday, Flaherty said "the issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low-ratio mortgages," adding "that's not the way most people usually think of CMHC."

Queen's University finance professor Louis Gagnon said he has also "been concerned about the CMHC for a long time."

"I believe that the federal government's plan to bring CMHC under the direct supervision of the Office of the Superintendent of Financial Institutions is long overdue," said Gagnon, who specializes in debt and risk management.

"In fact, the previous oversight arrangement was ill-suited for this important task and I never did understand why the CMHC had been placed under the jurisdiction of the minister responsible for Human Resources and Skills Development. This was a recipe for a disaster."

Canada's hot housing market has long been a concern for the government and the Bank of Canada, which has kept its key interest rate at a near-record low of one per cent since September 2010.

Mortgage rates also hit new lows as commercial banks competed for consumers who are continuing to buy into the housing market even as prices rise.