NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 13, 1999

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[English]

The Chairman (Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)): I call to order this April 13 meeting of the Standing Committee on Natural Resources and Government Operations.

Today we are having an extra-long session in order to hear from several witnesses on Bill C-66, An Act to amend the National Housing Act and the Canada Mortgage and Housing Corporation Act.

Colleagues, we're trying to be as efficient as we can, so with the assistance of the clerk I've scheduled witnesses in three one-hour segments.

First, from the Appraisal Institute of Canada, we have Bob Wade, president-elect, and Terry Gifford. From GE Capital, we have Peter Vukanovich, Phil Mayers, and Bob Weese.

Since the people from GE Capital are still catching their breath, maybe we'll have the Appraisal Institute of Canada start out.

We would ask each of you to try to keep your remarks to no more than five to ten minutes, giving members an opportunity to ask pertinent questions.

Mr. Wade, I invite you to start.

Mr. Bob Wade (President-Elect, Appraisal Institute of Canada): Mr. Chairman, I thank you very much for the opportunity to appear before the committee today.

I'm joined today by Mr. Terry Gifford, executive vice-president of the Appraisal Institute of Canada, which is located in Winnipeg.

We have distributed copies of our submission in both official languages. I'd like to take a few minutes to draw your attention to what we see as our major concerns. Then we will gladly answer any questions.

The Appraisal Institute of Canada represents about 5,000 professional appraisers. Many of them operate small businesses in communities across Canada. The institute is dedicated to serving the public interest by maintaining high national standards of professional practice in the analysis and valuation of, and counselling on, real estate matters.

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In most housing and real estate transactions, members of the institute have provided the consumer with their only independent advice. Typically, the lender wants to place a mortgage; the insurer is there to underpin the lender; the real estate agent wants to close the deal; and the appraiser is there to protect the consumer.

Historically, the institute has enjoyed a good working relationship with Canada Mortgage and Housing Corporation. The corporation has in the past helped to fund our constantly changing education program. This has enabled us to maintain the highest appraisal standards in North America.

I must be frank and say that good relations were somewhat strained three years ago when CMHC introduced computerized risk evaluation. We received three summer months' notice before CMHC began joint advertising with the TD Bank for what is called “emili”.

Mr. Chairman, we believe the legislation before you is flawed. While it opens up business opportunities for CMHC, it does so at an undesirable cost in terms of federal housing policy. We wonder whether members realize the full significance of these amendments.

Until now, we have all taken pride that CMHC, as our national housing agency, offered services at the same price to all Canadians wherever they might live. The corporation used the principle of cross-subsidization to balance off business in high-risk areas against business in areas where the risk is lower.

Proposed section 19 of this bill gives CMHC authority to abandon that principle, a principle that we thought was at the heart of our national housing policy. You could even say it was the basis for CMHC, as Canada's housing agency.

The amendments give CMHC the flexibility to vary the price of its premiums according to risk. Are members content to see Canadians in northern Ontario or northern Alberta be charged higher premiums for mortgage insurance than are Canadians in southern Ontario? Will the government require an undertaking from CMHC that it will never exercise this power, or will proposed section 19 be amended?

While that particular example doesn't directly affect the institute, it does show how the amendments change federal housing policy.

Let me return for a moment to emili and its impact on housing markets. A computerized risk assessment system is only as good as the database on which it is based. We think the quality of the emili database is an issue, but if—and it's a big if—the input data are correct and accurate, there is a place for computerized risk evaluation in the marketplace.

CMHC has been reducing qualified appraisers on staff while simultaneously reducing the number of appraisals it requires for mortgage insurance applications. As a result, we are by no means certain that Canadians can have confidence in emili.

What we do know is that emili can't guard against the irregularities and fraud that exist in the marketplace, and neither can it catch the pitfalls that arise with Canada's rapidly aging housing stock. It's our view that computerized risk assessment systems depend on the market being transparent, and more often than not, it is, but appraisers are aware that irregular deals and aging housing stock are facts of life out there. Let me give you some examples.

In a sale, the vendor may throw in an expensive boat. It doesn't come to CMHC's attention, certainly not through emili.

There may be a sale where there is an early closing bonus of, say, $10,000. That doesn't come to CMHC, which only sees the offer to purchase of $100,000.

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In another scenario, the vendor gives the buyer a so-called repair grant of $10,000. Let's say the selling price is $100,000. That's what goes into CMHC's data, but in fact the buyer has paid $90,000 for the property.

If a house is more than 40 years old, you must look at factors beside the credit rating of the buyer. A great credit rating does not detect structural problems.

Mr. Chairman, we believe it's the job of a national housing agency, with the responsibility for a huge mortgage insurance fund, to address these issues. We've proposed a well-defined system of random appraisals designed as the principal means of monitoring irregularities, fraud, and aging concerns. It could begin as a pilot project.

First, the frequency of random appraisals and the types of properties would have to be established. CMHC could then requisition the appraisals. A transparent and preferably arm's-length means of auditing the results would have to be established. After a year, the results could be reviewed, and the frequency of the random samples could then be adjusted.

We've also suggested that CMHC offer a reduced rate for emili processing when the applicant has a current appraisal. This step alone would build increased confidence in the system and could only strengthen the long-term credibility of emili.

CMHC will say that it already offers an incentive to get an appraisal. It's true that there is a reduced rate under its current basic service option, but we understand this is a seldom-used option that CMHC is actively discouraging. The corporation is currently promoting the exact opposite—an incentive not to get an appraisal. Effective April 1, rates were cut for the use of emili without an appraisal, from $235 to $165.

Mr. Chairman and members of the committee, we understand that CMHC must adjust to the times. So must the institute. We said to the minister, and we say to you today, that we want to realign the appraisal industry for the needs of a new millennium. We are interested in working with CMHC.

As a matter of fact, last December we made these proposals to Minister Gagliano in the company of a CMHC vice-president. The minister told us he thought the proposal for random appraising had merit. On March 19 he even told the House of Commons about our discussion, giving the impression that we were working together.

We have had no response to what we thought was a constructive proposal.

Mr. Chairman, the proposed amendments orient CMHC toward making a profit and away from being a national housing agency. We believe the corporation should continue to play a major role in the Canadian housing market. There should be more to a national housing policy than providing instant approvals for mortgage lenders.

The proposed amendments are very broad. They undoubtedly open up a number of new business opportunities for CMHC. As we say in our submission, which you have before you, we would be glad to work with the corporation on a number of initiatives.

Proposed section 77 gives CMHC the capacity to promote housing outside Canada. The institute has broad international experience and is widely respected. There should be opportunities for mutual cooperation in that field.

Proposed sections 57 and 58 give CMHC authority to develop equity takeout loans and reverse equity mortgages. In the private sector's experience with these products, appraisals have generally been required. We see opportunities again in this area.

Proposed sections 7 and 8 and proposed subsection 25(1) give CMHC the flexibility to develop products to assist in rental housing projects. Virtually no new rental stock has been built in this country for many years. We strongly support measures that encourage investment in the rental sector. Because of the complexity of rental housing loans, there may well be opportunities for our members to contribute to the development of this initiative.

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When he appeared before you on March 25, the minister said the government would ensure that CMHC would continue to be responsible, and that CMHC would ensure that Canadians continue to have access to decent housing. If that's the case, then perhaps the committee can discuss with the minister the best way to ensure that the issues we have raised are addressed.

We think the committee should also confront honestly the issue that the government is authorizing CMHC to abandon the time-honoured practice of offering service at the same price to all Canadians so that they will truly have equal access to decent housing, wherever they may live.

Mr. Chairman, this legislation has been a long time in the development process. It's been three years since the government announced its intention to commercialize CMHC. That being the case, we see no need to rush these amendments through. We urge the committee to take time to look carefully at the issues we have raised.

Thank you very much.

The Chairman: Thank you, Mr. Wade.

We'll go ahead and hear from GE Capital and then we'll have questions from members.

I invite Mr. Vukanovich to likewise try to keep it to around ten minutes.

Peter.

Mr. Peter Vukanovich (President, GE Capital Mortgage Insurance Canada): Thanks very much.

Mr. Chairman, honourable members, ladies and gentlemen, please allow me to introduce my colleagues. Mr. Phil Mayers is vice-president of business development and securitization with GE Capital Mortgage Insurance and Mr. Bob Weese is vice-president of government and external relations for GE Canada.

I'd like to begin by thanking the committee for hearing our views on Bill C-66. We feel it's a very important piece of legislation, one that will have a profound and long-term impact on the Canadian mortgage insurance industry and millions of Canadian homebuyers with low or moderate incomes who, as you know, would not be able to buy a home without mortgage insurance. As you also know, financial institutions are required to purchase mortgage default insurance for any transaction where the homebuyer has a down payment of less than 25% of the value of the home.

Like CMHC, we have anticipated this legislation for some time, and agree that CMHC requires some of the additional flexibility that this bill will provide to operate effectively in the marketplace. CMHC's commercialization objectives make sense, and we applaud the government's intention to promote competition in mortgage insurance by levelling the playing field. Healthy competition clearly benefits consumers, lenders, and taxpayers.

As you're aware, CMHC had a monopoly from 1993 to 1995 as a mortgage insurance provider when the Mortgage Insurance Company of Canada, also known as MICC, ceased operations due to capital programs. GE Capital Mortgage Insurance Canada, or GEMICO, entered the Canadian market in 1995 when we purchased the mortgage insurance franchise from MICC.

Since entering the market, we've been proud to have introduced a number of innovative benefits in several areas: significant reductions in application turnaround time; mortgage insurance portability; partnerships with home service providers; electronic application delivery systems; and risk management systems that combine the use of technology, as Mr. Wade just described, and appraisals.

To give you some examples as to how that relates to benefits to consumers, what used to take two days to approve now takes less than a minute in 50% of the applications we receive. Application or underwriting fees recently have gone from $235 down to $165. So there are price benefits to consumers.

There have been reduced premiums for second-time high-ratio purchasers. We introduced that to the marketplace and CMHC followed. Realtors, home inspectors, builders—we've all promoted programs with them to benefit consumers.

As I mentioned to you, over half of the business is now sent to us electronically. This is a big productivity hit for not only our customers, the lenders, but also for us as we move the transactions through and make decisions on them.

Finally, with respect to appraisals, we currently do appraisals on approximately one-third of the transactions we have. So we think it's a very prudent risk management practice.

Our customers, the lenders, will also agree that CMHC has responded to our entry with new products and more efficient service. To ensure the maintenance of a healthy, competitive marketplace, we feel that Bill C-66 requires three additions and five amendments.

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These amendments can be made simply. As well, we feel they're fairly easy to implement. If you like, we have some wording we can make available to your committee for further review.

Before I get into the details of our proposal, I'd like to give the honourable members some background on GE Canada and GE Capital Mortgage Insurance.

We're proud to be part of GE Canada, which was established in Peterborough, Ontario, in 1892. It now employs over 9,300 Canadians and operates 12 major manufacturing facilities, many of which are internationally recognized for their innovation, productivity, and efficiency. All of GE's 10 global businesses are present in Canada, including 16 of GE Capital's 28 financial services businesses. Total revenue for GE Canada in 1998 exceeded $4.7 billion Canadian. So it's a fairly large company.

Within that large Canadian company is a smaller company, GEMICO. Our parent company, which operates out of Raleigh, North Carolina, is the largest private provider of mortgage default insurance in the world, with subsidiaries in the U.S., Canada, the United Kingdom, and Australia, where we recently purchased the business.

When we purchased the mortgage insurance franchise from MICC in Canada, the purchase included the assignment of an agreement with the Government of Canada that guarantees 90% of GEMICO's policy liabilities in the event of its bankruptcy. As consideration for the guarantee, GEMICO pays an annual fee to the government and contributes to a trust fund established to protect policyholders.

As a licensed insurance company in Canada, we are regulated by the Office of the Superintendent of Financial Institutions, or OSFI. This requires us to meet stringent capital requirements and undergo regular financial and operational reviews.

Our mission is to work in partnership with lenders, mortgage brokers, realtors, and builders to make housing more affordable to all Canadians. We have to do it this way to be a profitable and vital Canadian enterprise. This is just like CMHC's new commercialization mandate.

To date we've insured over $75,000 Canadian homes and invested over $200 million in capital, now employing 90 Canadians in 12 locations across the country. We currently have $440 million in assets and can serve mortgage lenders and consumers anywhere in Canada.

We estimate our current market share to be approximately 12% of the total Canadian market, which obviously leaves 88% for CMHC. To date our business has been fairly successful, but again relatively small compared with CMHC.

This brings me back to why we're here today. In our opinion, for the benefit of Canadian homebuyers and the provision of innovative and efficient services, this legislation needs to result in a healthy marketplace and a level playing field in the Canadian mortgage insurance market. In a two-company industry where the companies are governed by different legislation, Bill C-66 in its current form can significantly affect the playing field.

Honourable members, we're aware that the Financial Administration Act subjects CMHC to oversight by the Department of Finance and Treasury Board, and CMHC is required to submit its five-year corporate plan to Parliament each year. However, we believe this legislation needs to include detailed amendments to ensure that the government's intentions are realized.

We've noted many references from both government and CMHC relating to the desirability of competition on a level playing field. CMHC's 1998 corporate plan summary refers to the commercialization initiative.

On page 8 it says:

This will benefit consumers as well as contribute to healthy competition. CMHC needs to ensure that the basis for public private competition is fair (i.e., that CMHC has no unfair advantages).

Further, page 16 goes on to say this:

Since CMHC operates in competition with a private mortgage insurer, it needs to ensure that prices for its products and services are set appropriately and its operating costs are comparable to those of the private sector.

Honourable members, we completely agree with those statements. However, we have concerns that part I of the bill may not achieve these results, or indeed may tilt the playing field even further to the advantage of CMHC, thus hindering competition and its attendant benefits to the industry and consumers.

CMHC, with an 88% market share, already enjoys substantial competitive advantages for three fundamental reasons that are not even addressed in Bill C-66. Again, we think we have some simple ways to make some corrections to the legislation that will allow this level playing field to happen.

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First, the 100% government guarantee versus the 90% for GEMICO places the private insurer at a distinct disadvantage. Under some rules set by the Bank for International Settlements—and these are rules lenders are required to follow—lenders keep zero capital in reserve when a loan is insured with CMHC, but they must keep $400 of capital for every $100,000 of mortgages issued by the private insurer.

The capital cost differential has resulted in several lenders indicating that, going forward, they will be forced to limit or even curtail their purchases of mortgage insurance from GEMICO, despite receiving outstanding service.

This all comes back to the fact that the mortgage business has become an extremely competitive environment, as you read every day, with regard to cost reductions and interest rate reductions. The product margins are very narrow. As this cost differential created by the capital requirements becomes more and more of a cost issue upon which they're focusing, they're continuing to push back in terms of continuing on with us. So it makes it very difficult for us to compete on a level playing field.

We have a quick fix for this, which I'd ask Mr. Mayers to briefly explain to you.

Mr. Phil Mayers (Vice-President, Business Development and Securitization, GE Capital Mortgage Insurance Canada): Under section 5 of the Canada Mortgage and Housing Corporation Act, CMHC is authorized to be an agent of the crown. We would suggest that wording be added to that section such that except for the insurance provided under section 8 of the National Housing Act, CMHC would continue to have the full backing of the government guarantee. That would then allow Parliament to determine the level of government guarantee that would apply to CMHC and the terms on which CMHC would receive that guarantee.

We'll be able to follow up this meeting with details, in writing.

Mr. Peter Vukanovich: The second amendment we'd like to see introduced relates to private insurers who currently are unable to successfully develop and market new products to benefit consumers, since only products offered by CMHC qualify for the 90% guarantee.

Without any guarantee, our lenders must hold $4,000 of capital per $100,000 of mortgage. This makes our offerings fairly unattractive to them from a cost perspective. This forces the private insurer, or GEMICO, to follow CMHC on all new product introductions, and reduces the incentive for us to develop new products independently. We have ideas, a lot of good ideas, that we think can benefit consumers, but we need to be able to lead with them for them to benefit.

Third, CMHC has announced it will fund additional policy reserves and commence payment to government based on the capital and additional policy reserves that OSFI requires of private insurers. Again, this is the right objective, but by our calculations the fee of $197 million, payable over the next five years, is understated, since it's not calculated using a private-sector-like cost of capital.

Since CMHC's 88% market share makes them the price leader, understating the fee may result in underpriced insurance products, inadequate returns, undue risk, and excessive liability exposure for the taxpayer.

For your review, we have appended to this statement a pricing model that reflects the private sector reality. Our suggestion is that they be made the same.

In summary, to level the playing field we ask the committee to consider the following three additions to Bill C-66.

One, require the same level of government guarantee for both public and private insurers. Either we both have 100% or we both have 90%. To make it fair for both, we should have the same number.

Two, extend the guarantee to apply to any mortgage insurance product offered by the private insurer. This would benefit consumers and spur innovative products.

Three, require CMHC to calculate the Government of Canada fee using a cost of capital comparable with that of other Canadian financial institutions. That will reflect, and result in, fair pricing.

Just as importantly, we'd like to also ask the committee to consider amending Bill C-66 in the following five specific areas in order to ensure the safety and soundness of CMHC's operations, minimize risk to taxpayers, and create the level playing field we've mentioned several times.

First, in the areas of issuing securities and the powers of approved lenders, as detailed in proposed sections 6 and 17 respectively, we request that Parliament not grant CMHC the power to become a financial intermediary in the funding of mortgages by issuing securities. No private sector can compete with the government when the government has a 100% sovereign government guarantee.

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We feel this would be a significant expansion of CMHC's powers relative to its current mandate and could potentially lead to the management of and exposure to very volatile risks. Some of them you may know of from what's been written in the papers regarding prepayment risks and interest rate risks. A lot of companies have had significant trouble managing these things.

As well, proposed paragraph 6(1)(d) appears to conflict with the Bank Act by permitting lenders to pledge mortgages as securities to CMHC for borrowings. So I think there are some issues you need to understand with regard to that.

Second, we feel the powers proposed in proposed section 8, dealing with insurance of loans, are too broad relative to CMHC's mandate and GEMICO's abilities as a licensed mortgage insurer. The legislation should be amended to specifically define CMHC's insurance powers to relate to indemnifying lenders against losses resulting from defaults on housing loans by borrowers. This would parallel OSFI's rules in the way they look at us.

We're concerned that we're constrained in this area by OSFI. By broadening CMHC's abilities they could get into other types of insurance that would be clearly in competition with other members of the private sector. That would make it very difficult for us to compete. Again, it's not the same set of rules.

Third, we applaud the proposal to give CMHC the ability to reinsure, as outlined in proposed section 18. However, we feel the corporation should be subject to guidelines similar to those published by OSFI. As well, to protect taxpayers, these reinsurance agreements should require Governor in Council approval.

Fourth, GEMICO agrees with the need to accelerate the growth of the secondary market for mortgage funding by providing a wider range of secondary market products, as outlined in proposed section 14. We're pleased to see that GEMICO-insured mortgages will now qualify for CMHC's timely payment coverage.

We suggest an amendment to the legislation to require CMHC to offer its timely payment guarantee on non-discriminatory terms and conditions, including price, since GEMICO-insured mortgages already benefit from a 90% government guarantee.

Again, it's the same issue. To be competitive and have it level, it has to be offered to lenders in a way that results in the same cost to them.

Finally, we feel proposed section 19 should be amended to require specific guidelines in establishing premiums and fees using an appropriate cost of capital, OSFI-like corporate governance, and prudent risk management practices, including the use of property appraisals, to ensure the safety and soundness of CMHC's operations.

In summary, Canadians are clearly benefiting from competition in the mortgage insurance market. More benefits will accrue by levelling the playing field. We encourage honourable members to consider how the changes outlined in Bill C-66, in conjunction with our recommendations, will affect current and future competition.

Thanks for listening. I'll be available for questions now as well as during the consideration of your bill.

The Chairman: Thank you, Mr. Vukanovich.

We'll start questions with Werner Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you very much, Mr. Chairman.

Thank you very much, gentlemen, for appearing before us this morning. You have raised a number of issues. All of them, I'm sure, are somewhat concerned with your particular business, and come at this from your perspective, but what impressed me more than anything else was your concern about making public housing available to everybody in Canada, making this as low-risk as possible for everybody while ensuring a comfortable return for everybody in the business, and making sure the rules are fair across the board. That rational approach makes an awful lot of sense to me.

My question is, what specifically ought to happen, then, to make this the case? How could there ever be a level playing field when the government of a country, with all its resources, exists, and has a corporation that is acting as its agent in the private sector? How could you ever expect a level playing field to accrue?

Mr. Peter Vukanovich: With the amendments we've introduced and the progress we've made in the last three years since coming into the industry in 1995, I think we can compete. I think it accrues benefits again back to consumers and back to lenders.

Mr. Werner Schmidt: If these amendments were instituted, do you believe there then would be a level playing field?

Mr. Peter Vukanovich: Yes.

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Mr. Phil Mayers: I think the critical element for a level playing field would be the same level of government guarantee. We think the recommendation we've proposed—that is, to extend the same level of government guarantee to both competitors—would be in itself a great first step toward levelling the playing field in conjunction with the other recommendations outlined in our presentation.

Mr. Werner Schmidt: That's very significant, Mr. Chairman.

If that's only a first step, what's the next step?

Mr. Phil Mayers: I think the following steps are the five specific recommendations we have outlined.

In terms of a competitive playing field, many of CMHC's advantages stem from their 100% government guarantee as well as the different legislative frameworks by which we are governed. Being governed under the Insurance Companies Act, we're subject to the guidelines published by OSFI. In many cases, the view OSFI has taken of mortgage insurance is that it is to be a mono-line insurance business. They will not allow us to write other lines of insurance within the same company. The legislation proposed in Bill C-66 would allow CMHC to combine a number of various insurance lines. There are several examples of that.

So a lot of our recommendations are focused on bringing the playing field back to a level playing field by proposing that some of CMHC's broad powers be restricted to those available to the private sector.

Mr. Werner Schmidt: Then would you suggest that CMHC be subject to the same scrutiny that OSFI exercises on other financial institutions?

Mr. Peter Vukanovich: Absolutely.

Mr. Werner Schmidt: Would you then suggest that CMHC be legally subject to the operation and supervision of OSFI?

Mr. Peter Vukanovich: Yes.

Mr. Werner Schmidt: If that's the case, does that mean CMHC would in fact become a financial institution like other financial institutions in Canada—banks, trust companies, insurance companies?

Mr. Peter Vukanovich: They'd be subject to the same rules, yes. I'm not sure what it does in terms of their corporate structure or how they're set up.

Mr. Werner Schmidt: Does that matter?

Mr. Peter Vukanovich: No.

Mr. Werner Schmidt: Okay.

To the Appraisal Institute of Canada, if that's the case, then what would be OSFI's concern with prudential portfolios with regard to CMHC's operations?

Mr. Bob Wade: Can we have the question again, Mr. Schmidt?

Mr. Werner Schmidt: In terms of the risk management OSFI requires in terms of prudential portfolios by insurance companies and financial institutions, how would that requirement change the operation of the appraisal institute vis-à-vis CMHC as it currently exists and if the mortgage companies were now subject to the same kinds of regulations as insurance companies are?

Mr. Terry Gifford (Executive Vice-President, Appraisal Institute of Canada): If that were the case, it would require CMHC to obtain appraisals on many of the properties they insure. At this time, under emili they do not obtain any appraisals.

Mr. Werner Schmidt: In other words, if the CMHC were subject to the same regulatory provisions as insurance companies and other financial institutions are under OSFI, the concern to provide safety of the insured vehicles would increase dramatically over what it is today.

Mr. Terry Gifford: Security for the Canadian taxpayers would be increased, yes.

Mr. Werner Schmidt: Does that mean the Canadian taxpayer at the present time is at risk because of CMHC's policies?

Mr. Bob Wade: That's to be determined, I guess. Now, emili has been in existence for only the past three years, but we think it may well be at risk. I have nothing substantive on which to base that, but I do know that insurance premiums a year ago were increased from 2.5% to 3.75%. Whether that was done in an effort to pump up the fund that's in place or whether it was done as an anticipatory measure in terms of their expansion, Mr. Schmidt, I honestly don't know.

Mr. Werner Schmidt: Would emili be satisfactory to GE Capital for the appraisal of its mortgages that it wishes to guarantee?

Mr. Peter Vukanovich: We have our own automated system that evaluates the properties but it does not completely eliminate the use of appraisals. We don't find it a prudent risk practice to do that.

Mr. Werner Schmidt: You referred to having one-third of your properties appraised. Is that done through the automated system or in another way?

Mr. Peter Vukanovich: The automated system receives the application and makes the determination on whether appraisals should be obtained, based on whether or not it's a high-risk transaction.

Mr. Werner Schmidt: To the institute, then, is it your suggestion that what should be happening here is a combination of emili and other appraisals?

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Mr. Bob Wade: Yes, that's our suggestion, Mr. Schmidt.

As we proposed to the minister at our meeting in December, there should be a random sample taken, with the number of properties to be studied to be determined. We would then understand, as would the corporation, whether they were in fact vulnerable and whether they were incurring losses that come as a result of not physically inspecting a property.

As I mentioned in my remarks, that study could continue for a year. We could sit back after that time, do an assessment of the results, and either increase or reduce the number of appraisals, depending on the results.

Mr. Werner Schmidt: I'd like now to ask you for some clarification on a totally different subject—namely, reverse mortgages. How do you insure reverse mortgages?

Mr. Peter Vukanovich: We don't do those right now.

I wouldn't pretend to be the expert on a reverse mortgage situation. Perhaps Phil—

Mr. Werner Schmidt: But the bill provides that the new power given to CMHC is to guarantee a reverse mortgage. You're in the business. How would you ever go about doing something like this?

Mr. Phil Mayers: I think it's more difficult than a conventional mortgage in that the balance, instead of decreasing as payments are made, increases over time. That makes it somewhat difficult. A large part of the risk relates to the estimated remaining life of the borrowers.

So it has some aspects that are similar to life insurance. Certainly it's a substantially higher-risk product. You can always price the risk, but I think the question we struggle with is whether you can price the risk such that it's attractive enough to the population for good take-up.

We have looked at it from time to time, and our analysis suggests that the price one would require to adequately cover the risk would be very substantial. That, in turn, would make it very difficult, and it may have a very low market acceptance.

Mr. Werner Schmidt: That's from the financial point of view.

I think the appraisal institute mentioned earlier the aging housing stock figures in Canada, which in itself increases the need for on-site appraisals of particular property. When you get into the reverse mortgage business, we're obviously talking about a stock that's aging.

Does this have any connection between insuring a reverse mortgage and the need for the appraisal institute to do it in a different way from what emili would provide?

Mr. Bob Wade: I think so. Reverse mortgages have been done by lenders to this point. It hasn't been a particularly popular program, but our understanding is that in almost every situation, with every property there is a physical appraisal completed. We think that's essential in order to ensure that the fund is not going to be negatively impacted. Somebody has to go through the property.

In a reverse mortgage situation, it could be a house of 40 or 50 years that perhaps has had little, if any, maintenance, and the house is in a deteriorating condition. That has to be factored in through the physical inspection. That is not currently being handled under emili.

The Chairman: One more short question, Werner, and then I'll get back to you.

Mr. Werner Schmidt: Okay, thanks.

Now, this is a judgment call. All of you gentlemen have appeared before this committee saying you're very interested in having housing available to every Canadian at a reasonable price. Are reverse mortgages in the best interests of Canadians?

Mr. Bob Wade: From our standpoint, I think it is an option that very clearly has to be looked at. Our population, as we all know, is continuing to age, and people don't necessarily want to have to move from their present house. Reverse mortgages offer the opportunity for them to continue to stay in their home and to use some of the equity in order to stay in the home.

Yes, I think reverse mortgages, properly insured, can be a very big factor for the Canadian public.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

The Chairman: Thank you, Werner. I have you on the list and I'll come back to you.

Roy Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you very much, Mr. Chairman.

Thank you, gentlemen, for appearing today. Given the limited time, I'd like to focus on GE Capital and the presentation by both Mr. Vukanovich and Mr. Mayers.

When CMHC presented, they talked about the need to level the playing field from their perspective to meet certain public policy objectives—market failures, if you like, or areas where the private sector can't go very easily.

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From what you've said, I gather you don't have any major problems with that. You have some concerns around where this additional mandate could take CMHC, but in terms of meeting certain public policy objectives, you have no difficulty with that, or with some of these areas of expansion. Is that correct?

Mr. Peter Vukanovich: Yes.

Mr. Roy Cullen: I'd like to come back to the other area you talked about, the sense of re-levelling the playing field for GE Capital. In your statement you talked about the 100% guarantee by the government and the 90% guarantee for GE Capital. If the loan is insured with CMHC, then there's zero capital in reserve requirement, but for a non-CMHC, there's $400 of capital for every $100,000 of mortgages insured by the private sector.

You mentioned the Bank for International Settlements' rules. Is that a constraint, or could our government...and I'm wondering which part of our government—OSFI or Finance or Supply and Services Canada? Could they make those changes to level that playing field for you in this area, or are there some constraints internationally or anything else you're aware of that would prohibit that? Who would take the lead on that?

Mr. Phil Mayers: Our understanding is that Canada is a signatory to the Bank for International Settlements' rules, rules that are intended to provide the same international framework for the regulation of financial institutions given the globalization of the financial services industry. We understand it would be very difficult for Canada to alter that, because that's a rule Canada has accepted. As well, as we understand it, both OSFI and the Department of Finance were actively involved in those activities.

Mr. Roy Cullen: Do you think some way could be developed to accomplish the objective you're seeking, or is there still a lot of homework to be done on that front?

Mr. Phil Mayers: Our homework to date indicates it's unlikely there's a remedy in that framework, with Canada being a signatory. As long as CMHC continues to have a 100% government guarantee, the assets of the banks are considered to be a sovereign risk, and therefore require a capital percentage of zero.

Mr. Bob Weese (Vice-President, Government and External Relations, GE Canada Inc.): Perhaps I could add to that, Mr. Cullen.

We've had our lawyers look at this issue, and they believe the mortgage insurance business of CMHC could be treated in a different way from CMHC business generally through a simple amendment. The legislation would say something like, “Except for the mortgage insurance business, CMHC is an agent of Her Majesty”, which would then allow the government to establish the same level of guarantee for CMHC, should the government choose to do so, that they have for our mortgage insurance business.

Mr. Roy Cullen: You're talking about amendments to this bill.

Mr. Bob Weese: Yes.

Mr. Roy Cullen: It's not really possible, realistically, to go the other way, to have OSFI level the playing field through their channels. It needs to be done, you're saying, through an amendment to this particular bill.

Perhaps we could talk about the mandate expansion, if you like, that CMHC is seeking through this legislation. Could you paint a picture of some of the areas that would be of concern to you if CMHC developed this mandate into an area that would create what you might perceive to be an unfair advantage in your competitive marketplace? Can you paint any pictures of where that could go?

Mr. Peter Vukanovich: I think we talked about it a little bit. There are several examples. One would be the broadening of powers in terms of offering insurance products. I think that was second on our list of five amendments.

It's not very clear from the legislation what CMHC's intent is here, but if, for instance, they decided to wade into other insurance products and bundle those up so that our customers, the banks, started having a one-stop-shop approach with CMHC, I can see our customers wondering why they should go to GE just for mortgage insurance when they can buy five or six different types of insurance from CMHC; better yet, it's all 100% government guaranteed.

So it's very loose wording in the legislation right now. To us, it doesn't clearly outline what CMHC's intentions are.

Mr. Phil Mayers: Home insurance would be a specific example of what Peter is alluding to.

Proposed section 8 of Bill C-66 reads:

The Corporation may provide insurance against risks relating to housing loans.

Previously in the NHA the definition was a lot more specific to mortgage insurance. One could argue that it could include home insurance, creditor life insurance, job loss insurance, or title insurance. What is not clear to us is what the government's intent is with respect to CMHC's mandate. Should the government's intention be to continue the mortgage insurance business, we would recommend that the mandate be to refine the definition to be specific to mortgage insurance.

• 1020

Mr. Roy Cullen: If that is not possible, could it also be achieved by CMHC articulating more clearly in terms of their corporate plan or their mandate statement where they would intend to take this and where they would intend to limit it?

Mr. Peter Vukanovich: I think that is one way to do it. Our concern, again, is the level of detail that's included in the corporate plan. When you look at it from a private sector approach with somebody like the superintendent, they're very thorough and very understanding of what's going on, as well as very conservative. For us to be able to do something like this would require a lot of groundwork and a lot of explaining. Quite frankly, they've been very reluctant to let us go beyond our current mandate, our licence.

Mr. Phil Mayers: As well, these powers can fundamentally change the nature of CMHC's mortgage insurance fund. We think a matter of this significance is a matter for legislation.

Mr. Roy Cullen: Good. Thank you.

The Chairman: Thank you, Mr. Cullen.

Ghislain, please, then Marlene.

[Translation]

Mr. Ghislain Lebel (Chambly, BQ): I would like some clarification on this 90% guarantee we hear so much about. When you offer mortgage insurance, does the government guarantee you 90% of the amount that you would have to pay out in the event of a default in payment of the mortgage, in return for which you pay the government a portion of the premium that you receive?

[English]

Mr. Peter Vukanovich: No, that's not quite how it works. We are a stand-alone company. We receive applications. Along with the applications, we receive premiums. We also have expenses, obviously, the expenses to run our business, and claims. In the event of our company going bankrupt, which would mean blowing through all the assets and capital we have, the government would step in, following a two-year waiting period, to pay 90% of the remaining claims. That is the way the guarantee works. I'm not quite sure what the right word is here, but that is a fairly “unlikely” event.

Mr. Phil Mayers: The government guarantee agreement was structured by actuaries. In determining the level of government guarantee, there were requirements put on the company in terms of payments to the Government of Canada as well as a trust fund we contribute to. These are intended to cover any exposure the government may have. There's a very remote possibility of the Government of Canada being called for under the government guarantee.

[Translation]

Mr. Ghislain Lebel: I realize that it is not co-insurance that you are taking out with another party which, in this case, would be the government.

When you do appraisals, as does the Canadian Mortgage and Housing Corporation, you do not always use appraisers. The CMHC representatives who appeared before us a few weeks ago told us that their method of calculation was fairly accurate and that they were able to determine the exact risk by means of their evaluation system and their spot checks. They maintained that their appraisals are even more reliable than those done by qualified appraisers. Do you, the lender, reach the same conclusion?

[English]

Mr. Peter Vukanovich: No, I would not agree. There's nothing like an independent review of the property to provide information so that you're able to make the decision. When you're relying on a database, that database is only as good as the information that's been put into it—and things change. Like Mr. Wade explained earlier, property conditions change; the environment around the property could be an impact.

When you're relying on a model, you're relying on the law of averages and the law of numbers. There's nothing like going to a specific transaction and reviewing it—kicking the tires, so to speak.

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We cannot do that on every transaction—or we've chosen not to—because, again, the law of numbers comes back and says that it's not entirely necessary. We do appraisals based on our assumed risk of the transaction. We have internal guidelines to say that once a transaction goes beyond a certain level of risk, we get an appraisal.

[Translation]

Mr. Ghislain Lebel: I would like to ask the appraisers one last question. As you mentioned in your presentation, the consumer had come to count on the appraiser to know whether the price he was planning to pay for a piece of property was a fair price. I have had a notarial practice in Quebec and I have seen appraisers tell potential buyers that they were offering too much money for a property that was not worth the amount. The buyers' reaction was: "Thank goodness the appraiser pointed me in the right direction; otherwise I would have been cheated." However, these appraisers are no longer used. CMHC does the calculations, assesses files according its needs and the risk it is assuming, and completely ignores the consumer.

[English]

Mr. Bob Wade: We'd like to think that the general public, the buyers of real estate, would depend more on appraisals prepared by appraisers in this country. For the 60-plus years that we've been in existence we have attempted to educate the buyers and, unfortunately, it's a very slow process.

Recognize that when you're buying a piece of property, you're pumped up, you're enthused, and you want to get on with it and do it as quickly as you can. Perhaps you have the offer to purchase prepared by the realtor involved. You hopefully will take it to your lawyer or solicitor for review. Then you apply for your financing. Often the appraiser is not given the opportunity to come into the equation.

In many cases, we think, the appraiser should be there as an integral part of the purchase of a property. That's our concern with emili. Emili looks at, for the most part, the creditworthiness of the buyer; no physical inspection is made of the property itself or of the neighbourhood in which that property is located. We'd like to see a little more of that happening to ensure that everything is on very solid ground.

[Translation]

Mr. Ghislain Lebel: Could we say that CMHC now no longer uses appraisers at all?

[English]

Mr. Bob Wade: Sorry, but I'm not in a position to respond to that. My understanding is that they very infrequently use an appraiser. I had a situation just in the past week—I come from the Hamilton area—where I was talking with one of the appraisers in the Hamilton area, who, in just the past couple of weeks, was asked by CMHC to physically appraise a property. They were a little concerned about the credit risk. They weren't comfortable with it, so they had this appraiser take a look at the property. That's to their credit.

[Translation]

Mr. Ghislain Lebel: Thank you.

[English]

The Chairman: Thank you, Mr. Lebel.

Marlene Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you.

Thank you very much for your presentations. Your suggestions about requiring the same level of government guarantee—I'm talking to GE capital—and about extending guarantee to apply to any mortgage insurance property product offered by the private insurer sound logical to me.

I'd like to ask you some questions concerning the Government of Canada fee, using what you call “a cost of capital” comparable to that of other financial institutions. I'd like you to break it down a little more. What are the components, besides what you have on your table? Because you know CMHC is going to come back.... I'd like you to explain a little more about the table that you've given us here, because I'm not completely clear on, for instance, market return for banks at 20%. Where does that figure come from?

• 1030

Mr. Phil Mayers: Perhaps I can respond to that. In looking at the Canadian banks in particular and in reading their annual reports, we saw that most of the Canadian banks are currently earning in the range of 15% to 17%, but, as noted in all of their annual reports, their target return is about 20%, because that is the return on the international market and that is being consistently earned by international financial institutions. As the financial services market becomes more global, this is the target that they are working towards.

Ms. Marlene Jennings: Okay.

Mr. Phil Mayers: Because the government guarantee is notional and because currently within CMHC there is not the capital invested by the government—if the capital were invested it would have earned a rate of return— we're deducting the rate of return that would have been earned should the capital have been invested. Therefore, we derive a net cost of capital of 16%, which we believe should be used in the calculation of the Government of Canada fee.

Ms. Marlene Jennings: Now, if I'm playing devil's advocate...I'm CMHC, I'm as happy as a pig at his trough—

Mr. Phil Mayers: Oh, oh!

Ms. Marlene Jennings: —with this proposed bill as it now stands. What am I going to say to counter your estimate of the net cost of capital if CMHC had to go onto the market to get that capital?

Mr. Phil Mayers: One potential CMHC argument may be that the cost of funds for the government is the cost of issuing bonds, which is closer to 5% or 6%. However, that does not reflect the risk inherent in the business. Essentially, if a private enterprise similar to a bank—and the risk profile of mortgage insurance is probably similar to that of a bank—needs to earn 20%, I would think that it's in the taxpayer's best interests, if the fund is going to operate on a commercial basis, that the taxpayer should have the opportunity to earn that type of return, given that in the event of a significant economic downturn the taxpayers may be called upon to fund any losses that CMHC may have.

Ms. Marlene Jennings: Thank you.

Do I have time for another question?

The Chairman: Yes.

Ms. Marlene Jennings: Thank you.

This is for both of you. I'm amazed that emili does not have at least spot-check appraisals.

I am a homeowner. The home I bought had been built 50 years before I bought it. It had the same homeowner the entire time. The scenario that you, Mr. Wade, explained, in talking about reverse mortgages, was precisely the case. They bought the home when it was was originally constructed, the same year I was born, or close to it, and had not done anything to it. I think I've maintained my age pretty well—

Voices: Oh, oh!

Ms. Marlene Jennings: —but when we went into that home, when we visited that home, we had it appraised so that we knew exactly what needed to be done, what needed to be completely pulled out and put in new, and we factored that into the offer.

Does emili have something built into the program, like past studies as to the longevity of this kind of home or that kind of home, so that a kind of appraisal has already been built in—some study over 50 years? If it hasn't, I worry for the Canadian consumer, and that includes me. If I pay my taxes and my taxes are going into guaranteeing a mortgage, that mortgage may be inflated, because it may be built on a selling price that is highly inflated.

Mr. Peter Vukanovich: This is particularly crucial when you're dealing with half of the market being “with only 5% down payment”.

Ms. Marlene Jennings: Right.

Mr. Peter Vukanovich: When you go in, say, just to work off $100,000 with someone who only has $5,000 of equity, if they've overpaid by $10,000 and realize that a year after, and then run into financial hardship, their thought process is, “Well, Jeez, I've overpaid for this place, I'm already under water, so I'll walk.” Or there is certainly more of a propensity to walk.

Even if you look at conventional underwriting practices, as I think Bob mentioned earlier, the banks, which have no requirement to purchase mortgage insurance below 75% loan-to-value, still get appraisals done on those transactions.

Ms. Marlene Jennings: Now, last question—

Mr. Bob Wade: Can I just respond to that—

Ms. Marlene Jennings: Sorry.

Mr. Bob Wade: —very quickly? We have concerns about the apparent lack of spot checks or random checks.

As I mentioned in my presentation, when we met with Minister Gagliano on December 16, we proposed the idea of random samplings. His response was that he thought that was a great idea. We covered that off in a letter to him after the meeting and we have not heard anything further. We think that's a question you should direct to CMHC.

• 1035

Ms. Marlene Jennings: Thank you.

Mr. Bob Wade: Thank you.

Ms. Marlene Jennings: Lastly, one of your concerns, GE Capital, GEMICO, is the issue of the creation of or innovation in new products and the fact that those products, if offered by CMHC, have the government-backed guarantee, whereas OSFI does not necessarily allow you to get into certain products, and those that you do get into do not have the government-backed guarantee. Therefore, your potential clients could very well be drawn to CMHC. If there were something in this proposed legislation that allowed the same kind of guarantee for your new product, would that settle or satisfy OSFI? Or is the issue of OSFI completely separate and it doesn't matter whether or not there is a guarantee, you still wouldn't be able to move into those areas?

Mr. Phil Mayers: OSFI's primary concern is that the products that form part of the mortgage insurance are mortgage insurance products. As long as the product qualifies as a mortgage insurance product and is being operated on a prudent basis, OSFI is okay with that. Where the concern comes in is from the client's perspective: if the product does not have the government guarantee, there's an incremental cost to capital.

Ms. Marlene Jennings: Sure.

Mr. Phil Mayers: The banks are unable to charge a differential interest rate to recover that cost.

Ms. Marlene Jennings: I understand that, but you gave some examples, like home insurance, life insurance—

Mr. Phil Mayers: Yes.

Ms. Marlene Jennings: —stoppage of work or whatever.

A voice: Title insurance, job loss...yes.

Ms. Marlene Jennings: If CMHC moves into that and offers that as a product, it has the government guarantee for that.

Mr. Phil Mayers: Yes.

Ms. Marlene Jennings: Okay. If you move into it and the legislation allowed for government guarantee, would OSFI still curtail your movement into it?

Mr. Phil Mayers: It would require a change in OSFI's current policy, and it's difficult to predict whether they would—

Ms. Marlene Jennings: Okay. So basically your bottom line is that you don't want CMHC to move into that unless OSFI has changes to its regulations.

Mr. Phil Mayers: Right, and I think the other consideration for a government subsidiary when there's a very competitive private enterprise market for those other product lines is that of prudent activity.

Ms. Marlene Jennings: Thank you.

The Chairman: Thank you, Marlene.

Michelle Dockrill, please, then Tony.

Mrs. Michelle Dockrill (Bras d'Or—Cape Breton, NDP): Thank you, gentlemen, for appearing before us this morning. I've been making so many notes here it's almost like writing a book, so what I think I'll do is throw you my questions and wait for your answers.

If CMHC faces competition, I think there's a fear that it will have to focus on a more lucrative side of the market and that high-risk clients may be unable to obtain mortgage insurance. To both presenters, I'd like to know whether or not you have any comment on that.

For the gentleman from GE Capital, I have two specific questions. One, do you feel that CMHC can continue to operate as a viable public service when it has to compete with the mortgage insurance industry? Two, in your remarks I heard you refer to new products, and I'd be interested in knowing what new products you are unable to introduce to the Canadian market because of the absence of a 90% federal government guarantee.

Mr. Bob Wade: Can I just deal with the issue of mortgage insurance first? Our concern with respect to mortgage insurance as covered in the amendment is that CMHC will now have an opportunity to vary the mortgage insurance fee across the country, to recognize those properties on which there may be mortgages placed in areas that would appear to be of higher risk. We think that's counterproductive. To this point, CMHC has offered the same mortgage insurance premium to all homeowners in all parts of the country, and we'd like to see that continue.

Thanks.

Mr. Peter Vukanovich: Michelle, I want to make sure I understand your first question. Does it relate to high-risk clients?

Mrs. Michelle Dockrill: My first question, I think, was whether you think that CMHC can operate—

Mr. Peter Vukanovich: Yes, absolutely.

Mrs. Michelle Dockrill: —as a viable public service if it has to compete—

Mr. Peter Vukanovich: Well, they're doing it right now.

Mrs. Michelle Dockrill: —with the mortgage insurance industry?

Mr. Peter Vukanovich: They're doing it now.

Mrs. Michelle Dockrill: But you do feel that it will survive?

Mr. Peter Vukanovich: Absolutely. They have an 88% market share.

Mrs. Michelle Dockrill: Okay. The second question was about the new products.

Mr. Peter Vukanovich: With respect to new products and the types of things we'd be looking at, again, a lot of this stuff has to go back to the economics of the transaction. You need to be able to set the price to bear the risk.

• 1040

For instance, one of the products we were looking at is something we call “family plan”, where a loan would be granted given that there is a guarantor in the background. This is something that's not currently offered. In the time we have here today.... We could get into a long discussion about how it operates, but basically it would be something innovative in the market. CMHC currently does not do it. Right now if we offer that, our customers look at it and say, “Jeez, the amount of capital that we have to set aside because CMHC doesn't offer that makes it prohibitive to go ahead.”

Mrs. Michelle Dockrill: Thank you.

The Chairman: Thank you, Michelle.

Tony Ianno, please, and then I have Gilles, Werner and Carolyn.

Mr. Tony Ianno (Trinity—Spadina, Lib.): My question is first to the appraisers, just in general. I gather that GE, if I heard correctly, does approximately one-third of its high-risk appraisals for the insurance. Correct? You indicated that CMHC does zero, almost, except for the odd one like the example you cited regarding Hamilton. Are you aware of what percentage they might do?

Mr. Bob Wade: Mr. Ianno, I'm not. It would be very small, I would think—minuscule, probably.

Mr. Peter Vukanovich: Minuscule.

Mr. Tony Ianno: Minuscule. Okay. Are you indicating that it's potentially a high-risk situation for CMHC? Is that what you were indicating?

Mr. Bob Wade: We think it's prudent that there should be this random sampling, recognizing that parts of the country may be having economic conditions that are not as good as those in other parts of the country and that as property values decline in those areas it has the possibility of being a major drain on the mortgage insurance fund. We think that everything possible should be done in order to protect that fund. The fund is, of course, the money of the taxpayers of Canada.

Mr. Tony Ianno: How is it determined in terms of the emili process? Is it market value that determines it generally? Do they input that at all?

Mr. Bob Wade: The real estate appraiser will examine the market, will look at sales of comparable properties, will physically inspect the house, and will thus come up with an assessment or an appraisal of the condition of the house. For example, the appraiser, if he anticipates problems in the basement area, may recommend a structural engineer to the buyer.

Mr. Tony Ianno: But generally, if I were handling an emili database, if I know of a house that sold I would plug that into the computer; the database is there, so if it's 22 Grey Street versus 24 Grey Street, with the same style of house, and it just sold three months ago, I would think, even if there is a decline, that the system would work within reason. Is that correct?

Mr. Bob Wade: I think the appropriate words are “within reason”, because there is nothing to ensure that the degree of maintenance is the same from one property to the other, and that brings the appraiser and the physical inspection into play.

Mr. Tony Ianno: Generally the purchaser would, I think, have the ability to probably check within reason and also to ask for an independent appraisal if they deemed it necessary. Correct?

Mr. Bob Wade: Very definitely, and we'd like that to happen.

Mr. Tony Ianno: So I would assume, then, that when they're approaching on a 5% basis or anything thereof, they would be probably be prudent, considering it's something of a major investment for themselves. Right?

Mr. Bob Wade: Yes, we'd like to see the corporation offer an incentive, genuinely offer an incentive for that—

Mr. Tony Ianno: No, I'm not talking about incentives. I'm saying that the purchaser generally, I would assume, when they're applying for CMHC, would probably be prudent in their decision as to what the market cost is and how it relates to what state the house is in, aside from having the structural engineer come in and do the appraisal—which I doubt very much that you do often. Correct?

Mr. Bob Wade: Yes. The purchaser would go through the house. The purchaser most often is supplied with comparable sales by the realtor and would have the opportunity to check those comparable sales if they wish to do so.

Mr. Tony Ianno: I would assume that generally within range you're talking about a very small percentage of variance. Is that correct?

Mr. Bob Wade: We don't know that. The situation that I cited in the Hamilton area resulted in the appraiser not being able to come up with a value that fully supported the sale price. His value was less than the sale price because—

Mr. Tony Ianno: What is the percentage of your institute's difference in terms of the appraised value versus the market value?

• 1045

Mr. Bob Wade: I can't honestly answer that question, because each one of our appraisal members operates independently. We don't keep—

Mr. Tony Ianno: So you never gather the information.

Do you have your own business also?

Mr. Bob Wade: No, I do not.

Mr. Tony Ianno: Were you ever in business yourself?

Mr. Bob Wade: I'm retired from the appraisal business.

Mr. Tony Ianno: Were you ever in it yourself?

Mr. Bob Wade: I was in the mortgage business for 38 years, working for a large Canadian life insurance company.

Mr. Tony Ianno: But you didn't do appraisals yourself?

Mr. Bob Wade: Yes. I did in-house appraisals, but after I retired I was, for three years, earning my living as a fee appraiser, on the street.

Mr. Tony Ianno: With your gut instinct—

Mr. Bob Wade: Yes.

Mr. Tony Ianno: —how often did you differ in the market cost in your appraised value, and what variance was there in percentage terms?

Mr. Bob Wade: I only did industrial and commercial. I was not into single-family residential. A reasonable guess might be that was a differential 10% of the time, perhaps as much as 15%. But most often—

Mr. Tony Ianno: So you're saying there's up to a 10% difference in the cost? If it's a $1,000,000 building—

Mr. Bob Wade: No, sorry—

Mr. Tony Ianno: —you would have a $100,000 difference?

Mr. Bob Wade: No. On 10% of the appraisals completed, the appraiser may not be on the purchase price or the sale price. It might be something less than that.

Mr. Tony Ianno: I see. So there's a 10% difference. How much, do you think, out of that 10%, would the difference be? What's the average? Is it 5%, 3%...?

Mr. Bob Wade: I can't give you a call on that, Mr. Ianno. I'm sorry.

Mr. Tony Ianno: The reason I ask this is that you are concerned re CMHC's inability to handle the status system, yet, if I go 10% and then you can't tell me the variance, really how much of a concern is it in general, other than just making sure appraisers have additional lines of work?

Mr. Bob Wade: Our concern is not with how they handle the system but that the system doesn't go far enough. They do a good job with the information they have available to them, recognizing that there are many scenarios in which they have a 95% loan in place. The market doesn't have to slump very far to wipe out that 5% equity and put them in the situation, then, of being over-mortgaged on a property. It's just to ensure that there are safeguards in place that we think should be there.

Mr. Tony Ianno: Do you have the same concern with GE Capital doing only one-third?

Mr. Bob Wade: I guess we're not sitting here discussing changes to the NHA that might directly impact GE Capital.

Mr. Tony Ianno: I can't speak for my other colleagues, but if you're asking me to change something that's already in a bill being presented and you don't want to comment on what the private sector is doing, but you want the public sector to change its format, I'm sorry, but I can't work on that basis.

Mr. Bob Wade: That's a fair comment. We've heard GE Capital say they appraise about one-third of their properties. That's a far cry from what CMHC is presently doing today. Even if CMHC did 10% or something up to 10%, I think there would be a much higher degree of comfort.

Mr. Tony Ianno: Do they have appraisers on staff?

Mr. Bob Wade: That is very limited now. We used to have a lot of members of the Appraisal Institute who were corporation employees. In the Hamilton area at one point, they would have had five to six appraisers on staff; they now have one. I don't know if that individual is doing any review appraisals. I don't know what he does.

Mr. Tony Ianno: Thank you.

Mr. Bob Wade: Thank you, Mr. Ianno.

The Chairman: Thank you, Tony.

Gilles, please.

Mr. Gilles Bernier (Tobique—Mactaquac, PC): Thank you, Mr. Chairman.

I want to thank the members from GE and from the Appraisal Institute of Canada for meeting with us this morning.

We heard a lot of good questions here this morning. I had a few, but there is no need to repeat them. I only have one, really, and this one has been bothering me for a very long time. I've always believed that fair competition is good for businesses, good for the Canadian economy, and also good for the consumers. Everybody benefits from it. Before this bill was tabled, Canada Mortgage and Housing was not paying any fees whatsoever. Now they will be paying fees, and we all call that a level playing field.

Yet it's been well documented that they're going to be paying some $197 million to $200 million in total over the next five years. I've been looking at your notes. You say:

...by our calculations the fee of $197 million over the next five years is understated since it does not reflect private sector-like cost of capital.

My question is, what would be a fair market fee for Canada Mortgage and Housing to reflect the level playing field if you feel that $197 million over the next five years is not fair or not enough?

• 1050

Mr. Peter Vukanovich: If you want to work off of 16% as being what the private sector would require—and again, these are subjective measurements, 16%, 17%, 18%—we think that the CMHC calculation was done on something like 6%. So I'd say multiply it by three and you have your number: $600 million.

Mr. Gilles Bernier: Instead of $197 million for a period of five years.

Mr. Peter Vukanovich: Yes.

Mr. Gilles Bernier: Now, if I understand correctly, we didn't have the latest calculations. I think Canada Mortgage and Housing lost money in 1997.

Mr. Peter Vukanovich: Yes.

Mr. Gilles Bernier: Let's say that just in this year, for example, Canada Mortgage and Housing would be making a $15 million or a $20 million net profit, and that having this amount of money paid in fees means that it would not be feasible for Canada Mortgage to keep operating—

Mr. Peter Vukanovich: Or it would further encourage them to look at their pricing or look at their cost structure, which is what we have to do every day in the private sector.

Mr. Gilles Bernier: Thank you very much, Mr. Chairman.

The Chairman: Thank you, Gilles.

Carmen, then Werner and then Carolyn.

Mr. Carmen Provenzano (Sault Ste. Marie, Lib.): I have a short question, Mr. Chair, for Mr. Wade.

The first point in your presentation was about a concern for the potential of CMHC to tailor premiums in accordance with regional loss experience. In particular, you mentioned northern Ontario and one other area. Do you have data that indicates great disparities in regional loss experience? Is northern Ontario—because you mentioned it—one of those areas where premiums might rise significantly if they were so tailored?

Mr. Terry Gifford: We don't have any data in that area. We were just using northern Ontario and northern Alberta as examples of remote areas. As in the Sudbury area or the Timmins area, if all of a sudden a depression hits and the economy slows down, the risk becomes higher. Therefore, the premiums would be higher for those individuals, instead of level across Canada.

Mr. Carmen Provenzano: There is no data right now indicating that kind of regional disparity.

Mr. Terry Gifford: No.

The Chairman: Carmen, thank you very much.

Next I have Werner.

Mr. Werner Schmidt: Thank you very much, Mr. Chair.

It's really an interesting exercise that we're going through here this morning. I find it fascinating. I'm beginning to wonder whether we ought to look at some pretty basic philosophical issues here, Mr. Chair. It has to do with the whole business of mortgage insurance in the first place. As the discussion is taking place, it seems to become a quarrel, almost, between whether you are ensuring the mortgagee and his or her creditworthiness on the one hand, and the property value on the other.

The two things are integrally related—I quite agree—and are very much involved in the whole economic cycle and where things exist, the regions and all of these kinds of things. Yet it seems to me that the financial institutions and OSFI are primarily concerned about making sure that the capital is guaranteed and secure. On the other hand, there is a relationship between the real property that exists.... So my question really is, what ought to be the relationship between these two considerations? Ultimately, I think, that determines, on the one hand, the viability of the financial institution that obtains the risk, and on the other hand, the input that comes from the evaluation of the property itself, which is actually the object that causes the financial risk to be undertaken in the first place.

Mr. Peter Vukanovich: Phil, do you want to take that?

Mr. Phil Mayers: Okay.

Certainly from a loss perspective, losses are determined by the frequency or the number of times a board defaults, and the severity, meaning the size of loss, which is substantially influenced by the value of the property at the stage of claim. The creditworthiness of the borrower influences the number of borrowers who go into default, while the properties impact primarily on the severity, so really, the two are combined when it comes to the exposure from the insurance perspective.

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From a banking perspective, OSFI is concerned about deposit-holders. The way they regulate it is to sort of say that if you invest the deposit-holders' moneys in assets, you need to ensure that you have a margin of safety to ensure that the deposit-holder will be kept whole.

In the macropicture, all the elements are related, and, largely, the exposure on a mortgage is defined by the creditworthiness on the property; that's being translated by OSFI into a margin to protect policyholders, which is representative of the former capital.

Mr. Werner Schmidt: Sure. That's the beginning answer, but now let's move into the specific case we had here in Canada with Confederation Life, where the the mortgagees were not repeat offenders at all. They didn't default, yet the company went down. Where was the risk? We all know where the risk was. It seems to me that there's a real fundamental issue here that goes well beyond the issue of the number of times somebody defaults on a loan.

Mr. Phil Mayers: Certainly the business is subject to macroeconomic factors. As a result of that, the performance of mortgage insurers is cyclical, hence, OSFI requires private insurers to maintain substantial capital to protect against those circumstances.

Mr. Werner Schmidt: Quite right.

Okay, so now we have Central Mortgage and Housing exposed to the tune of somewhere between $250 billion to $300 billion worth of insured mortgages out there. There is one specific example that is now before us: the leaky condos in Vancouver, on the west coast.

Mr. Phil Mayers: Yes.

Mr. Werner Schmidt: That exposure by CMHC to mortgages has nothing to do with either the appraisal, in the first instance, or the creditworthiness, in the second instance, but it has everything to do with an exposure in the overall marketplace. Who should determine that kind of risk and the regulations governing that kind of situation?

Mr. Peter Vukanovich: Are you talking about when the application actually comes in?

Mr. Werner Schmidt: There is a risk.

Mr. Peter Vukanovich: So when the application is made—

Mr. Werner Schmidt: Who should determine that? Should the appraisal be able to anticipate something like that? Should the capital be able to anticipate something like that? Is this one of those things that becomes an act of God when in fact it's not an act of God but a design fault in the building?

Mr. Peter Vukanovich: We had a little conversation about that yesterday. The whole leaky condo situation is a fairly complicated thing.

Mr. Werner Schmidt: It is.

Mr. Peter Vukanovich: We were talking to the Canadian Home Builders, actually.

I don't think you can expect any one party that you just mentioned to be on the hook for that situation. From the business perspective of being a mortgage insurer, what it does is tell us that we need to assure ourselves about the quality of the property being insured and about the conditions of that property.

For instance, for a leaky condo now, we would go out and look at that with an appraiser. We know it's a condominium, we know where it is, go look at it.... I'm not just going to buy it like I would buy something over the Internet.

Mr. Werner Schmidt: I know my next question is a speculative one in one sense, but here's the question: would CMHC now appraise every potentially leaky condo on the west coast?

Mr. Peter Vukanovich: It doesn't sound like that's their current practice, but I think you have to ask them.

Mr. Werner Schmidt: Okay. But the prudential requirement would be that they do that.

Mr. Peter Vukanovich: Yes. From our perspective, it is.

Mr. Werner Schmidt: How about yours, Bob?

Mr. Bob Wade: I would think the same. We must have the appraisal completed.

Mr. Werner Schmidt: You see, Mr. Chairman, the current legislation doesn't cover that situation at all.

A voice: No.

Mr. Werner Schmidt: It doesn't even come close to it. I think we had better look at it.

The Chairman: Thank you, Werner.

Excellent questions from all, as usual.

A very short question, I'm told, from Tony, and then Carolyn has a couple of short ones.

Mr. Tony Ianno: Sorry, Carolyn.

In terms of the appraisal, how did you get the information that CMHC does almost nil?

Mr. Terry Gifford: We've asked CMHC to explain to us what emili is. They never have. The only other way we've been advised is through individuals who are familiar with CMHC. We don't have any data and CMHC has never provided us with any data to indicate the number that they have actually done.

Mr. Tony Ianno: So the number of people that you have spoken to...is it 100 or 20...?

Mr. Terry Gifford: Prior to the introduction of emili, our members...approximately 100,000 appraisals were requested by CMHC on an annual basis.

Mr. Tony Ianno: Last year? When was it?

Mr. Terry Gifford: Three years ago.

Now, to the best of our knowledge, I'm hearing from our members that very seldom does CMHC ask them to do appraisals. I understand that CMHC now has seven appraisers in Canada. That's the number I was provided with.

Mr. Tony Ianno: How many did they have before three years ago?

Mr. Terry Gifford: I'm guesstimating probably 70 to 80. CMHC could give you the actual number.

Mr. Tony Ianno: I see. My only concern is that you're not supplying.... I guess you don't have a lot of facts; it's just hearsay and pulling together—

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Mr. Terry Gifford: Well, I guess the fact that a number of our members have gone bankrupt because they did rely upon emili, albeit to CMHC...a number of our members are no longer in the appraisal business.

Mr. Tony Ianno: Is this in the last three years that there were bankruptcies?

Mr. Terry Gifford: Yes. We appreciate that times change, that computers come along and that there are certain things our members do that maybe computers can do to a point—

Mr. Tony Ianno: Right.

Mr. Terry Gifford: —but the thing is, we're dealing with human beings. We're not dealing with homes here. Most of the instances.... These are human beings.

Also, our major concern, as mentioned by Bob, is the 5% down. If that fluctuates, the individual who is sitting there with a home that he or she paid $100,000 for is now sitting there with a home worth $80,000.

Mr. Tony Ianno: Yes.

Mr. Terry Gifford: They have no alternative but to walk away.

Obviously our members can't guarantee that the market is going to stay there, but our members have provided us some security in the past.

The public has a general perception that if it is CMHC-insured, an appraisal has been done whereby the government is guaranteeing that price, and that is not the case. The insurance is for the lenders, not for the homeowners.

Mr. Tony Ianno: Is that the same case when GE does it?

The Chairman: Tony, I need you to wrap up.

Mr. Tony Ianno: Sorry. I'm going to.

Mr. Terry Gifford: Yes. I would say that if they purchase it through GE or get the insurance through GE, they've made the assumption. Now, as to whether all of them make that assumption, I don't know.

Mr. Peter Vukanovich: I'll give you some facts to think about. Take a $100,000 loan, for example. The average premium is $3,000. If you take a loss, the average loss is $30,000, which includes $20,000 related to the reduction in the property value. It doesn't take too many losses to wipe out that fund that's supposed to be providing the premiums. It's like a cheque book—coming in, going out.

Mr. Tony Ianno: You're still in the business yourself, with 90% guaranteed?

Mr. Peter Vukanovich: Pardon me?

Mr. Tony Ianno: On that kind of risk factor, you're in the business also?

Mr. Peter Vukanovich: Yes, but the 90% guarantee has nothing to do with what I've just talked about.

Mr. Tony Ianno: I see. But it's still a good investment from your perspective, from GE's perspective, in doing this business, even with that kind of potential loss. Correct?

Mr. Phil Mayers: I think what needs to be added is that we do one-third of our appraisals upfront in the approval process. The Appraisal Institute is proposing that CMHC do post facto appraisals, and they haven't specified a percentage. So as part of our due diligence process, we're using appraisals to make the decisions on whether this risk is acceptable.

Mr. Tony Ianno: Are you familiar with what percentage CMHC has? I gather you don't work with Bob Wade other than to supply them with business.

Mr. Phil Mayers: CMHC has not published their statistics. It would be very difficult for us to guess.

Mr. Tony Ianno: But you have no indication of whether they do less or more now than they did three years ago when they introduced emili?

Mr. Phil Mayers: I think that generally the indication from our appraiser clients is that they're doing substantially less.

Mr. Tony Ianno: So if CMHC were to supply you with statistics showing that they do still 20% to 25%, that would satisfy you? You indicated earlier that 10% would be more than sufficient, right?

Mr. Peter Vukanovich: Yes.

Mr. Tony Ianno: Thank you very much.

The Chairman: Thank you, Tony.

We have a couple of short questions from Carolyn, and then we'll get to the next stage of the meeting.

Mrs. Carolyn Parrish (Mississauga Centre, Lib.): I noticed that you had a market share of 5% in 1997 and an increase to 8% in 1998. Do you have a projection for 1999? That's actually very good, by the way. Congratulations.

Mr. Peter Vukanovich: Thank you. For 1999 it will be around 15% if we continue to do what we're trying to do.

Mrs. Carolyn Parrish: So your market share from 1997 to 1999 will go from 5% to 8% to 15%?

Mr. Peter Vukanovich: I want to make sure I understand what you're reading from, Carolyn. Where do you see that?

Mrs. Carolyn Parrish: In the presentation that you gave us—or maybe I have it as background information—you said that your original market share in 1997 was at 5% of the market and in 1998 you were at 8%.

Mr. Phil Mayers: Those are probably reasonable approximations.

Mrs. Carolyn Parrish: Is 15% a reasonable approximation for 1999?

Mr. Peter Vukanovich: No. It would be 12%.

Mrs. Carolyn Parrish: At 12%, it's still very good. I'm impressed. You obviously know what you're doing.

You talk about the percentage of the company revenue of $4.7 billion in Canada. That's the revenue.

Mr. Peter Vukanovich: That's GE Canada.

Mrs. Carolyn Parrish: Yes, I understand that, but it is also part of the backing for GE Capital. Is that correct?

Mr. Phil Mayers: The structure of that $4.7 billion enterprise is not one legal entity, so the backing for the mortgage insurance fund really consists of $440 million in assets, of which $200 million represents the shareholders' investment, in comparison to CMHC's $29 million surplus, with $192 billion of risk outstanding.

Mrs. Carolyn Parrish: I'm curious, because we have a couple of members here from places like the Nickel Belt, as to whether you do a lot of volume in resource-based communities.

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Mr. Peter Vukanovich: Do we do a lot of...?

Mrs. Carolyn Parrish: Do you do a lot of your mortgage insuring in resource-based communities?

Mr. Peter Vukanovich: How do you define “a lot”?

Mrs. Carolyn Parrish: Do you do any?

Mr. Phil Mayers: Yes, we do.

Mr. Peter Vukanovich: Yes, we do.

Mrs. Carolyn Parrish: What percentage of your business would be done there?

Mr. Peter Vukanovich: Excuse me. Are you asking me what percentage of business we do in Sudbury?

Mrs. Carolyn Parrish: I'm not saying Sudbury specifically, but that would be a good place.

Mr. Peter Vukanovich: We don't know that it's any different from what it is across the country.

Mr. Phil Mayers: One of our defining principles is that geographic dispersion is a good thing. It's good to participate in all markets, because at some points in time some markets will outperform other markets. We believe in geographic dispersion and we try to manage our business so as to have a geographic dispersion similar to the distribution of economic activity across the country.

Mrs. Carolyn Parrish: That's a wonderful thing to believe in, but I'm just curious as to what percentage of your business is done in high-risk communities.

Mr. Peter Vukanovich: I don't have the exact answer.

Mr. Phil Mayers: We don't necessarily define all resource-based communities as high-risk communities. Sudbury is an example of where we actively seek business. We don't have the statistics with us.

Mrs. Carolyn Parrish: Could you provide them?

Mr. Peter Vukanovich: Sure. Why is it relevant?

Mrs. Carolyn Parrish: It's relevant to me because I've asked the question.

The other question I have is, do you provide mortgage insurance on Indian reserves?

Mr. Peter Vukanovich: No.

Mrs. Carolyn Parrish: Not any at all?

Mr. Phil Mayers: I think one of the difficulties there is the security of the property. I think a change in the CMHC's act would allow them to do so more frequently, and we would obviously, since we compete head-on with CMHC, review that issue.

Mrs. Carolyn Parrish: Okay. You would review it, but you give no guarantees that you would get into it.

Mr. Peter Vukanovich: Sure.

Mr. Phil Mayers: If it's a prudent business decision.

Mrs. Carolyn Parrish: Good. Do you provide mortgage insurance for rental housing projects?

Mr. Peter Vukanovich: No.

Mrs. Carolyn Parrish: Would you be reviewing that policy?

Mr. Peter Vukanovich: Again, I'm not sure I understand the question. I'm sorry, Carolyn.

Mrs. Carolyn Parrish: Are you thinking of expanding into that area if this bill goes through?

Mr. Peter Vukanovich: That's not high on our list right now.

Mr. Phil Mayers: As well, it's not clear that our licence from OSFI allows us to get into that business. That was a significant factor in the failure of the previous private mortgage insurer.

Mrs. Carolyn Parrish: I have one last question. Do you provide mortgage insurance for public-private partnership projects, which CMHC is into heavily?

Mr. Phil Mayers: Perhaps you can expand on an example.

Mrs. Carolyn Parrish: For example, there's one right now that's being built in Toronto. It has 40 or 60 units. Some money went into—

Mr. Peter Vukanovich: No.

Mrs. Carolyn Parrish: No?

Mr. Peter Vukanovich: Our licence doesn't allow for that.

Mrs. Carolyn Parrish: Would you be interested in doing that?

Mr. Peter Vukanovich: Yes.

Mrs. Carolyn Parrish: Thank you very much.

The Chairman: Thank you, Carolyn.

I'd like to bring to a close this first part of our morning's meeting with a comment to all members. The questions this morning were, as usual, excellent and thorough.

I'd like to extend our appreciation to our witnesses from the institute and from GE Capital for their frankness and their willingness to share their ideas on Bill C-66 with us today.

Colleagues, just before I gavel the first half of the meeting, we're going to try to hear from the three witnesses in the next half of the meeting as opposed to hearing from them in two other sessions.

We'll take a five-minute break, but before we do that, Michelle, did you want to raise your motion?

Mrs. Michelle Dockrill: No.

The Chairman: Okay. We'll have a five-minute break, colleagues.

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The Chairman: Colleagues, I'd like to get us back to this Tuesday, April 13 meeting of the standing committee.

We welcome our witnesses: Mr. Kenward, accompanied by Don Johnston, from the Canadian Home Builders' Association; and Ann Rheault from the Bank of Montreal. I'm going to invite them to make their presentations of, hopefully, 10 minutes or less. Then what I'm going to do is, because we're a little bit delayed, if Mr. Hosler comes in, who's supposed to be at 11.30....

Is Mr. Hosler here? I'd invite you to come to the table, sir.

We'll do Mr. Hosler's presentation and then we will have questions to all three. Is that acceptable to the members here? Then we'll be ahead of schedule.

Mr. Hosler is from the Co-operative Housing Federation of Canada.

We'll go in the order they're printed. We'll ask Ms. Rheault to start on behalf of the Bank of Montreal, then we'll go to Mr. Kenward, and then Mr. Hosler.

Please do your best to keep it to 10 minutes or less. Thank you.

Ms. Ann M. Rheault (Director, Aboriginal Banking Group, Bank of Montreal): Thank you very much, Mr. Chairman.

My name is Ann Rheault. I'm the director of aboriginal banking for Bank of Montreal. I'm here today from the perspective of, as was mentioned by a number of members earlier, doing business on reserves in Canada. That is exclusively my business and has been for the last five years, although I'm a very long-time Bank of Montrealer.

The RCAP report, which was issued close to two years ago, very much emphasized something that those of us who work in first nations territories and aboriginal communities are well aware of, and that is the very significant need for improvements in access to financing for housing on reserve, both for new units and for renovation of existing units.

Volume 3 of the report spends considerable time reviewing the situation for on-reserve persons in Canada and also highlighting some of the opportunities that first nations and their members are looking forward to. I know quite a number of members here have very significant, large aboriginal constituencies within their ridings, but for those of you who may not be that familiar with this, I'll go through it just briefly.

The Indian Act restricts the granting or the taking of a mortgage. Section 89 of the Indian Act very specifically states that a status Indian or an Indian band may not pledge, mortgage, etc., personal or real property situated on a reserve. So the current situation is that very few products are available for mortgage lending or long-term lending for housing for on-reserve borrowers.

At the moment, CMHC and the programs they have with approved lenders are relegated to being able to underwrite a mortgage.

The current CMHC programs that approved lenders, such as Bank of Montreal, work with are section 95 and section 10 of the National Housing Act. They also have the RRAP program, which you would be aware of, for rehabilitation in rural areas.

Section 95 of the National Housing Act deals primarily with loans to Indian bands for multi-unit projects in a subsidized environment. Section 10 deals with loans to individuals or to bands in a non-subsidized environment. Section 95 is a ministerial guarantee, as is section 10. So the security for those particular programs is a ministerial guarantee from DIAND.

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CMHC also works with a number of other approved lenders and our mutual customers on training and development and research and demonstration programs.

In Toronto in March there was a housing conference organized by the AFN, the Assembly of First Nations. There were 600 participants at that conference, which highlighted the very significant need for increased housing and for the opportunity for lenders and their strategic and alliance partners to provide increased access to financing, both for Indian bands on reserve and for their members.

At that conference, some very innovative practices were displayed, primarily by first nations from across the country who work with their financial institutions, such as Bank of Montreal, and also with CMHC to design, deliver, establish, and maintain housing for their members.

As part of the package I provided to you, you have examples of some of the housing loan programs that Bank of Montreal has designed and delivered with individual first nations across the country. These programs are exclusive of the ministerial guarantees that the programs under CMHC, section 95 and section 10, provide. However, they are not a total replacement, nor do they meet the needs of all of the first nations that we would like to be doing business with. They have some restrictions to them. They also have what I would call a volume necessity. Each one is designed specifically with the first nation.

We would very much like to see CMHC have the ability to be sitting at the table with approved lenders such as us, to be more creative in specifically designing and delivering programs for borrowers on reserve.

It is a very unique regulatory environment in which to do business. From the work they have done with DIAND over many years now, CMHC is very familiar with the environment. We think, very sincerely, that having the ability to be innovative, to move beyond the requirement that they can only insure a mortgage, would allow us to provide better and increased access to our members and the first nations in Canada who would be interested in such a program.

Thank you.

The Chairman: Thank you, Ms. Rheault. We'll go to either Mr. Kenward or Mr. Johnston from the Canadian Home Builders' Association.

Mr. John Kenward (Chief Operating Officer, Canadian Home Builders' Association): Thank you, Mr. Chairman.

My name is John Kenward. I'm the chief operating officer for the Canadian Home Builders' Association. Don Johnston is with me today. He is the senior director for technology and policy with the CHBA.

I'd like to thank the committee for this opportunity to speak, and I'd like to assure the chair that this is going to be very brief.

We're not presenting ourselves today as experts in the mortgage insurance business. Rather, we're representing an association that attaches great value to Canada's housing system and necessarily feels it should have an opinion on this matter.

We would like to share with you—and we take these opportunities to share whenever we can—the value we place on the Canada Mortgage and Housing Corporation as an industry and the vital role the corporation plays in Canada's national housing system. The fact that we have the best housing system in the world and produce the best housing in the world has a great deal to do with the work carried out by CMHC. So from that perspective, any changes to CMHC's mandate are of particular interest to us.

We are very fortunate to have a crown corporation in this country with a mandate to support Canada's housing producers and consumers. CMHC's work covers many important areas, including economic and market analysis; research initiatives of every description; information dissemination, and certainly in that area, assistance to consumers; programs designed to help those in need of housing assistance; and, more recently, housing export development.

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We like to emphasize those points, because one of the concerns we have as an industry is to emphasize whenever we can, when we have a forum such as this, that indeed CMHC's mandate goes very much beyond mortgage insurance. While mortgage insurance is very important, they play an integral role in Canada's overall national housing system. There's not another level of government in the country with the same order of commitment to housing in this country.

This corporation serves a very important role as the federal government pursues its own commitment to support and encourage improvements in housing affordability, quality, and choice, as well as assistance to those in housing need. As an industry, we believe strongly that the importance of the federal presence in housing has not diminished over time, and we're very pleased that this federal government continues to recognize the significance of CMHC's role in our national housing system.

With respect to mortgage insurance, we believe it's very important that this country have a public mortgage insurer. CMHC's mortgage insurance operations have provided a real stability in the housing system over a great many years. We attach a great deal of importance to it.

We also support legislative amendments that will improve CMHC's capacity to run its mortgage insurance operations in a competitive, innovative, market-responsive, and financially responsible way. We understand that the amendments in front of the committee have a great deal to do with those principles.

We also believe there must be a competitive mortgage insurance environment and that this can only help to improve Canada's overall national housing system and benefit housing consumers. We understand that view is also shared by CMHC. They support competition. They say so in several of their own corporate documents.

So to get to the bottom line, we're here today to seek assurance that amendments to federal legislation will result in a fair and level competitive playing field between CMHC's mortgage insurance operations and the private mortgage insurer GE Capital Mortgage Insurance Canada.

We believe fair competition will achieve the public policy objective of providing Canadians with the benefits of competitive pricing, new and innovative products, choice, and quality service. All of that can be married up with the important role CMHC plays in many other aspects of its mandate.

In our view, the aim of legislative amendment should be to support and encourage a competitive and innovative mortgage insurance market in Canada and to support the continuation of a very well-run mortgage insurance operation in CMHC and also an environment that will attract the continuation of competition from a reputable private mortgage insurer in the form of GE.

That's our position that we wanted to state before this committee, Mr. Chair.

The Chairman: Thank you, Mr. Kenward.

We're going to go to our 11.30 witnesses right now. We have Ms. Danielle Cécile, director of sector development with the Co-operative Housing Federation of Canada, and with her, Mr. Laird Hunter, counsel to the federation.

We invite either of you to give us 10 minutes or so of your wisdom.

Ms. Danielle Cécile (Director, Sector Development, Co-operative Housing Federation of Canada): Thank you, Mr. Chairman, honourable members, ladies and gentlemen.

[Translation]

My name is Danielle Cécile and, as you've just heard, I am the Director of Sector Development with the Cooperative Housing Federation of Canada. Mr. Hosler, our President, who was to be here, was detained in Manitoba and he sends his regrets. He asked us to replace him. I have with me Mr. Laird Hunter, our legal counsel, who is a partner in the firm of Worton, Hunter and Callaghan in Edmonton.

I would like to begin by thanking the Committee, on behalf the member co-operatives of the Co-operative Housing Federation, for inviting us to share our thoughts on Bill C-66.

In a moment, I will ask Mr. Hunter to provide some specific observations about the bill, but I will first present a few introductory remarks.

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[English]

Our members—nearly 800 member-owned and -managed non-profit housing co-ops, local and regional federations of housing co-ops, and a variety of firms providing services to housing co-ops—are located in all parts of Canada. They have important interests at stake in the housing field.

As the committee knows, most of Canada's housing co-ops were put in place between 1970 and 1992 under programs administered by CMHC. These programs were designed with two main purposes: to increase the supply of affordable housing to those Canadians who do not own their own homes and to provide income-tested assistance to lower-income Canadians to help meet their housing costs. CHF Canada was intimately involved with the design and delivery of these programs.

From the 1960s, the federal role in housing Canadians of low and moderate income has been a significant success story. More than 660,000 affordable homes—quite a large number—were provided across Canada under a range of programs over some 30 years.

Over the years, the government used many diverse program tools to help meet Canadians' need for affordable housing. Well before public-private partnerships became a common approach, the development and operation of this housing was founded on partnerships between government, land developers and builders, financial institutions, and what is commonly called the third sector—community-based, non-profit, co-op and aboriginal housing providers.

As the principal agent in implementing the government's housing policies, Canada Mortgage and Housing Corporation played a vital role in this achievement. We hope the effect of Bill C-66 will be to enable that role to continue.

In some ways, we can see it will. In other areas, particularly the bill's possible consequences for existing affordable housing communities, we are concerned about the government's intentions. We hope our appearance here today will help clarify these intentions.

Mr. Laird Hunter (Counsel, Co-operative Housing Federation of Canada): Mr. Chair and honourable members, Bill C-66 is enabling legislation that is intended to allow CMHC to respond efficiently and effectively to a changing environment and to give it greater flexibility in the design and delivery of new programs and services.

Consistent with this flexibility, Bill C-66 also sets out a new accountability framework for the corporation. It is intended that the corporation will be able to operate in a more businesslike manner, more independent of government, central agencies, and Parliament. In general, we commend and applaud this flexibility.

In particular, CHF Canada welcomes the bill's proposal to strengthen the Canadian system for residential mortgage insurance. We also support the reinforcement of Canada Mortgage and Housing's international role, both in export marketing and in helping developing countries to build secure and affordable housing.

But as my colleague, Madame Cécile, said, we also have concerns about Bill C-66. We hope to offer some comments that will help to improve this bill and prevent some of the potentially harmful effects that might arise through unintended consequences on the affordable housing that now exists. My following comments, then, are in three areas: mortgage insurance, the international housing matters I've just mentioned, and the accountability framework.

An important aim of Bill C-66 appears to be to extend to others the existing benefits that Canadians realize from competition in the mortgage insurance business. CMHC will be able to offer a broader range of products and services to Canadians who need and want them.

As far as the commercial market is concerned, it is important that the new legislation not afford CMHC undue competitive advantages. You've heard other witnesses speak to this matter.

But the important point for CHF Canada—and this is the point we want to emphasize—is that there are products that private lenders and insurers cannot provide profitably. We are pleased to see that nothing in Bill C-66 will explicitly prevent CMHC from continuing to offer products and services that will serve Canadians whose needs the commercial marketplace may not be able to meet—Canadians in rural and remote areas, low-income Canadians, and those of aboriginal ancestry.

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By way of example, we note—and this is of prime concern to us—that CMHC retains its ability to offer insurance on 100% of a mortgage loan, the full capital cost of new construction. This, over the years, has been an absolutely indispensable ingredient for co-operative and non-profit housing development.

Housing finance instruments to serve remote and rural areas and new initiatives related to lending on reserves are, again, urgently needed. We are pleased to see the government considering a new role for CMHC and look forward to innovative new instruments that meet the needs of Canada's first nations.

I want to emphasize that history teaches us that government plays a unique role in providing housing assistance and must continue to play that role. It furnishes programs and services that will not be provided by the private sector. In spite of our later comments, we hope this unique role, and the government's expectations in light of it, can be established in revisions to Bill C-66.

We are concerned that if CMHC's vital role outside the marketplace is not expressly and actively provided for in legislation, commercial pressures may stop CMHC from offering products to serve the very many Canadians whose need the housing market may not meet.

I'll turn now to comments regarding international housing exports and development.

For more than a decade, CHF Canada's international development arm, Rooftops Canada, has been actively involved in the creation of co-operative housing and other forms of affordable shelter in developing countries, working with NGOs and community partners abroad. We welcome CMHC's new mandate to operate energetically in this field.

We hope that the committee, in its report to Parliament, will make special note of the value of partnerships in export marketing, but particularly in international development.

It is our experience that international development assistance can be of two kinds: where a government-to-government relationship exists and is most appropriate, and where non-governmental organizations do the best job.

The first kind of course is very valuable, and as a mature government housing agency, CMHC has much to offer Canadians and those abroad. But along with many other groups, we would be dismayed if CMHC's new mandate were interpreted to allow it to compete with Canada's not-for-profit sector in promoting sustainable development in the housing field. There would be an inevitable perception, rightly or wrongly, that as a crown corporation, CMHC has easier access to other government aid and export assistance.

We hope, therefore, that this committee will urge CMHC to carry out its international development mandate in partnership with Canada's NGOs.

I now turn to what is our primary concern and observation relating to the new accountability framework embedded in Bill C-66.

In search of new approaches to improve services to Canadians, government departments and agencies have been streamlined, refocused, and reinvented. Several new or revitalized organizations have been developed, including crown corporations, special operating agencies, collaborative partnerships, delegation to non-governmental organizations, and a range of other alternative service delivery programs. Accountability relationships have been restructured to promote program flexibility and to reduce detailed oversight by central agencies and ministers while maintaining financial and policy accountability.

On the whole, we believe it is fair to say these initiatives have had a significant positive effect on the delivery of government programs and services. And as we said earlier, we expect that the greater flexibility this ability will afford to CMHC will be used principally to the benefit of Canadians.

In light of our experience in several programs in the affordable housing area, though, we are concerned that the accountability relationship proposed in Bill C-66 may have some undesirable and unintended consequences.

It may impede the ability of future federal governments to act in the housing field. We support Mr. Kenward's organization's observation of the need for a vital and continued role of the federal government in housing.

We worry that Bill C-66 may eliminate policy principles that govern the present and future spending of federal dollars, and we worry that retroactive changes may be allowed to partnerships that are now in place with federally sponsored housing programs.

Scant weeks ago, the government expressed its deep concern with Canada's housing crisis by appointing a minister responsible for addressing homelessness. In that context, it is reasonable to ask whether the proposed new accountability framework will assist this government in moving forward, or whether it could present an obstacle to appropriate action. That is the question we believe this committee should ask, and we urge you to listen carefully to the answer.

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Second, we're concerned that, in the guise of promoting flexibility and responsiveness, the bill will make changes that could ultimately have the unintended effect of eroding the affordability and even the economic viability of Canada's existing co-operative, non-profit, and government-owned public housing stock. The same changes could divert federal government spending from purposes now approved by government and by Parliament.

Is it necessary or desirable, for example, to remove from legislation, by eliminating definitions, positive policy principles that have long applied to Canada's existing affordable housing? We would ask why Bill C-66 has been written to do this.

In its present form, for example, Bill C-66 eliminates a series of definitions from the National Housing Act. These definitions enshrine important principles and make sure federal dollars continue to be spent where they were intended to be spent. These expenditures are the result of announced government initiatives, introduced and debated in the House.

Let me take three examples of where these unintended consequences may arise.

As far as rental rehabilitation assistance is concerned, references to “non-profit recipients” have been removed, along with the requirement that recipients charge a fair rent. What purposes are these changes intended to serve?

With respect to co-operative housing, Bill C-66 removes references to our non-profit status and gives CMHC wide new powers to set conditions on occupancy, disposal, and leasing of a project.

Finally, the definition of “eligible contribution recipient” has been removed, a term that appears in the operating agreements of many communities developed under section 95. We would ask why.

We strongly believe the federal government should not, through this bill, give itself or its provincial successors the ability to change retrospectively the broad principles that govern commitments made under past housing programs. We support maintaining these and other policy principles. If the federal government intends to make substantial policy changes to existing programs, then we suggest there should be a debate on this matter.

Third—and this is my final observation and a most significant concern—is the wide grant of power that CMHC, through Bill C-66, may give to the provinces. Here we face a paradox. Just as Canada is facing its worst housing shortage in decades, the federal government would devolve to the provinces sole responsibility for meeting the needs of Canadians for affordable housing. But it is doing so without providing any new resources to the provinces to deal with this problem, now or apparently in the future. And here we are considering a new law that would give legislative effect to that devolution, again without devolving a single new dollar.

To get provinces to accept this kind of deal, the government seems to be offering them an unfettered mandate to alter the rules that govern existing projects, as long as the provinces continue to spend federal dollars under the general rubric of low-income housing. This is the aspect of Bill C-66 with which the members of CHF Canada are most concerned.

In particular, clause 38 of the bill allows the corporation to waive specific statutory objectives about non-profit housing now contained in the National Housing Act, rather than carry them forward. Coupled with clause 28, which enshrines the provinces' ability to deal with transfer agreements, Bill C-66 could be used to erode Canada's existing affordable housing stock.

I want to make a couple of final conclusions by way of observation.

By eliminating, with Bill C-66, the statutory purposes of existing affordable housing, the federal government would appear to have nothing to say about a provincial transfer that results in a significant net loss of affordable housing units, requiring the removal and reallocation of public housing tenants or even diverted federal subsidies into private profits. This scenario is indeed possible.

Earlier we underlined Canada's success at housing its citizens in co-operative and non-profit homes, and we emphasized the positive role CMHC has played in helping to house Canadians. We also confirmed other witnesses' statements by saying we're glad to see CMHC being given a new, more flexible accountability relationship that could allow this role to continue.

But we ask whether or not the bill as presently worded will allow the existing multibillion-dollar federal housing investment in Canada's non-profit and public housing stock to be maintained. It is an investment that deserves federal safekeeping, both because it continues to be federally funded and because it is securing the homes of more than 1 million Canadians.

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We would ask the members of the committee to seek clear answers to three questions. First, will Bill C-66 impede the federal government from acting, now or in the future, to alleviate Canada's housing need? Second, is it intended to allow provinces to alter existing statutory requirements retroactively? Third, if not, why does the bill empower CMHC to waive existing NHA provisions for existing programs, and to allow provinces in turn to waive them?

CHF Canada feels very strongly that the legislation must be substantially improved by removing the corporation's ability to waive today's statutory requirements as they apply to existing, federally sponsored, affordable housing.

Thank you. We would be pleased to answer any questions you might have.

The Chairman: Thank you, Ms. Cécile and Mr. Hunter.

We will start questions with Mr. Schmidt, and then I have Ben.

Mr. Werner Schmidt: Thank you very much, Mr. Chairman.

Thank you very much, folks, for appearing, and for appearing together. It's nice to see a group together like this.

The difficulty I have, Mr. Chairman, is that we may run out of time. It's important, because these are very significant witnesses, and we need to hear them.

The Chairman: I'll stay as long as you want, Werner.

Mr. Werner Schmidt: All right. Thank you very much.

My first question is addressed to Madame Rheault from the Bank of Montreal.

I may have missed the earlier part of your presentation, but I would like to ask you something. I noticed, in looking at some of the background material in your portfolio, that you have signed agreements with a number of Indian bands where you do provide for lending for the housing on the reserves, and the mortgages are insured by the band council. That's in effect what happens. So instead of CMHC insuring those mortgages, the band council does that.

Is it your proposal that that arrangement should be different from what it is today, and that the Indian Act or the Canada Mortgage and Housing Corporation Act should be changed so that in fact the same kinds of insurance arrangements would exist between CMHC and your institution or mortgages that you issue? Or should it be the way you've now agreed to do it with Westbank and other bands?

Ms. Ann Rheault: Thank you for the question, sir.

Currently the Bank of Montreal's housing loan programs' loans made to individual members of the first nation are secured by a full financial guarantee from the band itself.

Under the current housing loan programs, section 95 and section 10 in particular, the security for those loans to individuals is a band council guarantee, an Indian Affairs guarantee, and CMHC issues an undertaking but doesn't collect a default premium. This is my description. Under the existing programs where CMHC is involved on reserve, the security is an Indian Affairs guarantee. CMHC essentially acts as an agent for Indian Affairs to monitor the construction or the purchase, or to monitor the project itself.

The programs we have in place—and we do have seven of them in place, and you are of course aware of Westbank's—have portfolio limits established between the bank and the first nation, based on the financial and management strength of the first nation. So, for example, some of these portfolios are for $5 million and some of them are for $2 million, depending on the financial strength and the appetite of the band to take on the risk.

There are 608 bands in Canada all together. Many Indian bands, though, perhaps don't have the appetite for that risk or don't have enough members at this time who may qualify to the banks' usual standard for a loan. So the opportunity to put together a program such as we have with these other first nations is not available to every one.

In those instances, we would very much like CMHC to be with us in insuring either rental properties or individual purchases, because there is a preference in first nation territory to do business with financial institutions without the involvement of Indian Affairs, if that can be done.

Our product was designed to meet a need. We need to expand that product base to ensure we can provide more of this type of financing on reserves.

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Mr. Werner Schmidt: But isn't that possible now?

Ms. Ann Rheault: I do business all across the country, and quite a number of the first nations I do business with don't participate in one or the other of Indian Affairs programs. Although they're called section 95 and section 10, the underlying security is an Indian Affairs program. Again, part of the movement towards doing business independently is a request from first nations for doing business beyond the involvement of, in particular, the ministerial guarantee program.

So yes, there are programs available now, but they don't suit the needs of all the customers we are dealing with or have had occasion to discuss it with.

Mr. Werner Schmidt: Thank you.

There are other developments with the band councils, for example by land fee simple, which is not reserve land. In this case, does the bank have the assurance or the guarantee of the band council, or does it have the possibility of insuring those mortgages under CMHC?

Ms. Ann Rheault: Fee simple land is not reserve land, so the Indian Act does not apply. In some jurisdictions, as self-government continues to evolve in other parts of Canada.... A fine example of that is in the Yukon Territory, where the land that was owned and was acquired has a different status from a reserve. As a matter of fact, in the Yukon in particular, there are very few reserves.

So there are different land regimes across the country, but typically the most difficult land regime in which to raise mortgage financing of course is reserve land, which is not subject to a mortgage.

Fee simple land, if it is not part of a reserve—if it's not a designated reserve—is not restricted by the Indian Act.

Mr. Werner Schmidt: But if it's owned by a band council in the name of the band council, is it covered under the Indian Act?

Ms. Ann Rheault: If it's fee simple land, it's not subject to the restrictions of the Indian Act. However, in my own experience, most lands acquired by a first nation, especially those lands that are acquired under treaties or settlements, have a process whereby they will convert to reserve status.

Mr. Werner Schmidt: No, I understand that, and there is a distinction there, clearly. The question I really want to pursue—and I'll bring it up a third time and then I'll leave it alone—is one we need to examine very carefully.

The band council itself is created under the Indian band and exists under the regulations and provisions of the Indian Act. When it acquires land that is fee simple, I quite agree, it is registered separately, but it is not registered outside of the corporation of the band council. It is the band council that is there. If a mortgage taken by that band council defaults, what happens?

Ms. Ann Rheault: A mortgage on fee simple land is subject to foreclosure.

Mr. Werner Schmidt: So then, as a financial institution, you could foreclose and assume ownership of that land if the mortgage were in default?

Ms. Ann Rheault: Well, a number of very significant complexities will come into play, especially when dealing with an Indian band, and those very much rely on whether property is deemed to be situated on a reserve when in fact it's not.

I have some limitations in my knowledge, although this is a business I do all the time. There are instances when property can be deemed to be on a reserve even though it is not reserve land, and they stem a lot from the source of the funds that were used to acquire the land, the nature of the land, and so on.

Each transaction we do, for example, especially in a commercial development over and above a residential development, really is subject to a lot of work between competent lawyers, and I mean competent in Indian Act and real estate transactions.

Mr. Werner Schmidt: To put it into the context, in Bill C-66 as it is currently structured, can CMHC guarantee a mortgage on fee simple land, or on commercial or residential buildings on fee simple land, owned in the name of a band council?

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Ms. Ann Rheault: Residential, yes. The CMHC doesn't get involved in commercial, so on residential, yes.

Mr. Werner Schmidt: All right, then let me go one step further. Can the band council in this context be interpreted to be a municipal government, and can it then get money from CMHC to acquire land or to assemble land?

Ms. Ann Rheault: I can't answer the question, sir. I think you'd have to ask it of CMHC. I don't know for certain.

Mr. Werner Schmidt: But you're in the business of lending money.

Ms. Ann Rheault: Yes, I am.

Mr. Werner Schmidt: Do you lend money to band councils to buy fee simple land off reserve?

Ms. Ann Rheault: Have I? I'm not so sure I have, no. Most of the nations I deal with that are acquiring land are acquiring it under settlement agreements.

Mr. Werner Schmidt: Oh, that's not quite right. You'd better check your facts on that. That's not quite right. A lot of land is being purchased by band councils in their own name in fee simple—quite a lot of it—and it's not...[Inaudible—Editor].

Thank you, Mr. Chair.

The Chairman: I'll get back to you, Werner, if you'd like.

Mr. Werner Schmidt: Yes, please.

The Chairman: Ben has agreed to let Gilles take his place, so we'll go to Gilles, then Ben.

Mr. Gilles Bernier: I only have one question, Mr. Speaker, because I only have the time for one. I'm sorry I have to leave.

I understand where you're all coming from, and I want to thank all of you for meeting with us this morning. We're a great bunch of people to be dealing with.

My question is for Ann.

Maybe Mr. Schmidt asked you the question, but I could not relate to the answer you gave, because I have a big native reserve in my own riding. As a matter of fact I have two, and one of them is the second-largest in the province of New Brunswick.

The way I see it, you're lending money on reserves for housing. Is that correct?

Ms. Ann Rheault: Yes.

Mr. Gilles Bernier: If you are—and you say you are—then when they are in default of payment, can you go yourself and foreclose? If not, what kind of guarantee do you have? Who gives you the guarantee if you can't go and foreclose?

Ms. Ann Rheault: Can I foreclose? No. Under the housing loans programs that we have designed, excluding ministerial guarantees, the bank's security is a full financial guarantee from the band. For each of the programs we have in place, the band council is taking a mortgage or a pledge of that member's property as collateral for their guarantee.

Mr. Gilles Bernier: But isn't that property owned by the member residing in that house? Or is it owned by the band council?

Ms. Ann Rheault: Reserve land is crown land. In a number of reserves across Canada—particularly in the Maritimes, in British Columbia, and in the southern part of Ontario—Indian Affairs, and primarily of course chief in council, issue what's called a certificate of possession, which gives that member the right to possess that land. It's kind of like what our old land titles used to be like.

It does not, though, transfer title of the land. The land on a reserve is always, underlying, held by the Crown for the benefit of the members of that particular reserve. So essentially what the member is doing is mortgaging the building on it.

Mr. Gilles Bernier: Thank you very much, Mr. Chairman.

The Chairman: Thank you, Gilles.

Ben, please.

Mr. Benoît Serré (Timiskaming—Cochrane, Lib.): Thank you, Mr. Chairman.

I'd like to welcome all of you and thank you for your presentations, especially the one from Co-operative Housing. You raised some very important questions that need to be answered, and I myself look forward to some answers from the minister.

Almost all of my questions have been answered. It's the same line of questioning that my two colleagues have taken. I have quite a bit of reserve land in my riding also. I'm from northern Ontario. I'm very interested in, and I compliment you on, your program that has just been set up. There are none in my riding, but I see there are a few in northern Ontario.

But I'm also a little confused about how this whole system works. You mentioned that you make those agreements without a government guarantee. I understand that you have no ministerial guarantee. But ultimately, isn't it the responsibility of the taxpayers and Indian Affairs?

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If you take a guarantee from the Indian band—and we all know that a lot of those bands are in very serious financial difficulties and may default.... I have the situation in my riding quite often where a contractor will come in and build houses and the money is given to the band, but the band forgets to pay the contractor, and then the contractor has no recourse. I have one situation that's been dragging on for five years. You can't foreclose; you can't seize anything; there's no real guarantee.

I understand the process that the band guarantees for the individual and then takes a mortgage within the band system on that individual property and whatnot, but at the end of the day, isn't it Indian Affairs or the Crown that is responsible?

Ms. Ann Rheault: Certainly most of the first nations programs are financed by federal transfer payments.

One of the reasons we're supporting very much the changes that would allow CMHC to be more creative and work with us is that the programs we've put in place are for very large portfolios. I'm from northwestern Ontario, a little bit farther west than you are, so I'm very familiar with the bands in that area. They tend to be remote and smaller than perhaps some of the first nations you'll see included in those particular programs.

We work very closely with the chiefs and councils of the first nations that we've developed those programs on, because we've all had to assess our risk. That certainly is a risk that the first nations are assessing, based on their requirement to provide benefits and services to their members with the funds that are provided to them by transfer payments.

So the programs that are in place are very carefully and very thoroughly analysed. It is a significant risk to the band, to the bank, and to the member too. In many cases of course that person is putting their own funds in. The members who borrow under these programs are qualified to the bank's usual standards, so they will be people who are employed, who have a good credit rating, and who've made a commitment to provide their housing to them too.

Risk is there. It always is in this type of financing. But we feel we've mitigated it to an acceptable level for all of us, including, I would suggest, the funders, the government.

We've run this portfolio for about three years now. It continues to grow, and we are extraordinarily pleased with the results in it.

Mr. Benoît Serré: Let me put to you a little scenario. Let's say you make an agreement for $5 million with Band X. For some reason, the paperwork of Band X has not been done properly, there's been some fraud or whatever, and the band in insolvent. There's no money, and they default on their repayment for six months, a year, or whatever. Are you left with the loss of that $5 million, or does Indian Affairs have the responsibility to take over the band's finances? Are they then responsible for that $5 million, or does the bank lose that $5 million?

Ms. Ann Rheault: The loans and the portfolios we've put in place with the first nations that have those programs are unsecured, so we have no recourse beyond the arrangements, based on fiscal and sound management responsibilities.

Very similar to any customer or any program, a band doesn't usually just turn around from being responsible to their own members, who are their prime concern, and become a band that would purposely disregard its obligations. So that's part of the assessment.

The bands we've put these programs in place with are bands we're very close to. We spend a lot of time in their communities. We have developed a mutually respectful relationship, and we're very comfortable with the programs we do.

What we're looking for is to have a partner such as CMHC, which can help us move into other areas, perhaps with smaller bands that may not have the capacity to put together a program.

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Mr. Benoît Serré: That's my main concern actually, and this is the last thing I'm going to say, Mr. Chairman. It does well for the bands already in a good financial position and already capable of providing some affordable houses to their members. It does nothing, or very little, for those that are most in need, meaning the smaller bands, the ones that are unhealthy. Somehow I would like to see this bill and these agreements address those smaller bands, because they're the ones that need it the most.

Ms. Ann Rheault: I would agree with you.

The Chairman: Thank you, Ben.

Michelle.

Mrs. Michelle Dockrill: Thank you, Mr. Chair.

As my colleagues have said, thank you very much for being here this morning.

This legislation eliminates specific provisions for groups trying to build affordable housing on reserve, and I'm wondering how you see this affecting the efforts to address the housing issue with respect to aboriginals.

Ms. Ann Rheault: I don't quite understand how you—

Mrs. Michelle Dockrill: Well, maybe I should say I believe the legislation eliminates that. Let's put it that way.

Ms. Ann Rheault: My experience tells me that first nations and their members are looking for some very significant programs that will complement those that are in existence. So I certainly don't support an erosion of existing programs. We are looking for CMHC to have the ability to, in particular, support those programs. The ones I work with are for members of first nations who can provide for their own housing through loans. That's certainly my position.

Mrs. Michelle Dockrill: Okay.

I have a couple of more questions, Mr. Chair.

The Chairman: Go right ahead, Michelle.

Mrs. Michelle Dockrill: John, I have a two-part question for you. What is the role of your organization in economically marginalized areas of the country, such as Atlantic Canada, and how do you see the changes to the National Housing Act affecting your organization and your members in Atlantic Canada?

Mr. John Kenward: In relation to the housing industry, we're seen as one of Canada's most important domestic industries. We generate a huge amount of employment, even in times when we're operating below potential. So in Atlantic Canada, our industry plays a significant role economically in all communities where houses are built or renovated. We feel we're one of those unique industries where in fact our economic clout is felt in every part of Canada. In Atlantic Canada specifically, our industry would be as important as it would be anywhere else in the country.

We do face issues and problems in every part of the country today. Particularly in places such as Atlantic Canada, our industry is confronted by the underground economy, we've been hurt by the harmonized sales tax there, and so on. We continue constantly to make recommendations to all levels of government about issues of that kind. That's one of the reasons that we, like the social housing sector, have called for a national housing strategy in this country, to cause all three levels of government to get together with the industry to begin to deal with some of these issues.

In relation to the direct impact of Bill C-66 on mortgage insurance, our position is that if we do have a competitive mortgage insurance market where the public mortgage insurer is competing on a level playing field with GE Capital or any other private mortgage insurer that might enter the scene, then consumers are going to benefit from that. And our industry of course will benefit accordingly, because if we can improve housing affordability in this country, home builders do more business, to be frank with you.

Mrs. Michelle Dockrill: Okay.

Mr. Hunter, I have an important question, and I'm interested in your answer. Do you see this legislation as the first step to the privatization of CMHC?

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Mr. Laird Hunter: CHF Canada worries that that's the case.

We've seen a shift in the role of Canada Mortgage and Housing actively in the last several years. After the war, CMHC played a very central role in housing Canadians and in the exercising of the federal spending power. That role has been continued up until very recently. Now, with the devolution to the province of at least administration, and potentially portfolio ownership, the capacity of the federal government to respond to some of the things that Mr. Kenward is suggesting are necessary, such as a national housing strategy, is worrisome.

CHF is concerned that what it might describe as market failures will, as has so often happened in the past, fall between the stools of jurisdiction, and nobody will be left being the voice for that. If that resulted from the privatization of the corporation, then Canadians would be at a great loss.

Mrs. Michelle Dockrill: Certainly I'm concerned with the elimination of national standards such as decent, safe, and sanitary housing. I'm wondering what you feel would be the impact of those eliminations.

Mr. Laird Hunter: We're concerned. Historically the role that the federal house has played, as a mechanism where issues can get raised, has been a primary aspect of the accountability framework.

In a revised role for the corporation, where it's even further at arm's length from the government and involved in a range of commercial activities—where it becomes in effect the repository for housing policy—we worry that the elimination of definitional safeguards in the act could result in either active or benign neglect. That's our concern.

Mrs. Michelle Dockrill: I have just one final question. I'm wondering if your organization has any information on the cost of subsidizing for-profit developers, compared to supporting co-op or private non-profit developers.

[Translation]

Ms. Danielle Cécile: We have not conducted any recent studies on this question. I believe that one of our colleagues at the Canadian Housing and Rental Association recently examined the cost of rent subsidies in the private sector compared with the cost of direct subsidies for social housing. According to what I heard, the results appear to indicate that the cost of rent subsidies in the private sector would be higher.

That having been said, I should add that, in the past, the Canadian Mortgage and Housing Corporation had also conducted studies and compared the various kinds of social housing. It had agreed that housing co-operatives constituted an ownership arrangement that made it possible to have very, very competitive operating costs.

[English]

Mrs. Michelle Dockrill: Thanks, Mr. Chair.

The Chairman: Thank you, Michelle.

Werner, please.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

My question is to the Co-operative Housing Federation.

A tremendous thing has been done by the co-op housing unit in Canada, in all provinces. I want to refer particularly to the distinction between federal co-ops and provincial co-ops, particularly as it relates to Ontario.

If my memory serves me correctly, there is approximately a fifty-fifty split: there are about as many provincial co-ops as there are federal co-ops. There is a difference, but there's pretty good representation from each group. So I'd like to ask you, which is the more successful arrangement—those operated by the provinces or those operated by the federal government?

Mr. Laird Hunter: Could we respond by asking you to ask a similar question to Mr. Kenward with respect to his members?

Voices: Oh, oh!

Mr. Werner Schmidt: If the chair will allow me to ask another question, I will do exactly that, because I was leading into that. I do have a great sympathy for.... There is clearly a division here, and I'd like to know how it works.

[Translation]

Ms. Danielle Cécile: I'm almost inclined to tell you that my answer is my own personal opinion. In that way, I won't get into too much trouble.

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[English]

Mr. Werner Schmidt: Politics even in co-ops?

Ms. Danielle Cécile: Well, you know....

[Translation]

I think that the conditions that were placed on co-operatives which were financed under federal programs have resulted in their being more autonomous. In some ways, the co-operatives that were financed by the province are subject to much more direct control by the provincial bureaucracy. I feel that the operating costs of the latter are probably slightly higher because they tend to operate more like public housing. The less control that members have over operating costs, the higher these costs will be.

If you ask me which of the two is the better arrangement, I would tell you that it's definitely the federal one. I was going to ask you not to quote me, but this isn't the right place for that.

[English]

Voices: Oh, oh!

Mr. Werner Schmidt: Well, you're on record now. This is a public forum, after all.

I appreciate the perspective, and I would have been very surprised had you said anything otherwise, but the point I was trying to get at is the monitoring of the co-ops themselves. Who is the co-op accountable to? On the one hand you can argue it's the federal government, or on the other hand it's the provincial government. But now I want to lower it just a trifle. To whom is the management of a particular co-op accountable, wherever it happens to be—to the members or to the government?

Mr. Laird Hunter: To the members, subject to funding arrangements in place to government.

Mr. Werner Schmidt: Isn't that a very good way to provide affordable or low-cost housing to the general public, through the co-op structure?

Mr. Laird Hunter: We think it's the best way.

Mr. Werner Schmidt: Should the federal and provincial governments then not get out of public housing and rather let this go the co-op route?

Mr. Laird Hunter: The issue we address in our brief is that significant numbers of Canadians suffer an affordability problem.

The question we've all been addressing is this. Where there are market mechanisms that can allow those who are able to afford their housing to do so, and where there are affordability problems, what's the most effective vehicle to deliver? For many of the members of CHF Canada, well over 75% of the individuals living there are on rent geared to income. Notwithstanding the best efforts of Mr. Kenward and his members to provide affordable housing, they could not buy housing or find themselves in a position of affordability.

So the co-op vehicle becomes the vehicle to provide greatest accountability, both for the expenditure of public dollars and in response to the needs and aspirations of the members of those co-operatives to manage their own affairs. We would, in the best of all possible worlds, like a situation where there is no government assistance, but it can't exist in the world in which we live now.

Mr. Werner Schmidt: The best way of providing government assistance is really the question, whether it be the co-op or whatever. But the point is that whether your housing is co-op or public housing or private housing, John and Don's organization builds both of them.

Mr. Laird Hunter: Correct.

Mr. Werner Schmidt: So you're probably in the best position to say what is the best way to provide affordable housing.

Mr. Laird Hunter: In our view, the best way is a competitive environment that provides the most responsive cost to the building of the product, and then the obvious role government must play in helping those with problems of affordability. The programs that have been developed with CMHC's assistance over the last 30 years are demonstrative evidence of a very effective way to deliver housing in this country for people who can't afford it.

Mr. Werner Schmidt: We had all kinds of presentations made just before you appeared at the table here, and we also had the Golden report on Toronto, so we know there's a problem out there with regard to providing low-cost housing for people who are in real trouble. So what is the way in which to handle this situation? I really would appreciate it if the CHBA came into this.

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Mr. John Kenward: We've always understood that when we deal with questions of social housing need, we're always talking about the expenditure of public money and so forth.

Mr. Werner Schmidt: We always are, yes.

Mr. John Kenward: Our terminology is that in a civil society, we'd better be prepared to do that to deal with people experiencing need.

Our view has been that in dealing with housing need, you really need a tool kit of various policies and programs, because it's diverse in nature. So CHBA's position has been that at any point in time, we should be looking at shelter allowances—and we have put an emphasis on that—where the problem is clearly an income problem. We have said that in other cases, we need supply programs where in fact we're dealing with special needs that obviously the marketplace cannot address. In other cases there is the case for co-operative housing initiatives, because they've been shown to work.

So it's not a question, for us anyway, of moving into this and saying we have found the solution, because we don't believe there is simply one problem. There are diverse problems requiring a diversity of approaches. Ultimately we can't get around the problem, however, that it's going to cost public money to deal with it. It's a question of deploying that money in the most intelligent, rational way we possibly can.

Certainly the Canadian Home Builders' Association, over time, has had strenuous debate with the Co-operative Housing Federation and the Canadian Housing and Renewal Association about the most appropriate ways to go about addressing need. However, there is one thing that we're not going to disagree on, and that is in relation to other countries, particularly if we look to our friends south of the border. Whatever we've been doing up here is sure a hell of a lot better than what they've been doing.

Mr. Werner Schmidt: That's correct, and this ties right into the provisions within Bill C-66 where exactly this kind of issue is addressed in part. Ultimately it does come down to money, so what's the best way to use the scarce resources that are available?

Mr. John Kenward: One other point I'd like to make is that it would be extremely unfortunate if we just constantly looked to the federal government as the source of money.

Mr. Werner Schmidt: Hear, hear.

Mr. John Kenward: If we look across the playing field now, in relation to the federal presence in housing, we have the federal government in a very strong leadership role on this. For years we've been able to use spousal income for home purchase, we have the GST rebate for new home purchases, we have access to the RRSP provision for home ownership purposes, and we have the low down payment. We have the federal government firmly committed to research through CMHC, but also through the National Research Council, the Institute for Research in Construction, CANMET over at Natural Resources Canada, and the list goes on and on and on.

In other words, the federal government has carved out a significant territory of public policy initiative and support in relation to housing in this country.

I worry greatly when people start talking about privatization. I don't understand what that means, but we are certainly persuaded by the view that in order for us to be able to get the full value out of the federal government commitment, it is high time for the other levels of government, particularly the provincial and territorial governments, to meet with the federal government again to deal with some of these housing issues we're talking about today.

Mr. Werner Schmidt: I made a note here, and I put a big square around it, that we need a national housing strategy or plan. We don't have one.

Mr. John Kenward: No, you don't.

Mr. Werner Schmidt: There isn't one.

So I'm wondering, Mr. Chair, whether within this context—and I know it's outside the provisions of Bill C-66 to a degree—it might not be appropriate for this committee to go to the minister.

Looking at the people who are before us here this morning, would you be prepared to sit down and help develop and devise something? I'm sure you all have ideas of what ought to be in a national housing strategy. We do need all levels of government involved in this thing.

The Bank of Montreal has shown us what can be done in one area, you've shown us in another area, and the Co-operative Housing Federation has shown us in another area. There's a host of things. The Golden report gives us another approach to this thing.

Somehow this is all topsy-turvy, it's a little bit here and a little bit there, and we're spending a lot of money inefficiently.

The Chairman: Werner, in our Tuesday business meeting we can discuss that very thing, if you like, and maybe Michelle will let you bring it up too.

Mr. Hunter wanted to say something too.

Mr. Laird Hunter: I'll defer quickly to Mr. Kenward, and then I'd like to make just one observation.

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Mr. John Kenward: Thank you very much.

We certainly would participate in such an approach and would be very pleased to sit around the table with the Bank of Montreal, CHRA, and CHF. And I should point out, because you forget these things, that the federal government has also created environments for public-private partnership among us already. We work with the CHRA on Homegrown Solutions. We work with the Federation of Canadian Municipalities and CHRA on the Affordability and Choice Today program.

The caveat on all of this for us is that we have to get the provincial governments back to the table again.

A voice: Exactly.

The Chairman: Mr. Hunter.

Mr. Laird Hunter: First, on behalf of CHF Canada, I'd say indeed we would welcome such a debate on a national strategy for housing.

To respond in part to Mr. Schmidt's observation about Bill C-66, one of the concerns CHF Canada has about this bill is that it doesn't have any proactive sense. It in effect talks about flexibility to respond to market conditions, and while we applaud that, the exact need that you spot, sir, is needed in this act, which is that there should be a commitment by the government through the corporation to actively set the national agenda for housing. That's what we would recommend this committee consider in Bill C-66.

Mr. Werner Schmidt: In fact I would go so far as to say that what this bill really does is allow CMHC to determine the national housing strategy.

Mr. Laird Hunter: Exactly.

Mr. Werner Schmidt: And that's wrong. It should be the government that does this.

The Chairman: Okay, Werner, thanks.

Michelle, please, and then we'll finish with Carolyn.

Mrs. Michelle Dockrill: Thank you, Mr. Chairman. I have one quick question for Mr. Hunter.

I'm just wondering if you see the proposed changes to CMHC as a hindrance or an enhancement with respect to the issue of homelessness.

Mr. Laird Hunter: Without some direct statement of the unique role and responsibility of government in ensuring an ongoing presence for affordability in homelessness questions, I see it as a hindrance. The flexibility that's provided is laudatory, but flexibility without direction is merely technique, and we don't need technique; we need a national strategy on housing.

Mrs. Michelle Dockrill: Okay, thank you.

The Chairman: Thank you.

The last word goes to you, Carolyn.

Mrs. Carolyn Parrish: I just want to clarify something. You know of course that CMHC has a board of directors. It reports to the Treasury Board and it has to ring all kinds of bells and whistles before it goes through. I don't want to leave the image sitting there that the bill gives CMHC a takeover role and takes it away from government.

I'd like to use a building analogy. I think what you're looking for is an architect, and what you have here is plumbing. You have all the nuts and bolts required to function properly under CMHC, and you're trying to come back at it and say you don't want the bill to be plumbing and nails and wood and cement; you want it to be a visionary architectural dream. I don't think that's what this bill is about.

Mr. Kenward, do you have any concrete problems with this bill? Your initial presentation appeared to be very positive.

Mr. John Kenward: In terms of the spirit of the bill, we have no problem at all. In terms of the content of the bill, I have to admit right at the very start that we're not experts in relation to the mortgage insurance business. All we can tell you is what we want to see as the end result.

What has comforted CHBA this morning is our ability to report that we heard a really constructive discussion this morning with very serious questions being raised, and a good exchange of views between the committee and GE. So we hope the committee will—and I'm sure it will—take all of that material into account, because all we're looking for at the end of the day is assurance that we're going to end up with a fair, level, competitive playing field between the public insurer and the private insurer.

Mrs. Carolyn Parrish: As the Home Builders' Association, you're obviously very familiar with what GE does. I was trying to get a little bit more detail out of them. I don't think they even do mortgage insurance in the Atlantic provinces. They don't have an office there. I know they aren't in Sudbury. They've grown at a phenomenal rate for a company that size, but I think it's because they don't get involved in public-private partnerships. They don't get involved in risk-taking. They're cherry-picking the best mortgage insurance victims they can find. Am I incorrect?

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Mr. John Kenward: Well, of course I cannot speak for the actual business of GE Capital. I can tell you about the relationship the CHBA has had with them, which causes me to describe them as a very reputable company. We recognize that they're of the same character, really, as many other institutions in our industry that are members of CHBA. They're very supportive of the industry, they want to make the system work, and so on.

They're also new. So to the extent that there may be things I wouldn't know about that are not in place yet, they may very well be evolving.

We've had absolutely no difficulty at all, as an association, making them feel at home within our association and part of our membership. That's all I can say about them, quite frankly. They're a very reputable company, in our view.

Mrs. Carolyn Parrish: Can you also say the same thing about your dealings with CMHC?

Mr. John Kenward: Oh, absolutely, no problem at all. If we could have the world we want, we would like to see the respective expertise of the public mortgage insurer and the private mortgage insurer competing with one another on service, price, and all the rest of it in the marketplace. We think it would work well for both of them.

In our view, there's nothing like competition to enhance capacity. Secondly, the consumers of Canada will benefit from this, obviously. And thirdly, we as home builders know we're going to benefit, because it's going to help housing affordability.

Mrs. Carolyn Parrish: Thank you.

The Chairman: Carolyn, thank you.

If there are no more questions, on behalf of the members who are here and those who were here—other obligations drew them away—I want to thank you all for your presentations and for your succinct, frank, and honest answers to the questions that were put to you.

With that, we're adjourned. We'll be in room 371 West Block on Thursday at 9.30. Thank you again.