Flaherty: Can you say Fannie Mae, Freddie Mac?

CMHC set to be under OSFI supervision?

Garry Marr   

Postmedia News

Apr 25, 2012 

 With Canada’s dominant mortgage insurer running up against its massive coverage limit, the federal government appears set to announce Thursday how it will toughen oversight of the Crown corporation that buttresses the housing market and banking sector.

In late March, the federal budget took aim at supervision of Canada Mortgage and Housing Corp., which controls about 75% of the mortgage default insurance market. In Thursday’s budget implementation bill, Ottawa is expected say how this oversight will change.

CMHC now falls under the jurisdiction of the minister responsible for Human Resources and Skills Development Canada. But, as first reported by the Financial Post, Ottawa has been examining putting the Crown insurer under the direct supervision of the Office of the Superintendent of Financial Institutions — a powerful financial regulator with the power to enforce a broad range of actions.

The government said Wednesday it plans to introduce a law “to implement certain provisions of the budget,” according to a document known as the Notice Paper. Asked about the potential role of the Office of the Superintendent of Financial Institutions in overseeing CMHC, Jim Flaherty, the Finance Minister, told reporters “I’ll talk to you about that tomorrow. Tomorrow’s Thursday, right?”

CMHC is backstopped by Ottawa but is coming close to breaching its mandated insurance limit of $600-billion because of the red-hot housing market and so-called portfolio insurance for the banks.

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It’s this portfolio insurance — also dubbed “bulk insurance” and often referred to as “commercial activities” by the government — that the Finance Minister is most concerned about.

While speaking to reporters in February, Mr. Flaherty criticized the extent to which this commercial function of the CHMC had commandeered its lending capacity and core function.

“The issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low ratio mortgages,” Mr. Flaherty said. “That’s not the way most people usually think of CMHC.”

Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

The budget document itself provided few details about what action would take place, but suggested the government was concerned about the Crown corporation’s dealings with the banks and how it could affect the broader economy.

“The government will propose legislative amendments to strengthen oversight of CMHC and to ensure its commercial activities are managed in a manner that promotes the stability of the financial system,” the budget said.

There may also be details Thursday about a new covered bond program, which will be available to federally and provincially regulated mortgage lenders in Canada and administered by CMHC.

“A legislative framework will support financial stability by helping lenders find new sources of funding and my making the market for Canadian covered bonds more robust,” according to the budget.

The Finance Department said in a May consultation paper it was considering whether the law should encourage banks to secure covered bonds with uninsured mortgages. The federal government guarantees the full value of mortgages insured by CMHC and 90 percent of loans insured by private firms.

With files from Bloomberg News