Good morning, colleagues. We will call the meeting back to order.
In the first half-hour we were fortunate enough to have met our new interim Auditor General of Canada in camera. Now we're being televised. If you have a cellphone or any kind of a device that may interrupt the proceedings, I would encourage you all to please set it to mute or silent. That would be great.
We are now reconvened to consider the special examination report, “Report of the Joint Auditors to the Board of Directors of Canada Mortgage and Housing Corporation”, of the 2018 fall reports of the Auditor General of Canada.
We have with us this morning from the Office of the Auditor General, Lissa Lamarche, assistant auditor general; and Clyde MacLellan, also assistant auditor general. From Ernst and Young, we have Michel Bergeron, managing partner. From Canada Mortgage and Housing Corporation, we have Derek Ballantyne, chairman of the board, and Evan Siddall, president and chief executive officer.
We welcome you all here. We will turn to the Auditor General's office first.
Mr. Chair, thank you for this opportunity to discuss our special examination report on the Canada Mortgage and Housing Corporation, or CMHC.
As you mentioned, I am accompanied today by Lissa Lamarche, assistant auditor general, who was the principal responsible for this audit at the time of the report. Because this audit was done jointly with Ernst & Young, we are also accompanied by Michel Bergeron, a partner with the firm.
As you know, in a special examination, we seek to determine whether the crown corporation's systems and practices provide reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.
Our examination covered the period from March to December 2017.
Overall, we found that the corporation had in place good corporate management practices. However, we identified a significant deficiency in the board of directors' complement and the related impact on board oversight. Specifically, we found that four of the 12 positions were vacant, which left gaps in the competencies and diversity of the board and hindered the effectiveness of its oversight.
This deficiency matters because an incomplete board of directors with competency gaps could compromise the board's ability to effectively oversee the corporation. Given the complexity of multiple transformation initiatives under way and their significance to the corporation's operations, adequate oversight and competencies were critical. In December 2017, a number of appointments to the board were announced.
We also found good strategic planning, performance measurement and risk management practices, but there was room for improvement in the corporation's capital management and stress testing practices. We noted that the corporation did not quantify the impacts of all material risks to ensure that sufficient capital was earmarked for these risks, and that it did not perform ad hoc stress testing to further explore its vulnerabilities.
These weaknesses matter, because determining the level of capital the corporation needs to address all significant risks helps mitigate financial risks to the Government of Canada and to the Canadian taxpayer. Furthermore, without the additional ad hoc stress testing, the corporation could not explore its hidden vulnerabilities and inform senior management and the board about potentially harmful scenarios.
We found that the corporation had in place good practices for its mortgage loan insurance, securitization and assisted housing activities. Specifically, the corporation planned these activities, implemented them effectively, and monitored and reported on them.
However, we noted weaknesses that were related to the significant organizational transformation initiatives under way, particularly in the integrated management of the technological and non-technological transformation initiatives, and in the identification and monitoring of performance metrics at the individual project level.
These weaknesses matter because for a large-scale, complex transformation program, managing all transformation initiatives together ensures proper integration of project interdependencies and facilitates change management and risk management.
In addition, without clearly defining and documenting objectives, outcomes, performance metrics and expected benefits, the corporation may not have been able to assess whether expected benefits were achieved once the projects were completed.
The corporation agreed with all of our recommendations and prepared an action plan in response to our concerns. However, because our audit work was completed in December 2017, I cannot comment on any measures the corporation has taken since then. The committee may wish to ask the corporation's officials to clarify what measures it has taken in response to our recommendations.
Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.
It's a pleasure to be here. I am joined today by the president and CEO of CMHC, Evan Siddall.
By way of opening, I would like to say that we welcome the committee's interest in the most recent special examination of CMHC's operations conducted by the Auditor General of Canada and Ernst & Young.
The Financial Administration Act requires that all crown corporations undergo a special examination at least once every ten years. The special examination we are discussing today covered the period between March 1 and December 31, 2017.
For the most part, the audit concluded that CMHC maintained good corporate management practices during this period, in a manner that provided the reasonable assurance required under the Financial Administration Act.
However, as you have also heard this morning, auditors identified a significant deficiency in corporate governance related to board appointments and oversight and competencies. I will limit my remarks to measures taken to correct these issues.
Most notably, during the period covered by the audit, four of the 12 positions on CMHC's board of directors were vacant. This resulted in gaps in the competencies and diversity of the board, which the auditors concluded hindered the effectiveness of its oversight.
CMHC and the board itself have limited involvement in the selection of board members; these are Governor in Council appointments. However, I am pleased to say that the government appointed six new members—including me—to the board in December 2017, just as the special examination was wrapping up.
These appointments filled the four vacant positions as well as two that were about to expire. Importantly, they also helped to address the competency and experience gaps identified by the auditors.
Since then, the government has appointed two additional members to replace individuals whose terms had expired. Together, the eight new members have brought diverse perspectives and a wide range of skills to the board, including in areas related to affordable housing, information technology and chartered accountancy.
My own background, for example, is managing large and mid-sized housing organizations, which includes extensive work with the non-profit, charitable, social entrepreneurship, co-operative and foundation sectors.
I believe Evan would agree that the reconstituted board's knowledge and expertise have been of significant value in helping CMHC lead the national housing strategy, which was announced post-audit, as well as ensuring that Canadians benefit from stable and secure housing markets.
Also, in response to the auditor's recommendations, CMHC has introduced new practices to improve the capacity of board members to oversee the company's operations. For example, it has strengthened the annual review of board competencies to identify gaps. My board colleagues and I have received training in specific areas of corporate governance. A menu of relevant courses and training for board members is updated quarterly and the company will be presenting a list of suggested deep-dive topics for the board and its committees on an annual basis.
The board created a new oversight board committee, the housing and capital projects committee, which will replace the affordable housing committee. This committee will oversee the national housing strategy, capital spending, future of work projects and any other projects with an expected cost in excess of $10 million. The housing and capital projects committee will meet for the first time in May 2019. These include measures under the national housing strategy as well as CMHC's new housing affordability strategy, which aims to ensure that “By 2030, everyone in Canada has a home that they can afford and that meets their needs.”
CMHC is supporting this new committee's work by providing regular updates on assisted housing activities. The company also provides information through its quarterly “Assisted Housing Business Supplement”.
Thank you again for the opportunity to be here to answer your questions.
I will turn things over to Evan now, who will complete our presentation.
Thank you, Mr. Chair and members of the committee, and thank you all for the opportunity to be here today.
Let me begin by reiterating CMHC's commitment to the aim of special examinations required by the Financial Administration Act.
These audits provide the government, parliamentarians and Canadians in general with independent assurance that CMHC has the necessary systems and practices in place to safeguard our assets, that we efficiently and economically manage our resources, and effectively carry out our operations.
They also help build trust in CMHC, a systematically important financial institution with a legislative mandate to contribute to Canada's financial stability and facilitate access to housing.
They make CMHC a stronger company by identifying management deficiencies that we need to address.
I'd like to respond to a few areas. In addition to the corporate management practices that Derek has spoken about, the most recent audit also focused on two other key areas—on the one hand, management of our mortgage loan insurance, securitization and assisted housing lines, and on the other hand, management of organizational transformation initiatives. The Office of the Auditor General recommended, for example, that we enhance our assessment and documentation of the capital required to cover all material risks faced by CMHC, including reputational and strategic risks. I'm pleased to report that an assessment of these capital requirements was recently completed.
Stress testing is a crucial discipline as we continue to improve our work at CMHC. We've identified additional ad hoc stress tests, again in response to a recommendation from the OAG, to ensure that we better understand and are able to respond to vulnerabilities in the event of extreme crises. Notably, I should emphasize to committee members that we are the only Canadian financial institution to publish our stress testing results publicly, every year, as part of our commitment to transparency.
As you may also be aware, CMHC is a much-transformed institution. We are a proudly innovative and client-oriented vehicle for housing policy and housing affordability throughout the economic cycle. In 2015 we began a multi-year initiative to modernize and transform our technology and business practices. The special examination auditors made a number of recommendations related to this work. We're in the process of responding to each of them in accordance with our action plans. For example, we have established a new division to oversee project and change management initiatives and to facilitate reporting to senior management and the board on these initiatives. We've clearly defined the objectives, outcomes, performance measures and expected benefits of our transformation projects. We advise the board of key achievements on a regular basis.
The OAG also recommended that the board of directors should play a more active role in setting CMHC's strategic direction. Again, we had already taken this recommendation into account by the conclusion of the examination. As a matter of fact, last year we engaged in a thorough review of our strategy. It was discussed at three separate board meetings, including a session dedicated completely to this topic. The review also absorbed a lot of our time at the executive committee. This is not to mention the work of a dedicated strategic advisory group that met multiple times. We established a strategic function at CMHC with a series of full-time colleagues.
In short, the board played a key role in the development of our new housing affordability strategy, which housing stakeholders have endorsed across the country. As Derek noted, our strategy sets out the bold aspiration that by 2030, everyone in Canada will have a home that they can afford and that meets their needs. Clearly, this is an ambitious goal and one that exceeds the targets inherent in the national housing strategy of removing 500,000 households from housing need and reducing homelessness by half from 2018 levels. Nonetheless, achieving housing affordability is vital to all for Canada's future economic health, social stability and inclusion. We recognize this, as do housing providers and our many partners across the country. Indeed, we believe CMHC exists for this single purpose, and we recently restructured our company to deliver results for Canadians and ultimately to achieve our aspiration.
I am sure Derek agrees with me that we are particularly proud of our employees' resilience and commitment throughout this process. As a result of the restructuring, 215 employees changed roles. Two out of three employees are now reporting to a new leader. Despite all of these changes—the third significant reorganization in five years—we continued to provide uninterrupted service to Canadians. Our project portfolio remains largely on track.
Supported by this team of dedicated employees, the initiatives included in the national housing strategy and new measures proposed in budget 2019 provide a solid base for our new affordability strategy. Nevertheless, we realize that we will need to go further and faster to reach our goal.
At the same time, as a crown corporation with the “sacred trust” of managing public resources, we are committed to being a leader in housing risk management and an accountable, transparent, efficient and innovative organization that is admired and trusted by Canadians from coast to coast to coast.
That concludes my remarks. Thank you again for inviting us to be here. We look forward to the committee's questions.
You'll be gratified by the answer.
First of all, we do use machines to manage workflow in our homeowner transactional business. It's a piece of software called emili, which we're updating. It's effectively a rules engine that something is either automatically approved—an insured mortgage application—or it's referred to somebody for intervention if it's more complicated.
In the case of multis, which are anything more than four homes in a unit, like apartment buildings, condos, etc., those are adjudicated differently and all, at this point, are largely manual. We're putting in a new technology system that will give people the tools to do that, but they're always complicated. They always involve different financing structures and different corporate structures. While we want to automate the rote part of that activity to make it more efficient, there is always human intervention. There is always an underwriter involved.
My questions are all to you, Mr. Siddall, and to your chair if he wants to answer.
In your 2018 corporate plan, you reduced your reserve from 220% in 2016 to 165% from 2017 to 2022. On page 14 of the special examination report, the Auditor General's office said that they “noted that the Corporation not quantify how much internal capital it should set aside in case reputational and strategic risks were realized.”
How did you make the determination, then, to go from 220% to 165%, if the AG's office said that in your controls internally you had a weakness to determine your capital management needs?
Can I ask you, then, a question because you have now been directed to pay dividends that are coming out of the reserve? For the premiums paid by homeowners who are purchasing a home and getting a policy for the banks, because it covers lenders, that dividend is now going to you. However, based on the Auditor General's report here, they are saying that there was a weakness in the controls, the capital management, the stress testing internally to determine whether you have enough money set aside to cover big scenarios, which you do post online.
How do you know the right amount of dividends you should be paying out when you've already paid out...? Last year, I think in 2018, public accounts documents showed $5.675 billion was paid out.
I'm just a little concerned. If there was a weakness going into the time period where those dividends were set to be paid, and now going forward you're paying it, can you give me some assurance that you've done the homework to ensure you have the right amount of capital? On the testing scenarios that you now post publicly, all you do is post percentages. You don't actually post the methodology as far as I know.
I'm glad I got here. I was trapped in the traffic. I guess one of the bridges is shut down. I really wanted to be here for this one. I was very enthused to dig into this one and to get to this public meeting. The main reason is that this is a darn good report. There are some issues, and I think my two colleagues, Tom and Randeep, have done an excellent job of wading into the minutia of that, but I love it when the big problems are buried in the details of what we're working on.
In the main, your biggest problem and your biggest deficiency wasn't even your fault. It has to do with the appointments process. The auditors, in the language they use, were practically swearing when they said things like “serious weaknesses”. However, it's not your fault.
I think I got something from your opening remarks, but is that now resolved? Are you up to speed now on the board appointments?
I have to tell you, this is not anything new. We've had it with previous governments. The appointments process is always a problem. There always tend to be bottlenecks, and you know—full confession—I can go back to when I was in provincial government and we had the same problem. We always seemed to be behind, and it always has such a major impact. At the centre, where these decisions are made, it ranks very low in terms of crisis problems, but in terms of the problems it manifests, it's huge. I don't know what the answer is, other than to keep underscoring it through reports like this, and politically underscoring it and holding the government to account in question period as to why these things aren't happening.
When I first opened this, I thought, oh, it's CMHC—this is going to be going down the rabbit hole. This is going to get ugly, because there are so many moving parts and each piece needs to be analyzed so carefully. If there are problems anywhere, my experience is that a lot of it is due to lack of planning, lack of analysis and lack of risk assessment, which are all the areas you've done a pretty darn good job on.
My opening—and I don't say this lightly, as people know—is that, in the main, given the responsibilities, the number of moving parts that you have to be responsible for and the in-depth thinking that needs to happen, I was fairly impressed with how well the operation has run. I really appreciate the questions of my colleagues, who have a much deeper background in these things. That's why it's good to have a good mix on the public accounts committee, so that we can all bring different perspectives.
I'm curious. I noted with interest what it said on page 8 in paragraph 23 on board appointments. It struck me. It said:
Further, anyone appointed as a director or president is required to divest themselves of any shares of lending institutions within three months of their appointment. These restrictions constrain appointments to the Board by limiting the pool of eligible candidates.
That's pretty big. Senators don't even have to do that, but we won't go there, will we?
How much does a board member make?
I get it. I understand why. It's great public policy, but from a practical level I'm wondering.... Either there should be a little less restriction or a little more money, but that's an awful lot. I mean, if you're retired and you're now sort of dabbling and recontributing based on your experience, I can see that, but somebody who's active in the middle of their career, the kind of sharp people that we're looking for.... Not that retirees aren't sharp, are they, Chair? No, they are very sharp.
Nonetheless, you do want people who have various experiences in life.
I see one of the assistant auditors general kind of nodding her head. Do you have any thoughts on this? Maybe you've had some chats.
I don't know. It just seemed to me to be an awful lot to ask. It should be asked. It's good public policy, but boy, that's not much remuneration for giving up your whole investment package, which may be leading to your retirement.
Can I hear further thoughts from the Auditor General side, please?
Actually, I tend to agree with my colleague, Mr. Christopherson, but here I have to disagree. I am really concerned with this Auditor General's report. Some of the points that were raised by Mr. Kmiec are quite valid.
Way back in 2016, in the annual reports that we get from public accounts—in those two huge volumes—we get a few lines on the contingent liability. The contingent liability from CMHC has been to the tune of about $450 billion. When I expressed my concern I was assured then by the assistant deputy minister from the Ministry of Finance that the stress test is all done and everything is very good, but the Auditor General has not given you a clean check on that very critical component for CMHC.
You are doing a great job on other things, but when it comes to contingent liabilities all I have to look at is what happened about 10 or 12 years back in the U.S., when Freddie Mac and Fannie Mae collapsed and led to all the financial crisis.
I'll quote the Auditor General's remarks, that the need “to address all significant risks helps mitigate financial risks to the Government of Canada and to the Canadian taxpayer.”
I saw that in your prepared remarks—and I was surprised—you did not emphasize the stress test, but in your verbal remarks you changed some of the things, which was quite interesting and quite welcome, too.
Going back to this contingent liability and the stress test, I'll ask this to the Auditor General's office. Do you have expertise in evaluating the methodology used by CMHC to do the stress test?
If I may, I'll start, and then I'll ask Mr. Bergeron to provide more specific details.
What I'd like to do for a minute, if I may, is to take a look at our report in the bigger picture and drill down to the types of issues and questions you are rightly posing and delving into.
When we do a special examination of a Crown corporation, we look at risk management and the systems and practices around risk management. When we do that, with the help of external consultants in an area such as financial risk management at CMHC, we need to come up with an assessment as to whether or not those systems and practices have a significant deficiency.
I want members to be aware that, when we looked at CMHC as it relates to their risk management practices, we did not identify a significant deficiency. That's important because it sets a bar of acceptable practice as what we understand, and whether or not we feel there is a significant risk that the corporation can't meet its statutory obligations.
For the big picture, in this particular case, we didn't see a significant deficiency or that there is a massive failure.
want to allow Mr. Kmiec to continue the line of questioning from the previous round, but before I split my time with him, I want to address or perhaps ask for clarification for Mr. Siddall. This is in response to one of Mr. Kmiec's questions on whether or not insurance premiums were set too high, given that you had excess capital. After many years of concern being expressed by the finance department about capital reserves and public risk in the insured mortgage business, CMHC in fact had excess capital to be paid back to the Crown. It seemed like you were trying to have it both ways.
If the premium was set correctly and the business cycle just happened to be positive—and you prepare for good times or bad—then it would seem that homebuyers are paying a tax when times are good. If times just turned out to be good and that meant you had excess capital that would be turned over to the Crown, how is that assessing the correct level of premium to account for good times or bad times?
Thank you very much, Mr. Chair.
Thank you all for being here today and for sharing your comments with us.
I don't know if my colleagues have already addressed this issue—and I'm sorry for my absence—but I would like to talk about the national housing strategy. Your primary purpose may still be to support national policy initiatives that are consistent with what you call your bold aspiration to ensure that, by 2030, everyone in Canada can afford housing that meets their needs.
Could you please tell us what steps you think you are taking to ensure that this happens by 2030? I would also like to know—and in this case, it really is ignorance on my part—whether this includes housing for indigenous people. Of course, I am talking about people living off reserve.
I'll answer first and then give the floor to Mr. Siddall.
I believe there are two parts to the answer regarding this bold ambition. First, it is about achieving, as part of the national housing strategy, fairly significant targets and activities that will largely address housing affordability issues for Canadians.
For the second component, we are working to find innovative ways to deliver our current programs or create new ones. We are also looking for other ways to do this, such as establishing partnerships with the private sector or partnerships with non-profit organizations or cooperatives. There is already a housing stock and efforts are being made by these two partners. It will be about acting as a lever when opportunities to expand the affordable housing stock arise and it can meet our ambition. These two components are in progress, but for part of the second component, we have not yet specified the measures that will be taken in the coming years.
With respect to housing for indigenous people, the national housing strategy provides housing for indigenous communities, but there is also a First Nations strategy that is the responsibility of another department, not CMHC.
I'll say this, if I may, in English.
It is possible that we will not achieve our ambitious goal. You want to achieve ambitious things without being ambitious. Just saying that we will deliver the national housing strategy to us.... You know, we're not just a delivery mechanism. We can innovate and find new ways to deliver housing and new ways to help Canadians.
The analogy we use is that, just as John F. Kennedy encouraged Americans to get to the moon within a decade by saying so, if we don't say we're trying to achieve something big—it's our moon shot—then we won't get even partway there.
I'll give you one single example.
Through the chair, our corporate plan details this in some—I won't read you our corporate plan—but we've reorganized our company to have an innovation function to try to think of new ideas with respect to housing. The budget also includes something called the housing supply challenge, for some $300 million, which CMHC will administer. It's kind of a crowdsourcing platform to think of new ideas.
In addition, we've set for ourselves the goal of sourcing $100 million of new money from the private sector this year, which we would add to the government's fiscal commitment to the national housing strategy in order to make use of the capabilities, the convening powers and the insights we have at CMHC to grow beyond the national housing strategy and fund more than the government has committed to funding through its own resources.
Welcome everyone. Thank you for being here.
I'd like to congratulate you on your new appointment, Mr. Ballantyne.
My colleagues have asked some excellent questions. Out of curiosity, I will address the issue of risk management, specifically paragraphs 36, 37 and 38 of the auditor's report.
I'm relieved to see that various scenarios have been simulated, including an oil shock and a large earthquake. Four variables were analyzed. According to paragraph 36, these variables are house prices, unemployment rates, gross domestic product growth rates and interest rates. Following this economic stress simulation, all results indicated that the corporation was “above the minimum threshold for all stress scenarios”.
On the other hand, paragraph 38 mentions that there is a weakness because no further stress tests have been conducted and that this could lead to latent vulnerabilities. I stress the word “latent”, which, by definition, means something unpredictable. It's sleeping somewhere and all of a sudden, it explodes.
Apart from the four variables in paragraph 36 I've just mentioned, are there any other variables that may have an impact on the corporation? My question is for the co-auditors.
I could give you an example by doing some reverse engineering.
What factors could cause the corporation to have capital difficulties? For example, if the 2007 recession in the United States had lasted five years instead of two and there had been a subsequent recovery, and if house prices in the United States had fallen by 60% instead of 30%, what would have happened?
There must be stress tests, whether it is this one or another. The purpose is to see which factors could endanger the corporation's capital. These situations are hypothetical and may never happen—which is what we hope—but if in 20 years' time we were to move towards such a situation, the corporation would have simulated scenarios to know how to react and which direction to take for two, three or four years. It would have time to react because it would have defined the long-term impacts from these scenarios.
These are the kinds of things you have to analyze. In the scenarios, can we extend the crisis periods and see what problems would occur? If such scenarios became a reality, they would have already been analyzed. You have to go as far as using scenarios that are striking.
I appreciate that. Thank you, Chair.
Once again it falls to the NDP to defend poor government entities just trying to do their jobs and helping out Canadians. Oh man, it gets tiring.
Voices: Oh, oh!
Mr. David Christopherson: I appreciate the questions my colleagues are asking. They're obviously very intelligent and very insightful, but I want to draw back to the conclusion. With a grade 9 education, I rely on the auditors. I look at the conclusion on page 22. If there's anything serious to worry about—serious serious—I expect it to be here.
What does it say in the conclusion? It says, “In our opinion, based on the criteria established, there was a significant deficiency”. Now, I underscore to colleagues that “significant deficiency”, in the world of auditors, that's swearing. I mean, that's strong language. There's a big difference between “significant deficiency” and “weakness” and “improvement needed”.
I'll finish the quote. There was “a significant deficiency in the Canada Mortgage and Housing Corporation's corporate governance systems and practices,”—recognizing that they don't do the appointments, the government does—“but there was reasonable assurance that there were no significant deficiencies in the other systems and practices that we examined.” It continues:
We concluded that except for this significant deficiency, the Corporation maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.
Hence my overview that I thought this was a fairly good report, and I want to focus, if I can—I only have a couple of seconds—back on the governance again, because that's the major issue here. I won't find the quote, but you made some reference that there were a couple of things the board could have done to offset that, and I'm curious as to what it is that they should have done, recognizing that they had a huge problem. They couldn't fix it directly in terms of appointments, but you suggested that there were some things they could have done but didn't.
Would you articulate those for me in the moment or two that we have left?