The International Monetary Fund is calling for a review of the rules that govern Canada Mortgage and Housing Corp. to ensure there is sufficient oversight of the Crown corporation.
“Since CMHC is now one of the largest financial institutions in Canada and the key backstop to the housing market, it would be useful to undertake a review aimed at ensuring that CMHC has a modern and effective governance structure and supervision, and assessing the scope for further strengthening its risk management,” said one of dozens of recommendations the IMF made in its annual report on the Canadian economy.
Gian Maria Milesi-Ferretti, the IMF official who led the review of Canada, stressed on a conference call with reporters that the fund has no reason to think CMHC currently represents a risk.
Rather, the IMF simply thinks the government should evaluate closely whether it’s appropriate for one of the country’s largest financial institutions to operate without formal oversight, he said.
Critics such as the C.D. Howe Institute have long called for legislators to re-evaluate the system and consider spinning off, or even winding down, CMHC’s main mortgage business. The IMF’s report comes after Finance Minister Jim Flaherty made moves to enhance Ottawa’s authority earlier this year, suggesting the IMF believes those changes have not gone far enough.
“Strengthening oversight of the [CMHC]will be particularly important,” given Canada’s record levels of household debt and evidence that some cities are experiencing house-price bubbles, the IMF's executive board said in a separate statement.
This year’s federal budget made a number of changes to the National Housing Act, including giving the minister of finance the ability to charge CMHC fees to compensate the government for the risk it is taking on by way of CMHC’s mortgage insurance.
The minister can also obligate CMHC to disclose information directly to either himself, the superintendent of financial institutions, the governor of the Bank of Canada, the head of Canada Deposit Insurance Corp., and the commissioner of the Financial Consumer Agency of Canada.
There is also a new rule that essentially allows the minister to determine what type of information CMHC must make publicly available.
The regulations spelling out these changes in detail have not been finalized.
The changes were announced at the same time that Ottawa gave itself more power over CMHC’s private-sector competitors in the mortgage insurance market, Genworth Financial and Canada Guaranty. The government did so because it has recently gotten into the habit of tightening up the housing market in an effort to stop consumers from taking on too much mortgage debt, and the easiest way to do that is to change the rules about who is eligible for mortgage insurance. However, Ottawa’s dealings with the private-sector mortgage insurers were governed by contracts, and so the government has moved to give itself broader authority.
CMHC noted in its most recent quarterly report that it “follows prudent regulations as set out by [the Office of the Superintendent of Financial Institutions]to protect the Canadian taxpayer from potential future costs arising from mortgage defaults and to maintain a level playing field with private mortgage insurers.”
CMHC boasts that it holds at least twice the minimum capital level that OSFI requires of insurers. However, the minimum levels are the lowest level that OSFI would allow, and most insurers have been forced to hold much higher amounts given the current economic uncertainty. OSFI tailors its requirements for the financial institutions that it directly oversees, and will require institutions with more risks on their books to hold significantly more capital.
The banking and insurance regulator also keeps tabs on the institutions that it oversees in a number of other ways, such as regularly grilling and assessing their boards of directors. Its qualitative observations can feed into the requirements it places on a bank or insurer.