A tart letter of reprimand from the Governor of the Bank of Canada suggests there have been rocky relations between the bank and embattled Canada Mortgage and Housing Corp. The newly released letter from David Dodge to Karen Kinsley, president and CEO of the housing corporation, uses unusually strong language to criticize new lending policies announced by the federal corporation over the summer.
"I read with interest and dismay your press release of June 28 which indicated that CMHC would offer mortgage insurance for interest-only loans and for amortizations of up to 35 years," the two-page letter says.
"Particularly disturbing to me is the rationale you gave that 'these innovative solutions will allow more Canadians to buy homes and to do so sooner.' " The corporation's actions are likely to drive up house prices and make homes less affordable, not more, Mr. Dodge says in the blunt missive, uncharacteristic of the usually tempered language of the central bank.
By stoking inflation with proposed new policies, CMHC is undermining the work of the central bank with "very unhelpful" actions, Mr. Dodge said.
The letter then upbraided the agency for blindsiding key government institutions.
"I would have thought that as a Crown corporation, you would feel a responsibility to consult with the Bank of Canada and the Department of Finance before taking actions which could make the macro management of the economy more difficult and which have implications for overall financial stability."
The June 30 letter, obtained by The Canadian Press under the Access to Information Act, was copied to Jim Flaherty, Minister of Finance, and Diane Finley, Minister of Human Resources.
Two weeks later, Mr. Dodge told reporters about his fears that policies at the housing corporation could be inflationary, though he used much more neutral language. A day later, Mr. Dodge and Ms. Kinsley met privately to sort things out.
"We were reassured by the fact that CMHC's interest-only mortgage product includes no change in mortgage qualification criteria and as such would not be of significant concern to the bank," Dodge spokesman Jeremy Harrison was quoted as saying.
That statement was taken verbatim from a "messaging" strategy worked out between the bank and the corporation, and distributed by Ms. Kinsley following the meeting to help paper over the rift, internal documents show. The meeting concluded that the bank is "on the same track as we are," a housing agency spokeswoman said.
"We have a good relationship with the Bank of Canada," Anne Dawson said in an interview. "CMHC has and does continue to meet periodically with all public institutions that have common interests with CMHC, including the Bank of Canada." Mr. Harrison declined to comment on the letter, but denied that relations are sour between the two institutions.
"We have a good working relationship with the CMHC," he said.
CMHC, where Mr. Dodge once worked, used to have a monopoly on the mortgage-insurance business in Canada, helping to push its annual profits over $1-billion.
But in 1995, Ottawa welcomed a U.S.-based competitor, Genworth Financial, which has since captured about 30 per cent of the market.
And earlier this year, rules were changed again to allow even more competitors to chip away at the agency's market share.
In the meantime, rumours are rife on Bay Street that the federal government wants to privatize the corporation, though that has been denied by officials in the Finance Department and by Ms. Finley.
And while a cloud hangs over its future, CMHC is reviewing its position in the Canadian housing market by drawing on some American comparisons.
The agency has launched a research project to determine the role that public and quasi-public housing bodies in the United States, such as the Federal Housing Administration, have played in the American market.