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Special investigation: How high-risk mortgages crept north Add to ...

Peter Vukanovich, Genworth's Canadian chief, fought to protect his profitable turf during the hearings and warned the government that it hadn't conducted any studies about the threat of disruption posed by new competitors.

Shortly after the hearing, Mr. Turner said he was approached by Mr. Flaherty's parliamentary secretary, Diane Ablonczy, in the House of Commons. "She came to my desk where I was computing away on my laptop," Mr. Turner said, recalling that she told him to "get onside."

In the end, no one raised a single question about the prospect of 40-year or zero-down mortgages. The bill sailed through the committee - including a vote of support from Mr. Turner.

"At the end of the day I sadly acquiesced," he said, adding that he regrets voting the way he did. "At the time it was politically difficult."

(He has since written and published a book, The Greater Fool, predicting a Canadian real-estate market crash similar to the one in the United States.) The provision later passed through the Senate committee, but not without one ominous exchange.

Senator Terry Stratton, a Conservative, had a prophetic inquiry about the potential that AIG might engage "higher risk" mortgage insurance practices, "thereby increasing the potential for forfeiture, which would place an additional burden on the federal government."

Mr. Charles, AIG's top executive in Canada, waved off the concerns. "In terms of exposure to the government, the practical likelihood of AIG, an organization with $800-billion in assets, ever coming to the government for anything as it relates to a claim is not nil, but it is as close to nil as it possibly could be."

Two years later, Washington has had to pump $150-billion into AIG after its business was shattered by reckless financial gambles.

A STEP TOO FAR

In February, 2006, as AIG was still trying to establish itself in Canada, CMHC moved to protect its coveted spot and announced a pilot project to insure 30-year mortgages.

For the industry, it was a declaration of war.

Two weeks later, Genworth announced it would do the Crown corporation one better, saying it would insure 35-year mortgages. CMHC matched that with its own 35-year product and raised the stakes by announcing it would insure interest-only loans that effectively required no down payment. The aggressive new mortgage products alarmed Mr. Dodge, the Bank of Canada governor, who scolded the president of CMHC, Karen Kinsley, in a letter for "very unhelpful" mortgages that he said would inflate prices and ultimately make homes less affordable.

In October, Genworth struck again, announcing Canada's first 40-year mortgage insurance policy. AIG and CMHC later added their own 40-year insurance products.

Industry officials repeatedly said in interviews that they were shocked at the frenzied escalation of risk. "It was fast and furious," said one AIG executive.

Mr. Vukanovich, the head of Genworth, declined repeated interview requests. In a statement, Genworth said it introduced 40-year mortgage insurance policies "as a continuation of global lending practices and trends at that time." The company added the policies were "prudently underwritten and not used to bring unqualified borrowers into the housing market."

In an interview yesterday, CMHC vice-president Pierre Serré repeatedly pointed to the behaviour of his competitors when asked about the agency's riskier products, explaining that CMHC's rivals were the first to introduce the 40-year products.

Asked if he thought that the new U.S. insurers pushed CMHC into riskier policies, Mr. Serré paused. "It' s a tough one for me to answer. In retrospect you can look at all the individual things happening and you can link them together, but it's a hard one to tell."

"We think we've done a prudent job of introducing these products and managing these products," he added, declining to explain how many 40-year and zero-down mortgages the public agency now has on its books. Unlike in the United States, such figures are not made publicly available in Canada.

Two-and-a-half years after Ottawa launched its mortgage insurance initiative, the promise of increased competition has all but died. Three of the entrants, PMI, Triad and Mortgage Guaranty Insurance Co., have retreated. Genworth and AIG are still operating, but, as financial woes mount for their U.S. parents, their future in Canada remains uncertain. Industry sources said most banks have become so cautious in the wake of global financial crisis that they have sharply reduced their use of private insurance in Canada.

The retreat by international insurers means that CMHC's dominant grip on the mortgage insurance market is expanding again, possibly beyond the 70-per-cent market share it enjoyed prior to the arrival of the bigger U.S. competitors.

An adviser to one of the U.S. insurers, who declined to be identified, summed it up this way: "It's a failed experiment."

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