Proceedings of the Standing Senate Committee on
Social Affairs,
Science and Technology
Issue 34 - Evidence, June 2, 1999
OTTAWA, Wednesday, June 2, 1999
The Standing Senate Committee on Social Affairs, Science and Technology, to which was referred Bill C-66, to amend the National Housing Act and the Canada Mortgage and Housing Corporation Act and to make a consequential amendment to another act, met this day at 5:35 p.m. to give consideration to the bill.
Senator Lowell Murray (Chairman) in the Chair.
[English]
The Chairman: We are meeting to resume our study of Bill C-66. As you will recall, yesterday morning we heard from the Minister of Public Works, Mr. Gagliano, from the president and other officials of Canada Mortgage and Housing Corporation, and from officials of the Department of Finance. This evening we have a series of interested witnesses from the private sector who have asked to be heard on this bill.
We have allotted each of them an hour. That does not necessarily mean, I hasten to add, that they need to take the hour. They certainly should not take it in their opening statements. It is vastly preferable if senators have an opportunity to enter into dialogue with the witnesses. I assure the witnesses that any and all points that they would like to bring out can be brought out during the question-and-answer period.
Our first witnesses are from GE Capital Mortgage Insurance Corporation. I understand you have a brief opening statement to make. Copies of that statement are available and are being distributed. Please proceed.
Mr. Peter Vukanovich, President, GE Capital Mortgage Insurance Corporation: Mr. Chairman, it is a pleasure to be here today. As you mentioned, we previously submitted a statement of our position on this legislation, along with specific amendments, and I believe you have those before you. I will therefore keep this quite brief.
Let me say first that GE Capital Mortgage Insurance Corporation, also known as GEMICO, is the private sector competitor to CMHC in the mortgage insurance business.
We are proud to have introduced innovative benefits in a number of areas since we entered the market in 1985. They include the following: significant reductions in application approval time, with over 40 per cent of applications now being approved within minutes; mortgage insurance portability, allowing reduced premiums for second-time buyers requiring insurance; partnerships with home service providers such as home inspectors, realtors and builders; electronic application delivery systems for more than 50 per cent of the applications; and risk management systems that combine the use of technology and appraisals. In 1998, we began offering services to mortgage lenders and consumers anywhere in Canada.
When we purchased the mortgage insurance franchise from MICC in 1995, the purchase included the assignment of an agreement with the Government of Canada which guarantees 90 per cent 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 regulated by the Office of the Superintendent of Financial Institutions, we must meet stringent capital requirements and undergo regular financial and operational reviews.
It is true that our market share has grown to approximately 12 per cent of the total Canadian mortgage insurance market, as compared to CMHC's 88 per cent. However, our success is threatened by two fundamental problems that I should like to highlight to the committee today. One is the issue of the government guarantee -- 90 per cent for GE and 100 per cent for CMHC as a Crown corporation. The other is the sweeping powers given to CMHC in this legislation -- powers that threaten to tilt the playing field even further in CMHC's favour than is now the case.
Let us go back to the guarantee. The 100 per cent guarantee for CMHC versus the 90 per cent for GE places the private insurer at a distinct disadvantage. Under Bank of International Settlement rules, lenders keep zero capital in reserve when a loan is insured with CMHC, but must keep $400 of capital for every $100,000 of mortgages insured by the private insurer. That capital cost differential has resulted in several lenders indicating that in the future they will be forced to limit or curtail their purchases of mortgage insurance from GE despite receiving outstanding service. That is a result of the additional cost that they must bear.
We recommend the same level of government guarantee for both public and private insurers. In principle, this result could be achieved by either reducing CMHC's guarantee to 90 per cent or by providing a 100 per cent guarantee for GE through a change in our government guarantee agreement with the Department of Finance. Our preference would be for the Department of Finance to raise the level of GEMICO's government guarantee to 100 per cent so that it does not impose additional costs on lenders or homebuyers.
I remind the committee that the government rationale for this legislation is explicitly to commercialize mortgage insurance and create a level playing field. At the request of Minister Peterson, we are currently in discussions with Department of Finance officials to explore options for a 100 per cent government guarantee for GE. To this end, we have proposed two options. Under both options the government would be fully compensated at commercial rates for the 100 per cent guarantee. We believe that it is imperative that the committee amend this bill to include the same level of guarantee for both insurers in order to ensure a level playing field in the future.
With respect to the power given to CMHC in this bill, we do not oppose the additional flexibility given to CMHC to operate effectively in the marketplace. We are, however, concerned about additional powers that could enable CMHC to do things that we are unable to do by virtue of our status as a licensed insurer supervised by OSFI and about the uncertainty of the powers that would be implemented as a result of Bill C-66. Examples of those CMHC powers could include increased powers permitting CMHC to act as a financial intermediary in the funding of housing loans and increased insurance powers that extend well beyond mortgage insurance and that could permit CMHC to offer, for example, home insurance and credit life insurance, which are currently offered by the private sector.
In our opinion, these expansions of powers are unwarranted and do not relate to CMHC's social housing activities, but rather relate to mortgage insurance where CMHC competes with the private sector. We believe these sections of the bill should be amended, as outlined in our written submission to the committee.
In conclusion, we do not oppose the continued existence of CMHC's mortgage insurance fund and we agree that there is an important continuing role for CMHC in social housing. I remind honourable senators that mortgage insurance is quite distinct from social housing. We also agree that CMHC's mortgage insurance fund should operate on a commercial basis with a level playing field to achieve efficiency, choice, and the lowest possible cost for homebuyers.
It is our understanding that the essence of the commercialization of the mortgage insurance fund is that it will no longer write any insurance that does not pass the test of commercial viability. Anything outside of that universe, for example any program that is designed to achieve an economic or social policy objective, will be priced and paid for by government. In some cases, it may make sense to suggest that the government ask both the public and the private insurers to deliver or to bid on those types of non-commercial transactions. That is a potential remedy.
Canadians are clearly benefiting from competition in the mortgage insurance market. More benefits will accrue by levelling the playing field. We encourage senators to consider how the changes outlined in Bill C-66, in conjunction with the recommendations we have made, will affect current and future competition.
Senator Doody: What do you think is the reason for the difference between the 100 per cent guarantee for CMHC and the 90 per cent guarantee for GE? We asked that question yesterday and the answer from the official from the Department of Finance was that that was in the agreement of the previous Mortgage Insurance Company of Canada, whose assets you people bought, and therefore it remains. The witness could not or would not elaborate on that.
The minister indicated that the explanation may be that GEMICO might be reluctant to accept some risks that the Crown corporation would be prepared to take on. He mentioned as a possible example the northern parts of Canada. I suspect that he might also include parts of rural Canada.
Is GEMICO prepared to accept the same level of risk as the central mortgage company would be asked to accept, and in all parts of the country? Have you had occasion to turn down some risks because you felt that the exposure was too great and you would prefer that the Crown corporation take them on? I am trying to justify the existence of the Crown corporation in the insurance business. That is a close as I could get to it yesterday.
Mr. Vukanovich: We currently accept applications from anywhere in Canada.
That is different than when we started operations in 1995. There has been a change in attitude within the company with regards to that.
Furthermore, now that changes have been introduced to make CMHC more commercial, there are ways and mechanisms to be further discussed that could make it possible for us to do programs that are of social or economic benefit. One example would be to offer it up to a bid between CMHC and us. These things are all potentially possible.
Senator Doody: The manner in which the business is conducted now is, I expect, quite different than it was when you first took over this operation. Electronic systems would enable you to get into all parts of Canada quite easily compared to 10 or 15 years ago. You are not physically excluded from doing business in any part of the country. Your resources are able to move you to wherever the business might be. Is that correct?
Mr. Vukanovich: Yes, that is correct.
Mr. Michael Davies, Vice-President and General Counsel, GE Capital Mortgage Insurance Corporation: I might comment on the first part of your question relating to the history of the guarantee and the 90 per cent. I was involved at the time that GE Capital Mortgage Insurance purchased the business from MICC.
As you rightly mentioned, the 90 per cent guarantee was in place with MICC. We acquired MICC and the guarantee came over. It was negotiated that it be transferred over to GE Capital Mortgage Insurance Corporation.
As Mr. Vukanovich has mentioned, two things have happened since then. We have determined in carrying on the business that that is a significant impairment to the banks providing business to GE Mortgage Insurance Company because of the capital requirements. Because of that disparity in the playing field, there appears to be a limit to which the banks are prepared to provide business to GE Capital. It is a serious impairment.
The other aspect that has changed since 1995 is that Bill C-66 proposes to grant additional, wider powers to CMHC, which will even further tilt the playing field. Without the guarantee being placed on an equal basis, either at 90 per cent or at 100 per cent, our view is that there will be a significant impairment to competition and a level playing field will not be created.
Mr. Robert Weese, Vice-President, Government and External Relations, GE Capital Mortgage Insurance Corporation: Allow me to supplement what Mr. Vukanovich said in response to the second part of your question. Since 1998, GE has grown and has introduced technology to the point that we can now accept applications from lenders any place in Canada. For us, as for CMHC, some small remote communities pose special challenges in terms of the risks associated with home buying and mortgage lending. As CMHC becomes totally commercial in the way they operate the mortgage insurance fund, they will apply the same criteria presumably that we would in assessing those risks and in accepting applications from lenders and consumers any place in the country.
Our point is that if, for economic or social policy reasons, the government wants to have the mortgage insurance fund operate in a way that is not commercial, to accept risk that is not commercially viable, they should identify price and pay for those programs, which could be delivered through us or through CMHC. Perhaps they could invite us to bid on programs of that sort that go beyond the commercial mandate that CMHC is now going to have with respect to the mortgage insurance fund.
Senator Doody: A fee of approximately $190 million or $200 million was mentioned. Could you explain to me where that money comes from and where it goes? Also, could you elaborate on whether you and/ or CMHC have to pay a fee?
Mr. Vukanovich: I would prefer if Mr. Mayers would take you through that.
Mr. Philip Mayers, Vice-President, Business Development and Securitization, GE Capital Mortgage Insurance Corporation: At present under our Government of Canada guarantee agreement, we are required to pay a fee that compensates the government for the risk inherent in the government guarantee. In addition to the fee, we also are required to contribute funds to a trust fund of which the government is a party. Those funds are set aside, and in the event of a bankruptcy of GE's mortgage insurance company, they would be made available to pay claims. The government would pay any amounts over and above that, up to 90 per cent of the original insured amount.
Bill C-66 proposes to introduce for CMHC a fee that would compensate the government for the explicit 100 per cent government guarantee of their obligations. CMHC is not a licensed insurance company and, therefore, is not required to have the same level of capital that GE would have in place. The bill does not give all the details for the calculation of the fee. However, from reading the corporate plan, I believe that the fee is intended to compensate the government for the capital that the corporation would have to maintain if it were a licensed insurance company and to compensate the government for the 100 per cent government guarantee.
We reviewed the calculations of the fee based on how it would be applied in the context of our capital requirements. The $197-million fee over a five-year period would appear to be grossly understated relative to the costs of a private mortgage insurer putting capital in place and being able to earn a reasonable rate of return similar to other Canadian financial institutions.
Senator Doody: Would CMHC be required to pay a fee on the same basis that you are now required to pay?
Mr. Mayers: It is a similar basis but the fee understates what the cost would be for the private insurer, in our estimation.
Senator Doody: Is there a formula or a stated way that the government or CMHC arrived at this number or is it a notional number?
Mr. Mayers: I cannot answer the question. It appears in reading the corporate plan that there is a formula but the details are not disclosed in the corporate plan and are not publicly available, to the best of our knowledge.
Senator Doody: Are you suggesting that CMHC be required to pay a larger amount or that the whole fee practice be discontinued or that a fund be set up separately or that some outside agency do this if it is necessary?
Mr. Mayers: We support the concept of the fee because it is intended to create a level playing field with respect to the cost of capital that the private insurer has to maintain. However, we believe that if CMHC is going to operate in a commercial manner, the returns to the government on that business should reflect commercial returns similar to that of other Canadian financial institutions. That is a key requirement as part of a commercialized CMHC. Therefore, we believe that the fact that the fee is understated may result in non-commercial behaviour on the part of CMHC. Obviously, in order to earn an amount sufficient to pay the fee, CMHC must reflect that in their pricing and setting of premium rates.
Senator Doody: Is it visualized that there will be an actual cash transfer or is it another ledger entry in the bottomless pit of the general revenue?
Mr. Mayers: Once again going from my knowledge of reading the corporate plan, I understand there will be a payment to the Receiver General from CMHC's mortgage insurance fund.
Senator Doody: It would be destined for general revenue. In the absence of information to the contrary, I assume that is where it is going.
Mr. Mayers: I believe so.
[Translation]
Senator Gill: My colleague asked a question about risk. If I understood correctly, you have asked for a guarantee that is just about 100% equivalent to that given to the Canadian Mortgage and Housing Corporation with respect to risk. I have a question about Aboriginal peoples. In previous hearings, the Bank of Montreal stated that it was prepared to go into the Indian communities and set up financing for housing. Are you prepared, if in fact you wish to have a guarantee equal to that given to the Canada Mortgage and Housing Corporation, to go into the Indian communities throughout the country at the request of Parliament? Indeed, CMHC complies with the requests of the government. If you obtain exactly the same thing as the Corporation, are you prepared to take the same risks in Indian reserves and elsewhere in the country, wherever you are asked to do so?
[English]
Mr. Vukanovich: Each application is reviewed on its own merit. That includes assessing the risks of the application. Regardless of where an application comes from, you must go through a methodology to calculate the risk and the reward. The reward is fairly standard, given that the premiums are set. The risks are then determined based on the criteria of the application.
[Translation]
Senator Gill: What guarantee do we have that you're going to do this, since you are a private company? You are not regulated as CMHC is. Do we have any guarantees that you will do this?
[English]
Mr. Vukanovich: I am perfectly comfortable with a discussion regarding the 100 per cent guarantee, if that is the decision that is made. There is a stipulation or a condition that we have to alter the way we are looking at applications, which can be part of the dialogue.
[Translation]
Senator Gill: If we were to amend the bill by changing the amount to 100%, what guarantee would we have that you would do as you say and be prepared to go into the communities throughout Canada? If we were to give you a 100% guarantee, as we have done with the Corporation, or if we were to agree to an amendment to the bill, what guarantee do we have that you will do this?
[English]
Mr. Vukanovich: What guarantee do you have regarding the guarantee? As it is currently written, and as I would assume it would be written in the future, the guarantee is retractable. If, for some reason, you did not feel that we were meeting our obligations or commitments, the guarantee could be retracted.
The reason for the guarantee is to allow for and to encourage competition.
Mr. Weese: The minister and representatives from the corporation have said that CMHC is operating the mortgage insurance fund on a commercial basis. That is the whole point, as we understand it, of this legislation. CMHC will be assessing mortgage insurance applications in precisely the same way we do, applying the same criteria to assess risk. There should be no difference in the way CMHC and GE operate in accepting and reviewing mortgage insurance applications.
If there are areas where the government feels, for economic or social policy purposes, that it is important that a mortgage insurance product be delivered that does not meet the test of commercial viability, whether it is CMHC or GE applying that test, the government should specifically develop a program, identify price and pay for that program over and above the operation of a mortgage insurance business on a commercial basis.
Senator Butts: I understand you have five proposed amendments to Bill C-66. Could you paint a picture for me of where you would be if none of those amendments were enacted? Second, would you prioritize your amendments to tell me if you have one or two what would be your best?
Mr. Vukanovich: The picture would be that we would have a significantly weakened private competitor. It is largely dependent on how CMHC chooses to execute or implement their newly found powers. Yesterday CMHC called those powers a "broad range of tools." There were not many details behind them; those were to be decided later. Those may not be the exact words CMHC used, but I believe that is what the record would show. How they use those tools is of paramount importance to us. That would be the first question.
In terms of prioritizing the five amendments, the level of the guarantee is first. We have requested that that be an amendment to the legislation. It is a concern that the guarantee does not extend to new products that are introduced unless CMHC also has a product along the same lines. It could be a significant benefit to consumers, because then the incentive is there for us to bring new products to market more quickly. That would appeal to lenders from a cost basis.
The mortgage back security program goes into some fairly complex waters. I will just say right now that CMHC has a monopoly on the securitization of mortgages. Bill C-66 implies that GE-insured mortgages will be allowed into the mortgage back security program. However, again, it does not say at what cost or at what price. That is absolutely paramount to understanding whether we are in fact being given a level playing field or whether it just says that we are in, but no one will use it because of the price again.
I would say those are the top three priorities. I would ask Mr. Mayers if he has any disagreement with that or if he would like to add any more.
Mr. Mayers: The other issue worth mentioning is that there are new powers that CMHC will have under the proposed legislation that will allow them to issue securities in the market and take advantage of the Government of Canada triple-A rating and borrow. They can then, in turn, purchase mortgages but only purchase CMHC-insured mortgages from lenders. That could substantially change the way mortgages are funded in Canada and also increase the government's borrowings.
It is difficult to understand the necessity of that power, given the efficiency of the Canadian mortgage market. We suggest that it would be worthwhile looking at that area also. Our recommendation is that that clause be deleted.
Senator Butts: You have admitted that all of this is newly found; therefore, it is really speculation, is it not?
Mr. Vukanovich: The government guarantee of 100 per cent is very clear. The fact that we cannot currently have products in the marketplace with a guarantee if CMHC does not is fairly clear. There is speculation with regard to CMHC being a financial intermediary. I do not see that there is speculation regarding the mortgage back security program.
Senator Butts: I was just quoting your words "newly found."
Mr. Vukanovich: Some of it is.
Senator Butts: You have been prospering as the legislation currently stands, have you not?
Mr. Vukanovich: We have been prospering to date, but people must understand that mortgage origination is become being an extremely competitive business. Our customers have clearly indicated to us that any additional costs that are passed on to them, and here they are looking at the difference between us and CMHC, will significantly inhibit them from purchasing insurance from us in the future.
Mr. Weese: The additional flexibility that the mortgage insurance fund will achieve through this legislation, with which we do not quarrel, and the additional powers that CMHC will have in the mortgage insurance area will augment the disparity that has existed from day one by virtue of the difference in the level of the guarantee. In my view, the fundamental problem is the level of the guarantee. The level of the guarantee must be fixed if we are to have a more competitive market for mortgage insurance.
Everyone agrees that competition in that market has been good.
Competition has helped to increase the efficiency, speed up processing time, lower the cost, and introduce new products for homebuyers. Everyone wishes to see a competitive marketplace for mortgage insurance.
We now have 12 per cent of the market and CMHC has 88 per cent. We are being told by the lenders, who are our customers, that there is not a prospect that we will be able to grow beyond 12 per cent because of the additional costs imposed on them. We do not believe that a competitive marketplace will be achievable if we do not resolve at least that fundamental problem of the level of a guarantee.
Senator LeBreton: Yesterday, when we had the minister responsible for CMHC here, we seemed to have -- and I mean no disrespect to the minister -- sort of an "After you, Alfonso" routine going, where in his statement he talked about CMHC following much the same regulatory regime as private mortgage loan insurers. I asked him what he meant when he said "much the same but not the same"; his answer was that personally he had no difficulty with the level playing field with a 100 per cent guarantee for each. Then the officials from the Department of Finance hung their argument on the fact that GE Capital took over from MICC in 1991 and that was part of the deal and then it went back to January 1995, which of course is four years ago; it was 90 per cent then and that is the reason it is 90 per cent now. They could not answer specifically other than that why it was so.
I am wondering if you or representatives of the Canadian Bankers Association or people in the financial sector have asked the Department of Finance to explain why, if the minister responsible for CMHC has no difficulty, there this discrepancy between two levels of government. Have you asked them if they are prepared to consider a change?
Mr. Weese: As was said before, when we entered the market through the acquisition of the old MICC, we negotiated an assignment of the guarantee then in place. I am not sure it was ever clear to us, frankly, why that guarantee was at a level of 90 per cent when CMHC, as a government corporation, automatically had 100 per cent backing from the government. I am not sure anyone ever explained that to us and at that time our major preoccupation was to get the guarantee assigned to us. Without some kind of guarantee, we just could not operate at all in the market, and at that time, CMHC being what it was then and operating the way it did with the powers it then had, we felt we could make a business with a 90 per cent guarantee.
On the second question, we have been in discussion with officials in the Department of Finance, specifically at the request of Minister Peterson, to explore with them ways in which we could achieve 100 per cent guarantee without increasing the cost or the risk to the government. I believe it is fair to say we are making progress; however, we are not there yet and it would be helpful if this committee could send a signal of support to encourage us and officials from the Department of Finance to continue working towards a solution of that problem.
The Chairman: You are asking for more than a signal, though.
Mr. Weese: Yes.
The Chairman: You are asking us to overtake the discussions and force their hand.
Mr. Weese: Exactly. Thank you.
The Chairman: We will send a signal.
Senator LeBreton: The Department of Finance officials indicated that nothing has changed. I offered that something has changed, because we have Bill C-66 before us. I am just wondering why, when there is a bill like this before Parliament, they would not have addressed that issue to begin with? I do not expect you to have the answer; certainly, we do not.
We talked about the level playing field, but you mentioned other, wider powers of CMHC that cause further difficulties. Can you give an example of what you mean by that? You said "wider powers" that give CMHC more of an advantage. Were you referring specifically to this? I understood from your testimony that you were talking about other powers in the bill and not just this.
Mr. Vukanovich: This goes back to what we were talking about with Senator Butts. Yesterday, CMHC described those powers as a broad range of tools that they may or may not use. It begs the question of why have such broad, sweeping legislation without having the details. If they chose to do some of the things that we have mentioned, like becoming a financial intermediary or going into home insurance, they could become a one-stop type of shopping for our customers, and that would clearly put us in a situation where we could not compete. OSFI will not let us do that. Our licence will not let us do that. Anyone who does not have a sovereign government guarantee cannot do those kinds of things. Therefore, it would be a huge competitive advantage if they were to move into those areas.
Senator LeBreton: I wish to follow up on a question asked by Senator Gill. Yesterday, the minister also talked about the difference in terms of you being a private-sector company answering to a private-sector board of directors, while CMHC is a Crown corporation and pursues more of a public policy role. However, if I understood your answer to Senator Gill, in terms of the mortgage insurance business and the accessibility and availability or the approval of mortgage insurance, there is no difference. Your being a private-sector company does not mean that some northern housing project has a disadvantage because you are in the market or CMHC is not or you both are. Is that correct?
Mr. Vukanovich: Yes. Again, going forward, when they say that they will commercialize, it seems to us that they will be looking at applications the same way anyone in the private sector or on a commercial basis would look at applications: They will take them the same way we do and assess the risk. If a government has a specific program that they would subsidize -- I am not sure whether that is the right word -- or encourage or enhance, it must pay for that.
Senator LeBreton: It must go beyond the limits of what is available here.
Mr. Vukanovich: Yes.
The Chairman: A 100 per cent guarantee would be sufficient, would it not?
Senator LeBreton: I believe they are saying over and above that.
Mr. Vukanovich: It goes a long way, senator, yes.
Senator LeBreton: GE Capital, of course, is a huge company. Everyone thinks it is one of the biggest companies in the world. What is the Canadian GE Capital? Is it a stand-alone Canadian operation? How many employees do you have in Canada and where do you base yourself in Canada?
Mr. Vukanovich: Our company, GE Capital Mortgage Insurance, is based in Mississauga, Ontario. We have 10 locations across the country. We have a person in Victoria, as well as Vancouver right to Halifax. We have approximately 100 employees right now, and that has grown over the last couple of years. GE Capital is a very complex organization of companies. In Canada, I believe GE Capital has approximately 4,000 employees, and they are Canadians. GE Capital has a substantial presence in Canada and it is split amongst 16 or 17 specific businesses that stand alone.
Senator LeBreton: I ask that only because there is always an element in Canada that seems to think that a Crown corporation is Canadian while others are not.
Mr. Vukanovich: We are Canadians.
[Translation]
Senator Ferretti Barth: At the House of Commons committee, you said that, unlike the Canada Mortgage and Housing Corporation, you do not make any loans for rental housing. Why?
[English]
Mr. Mayers: At present, our business consists primarily of insuring owner-occupied properties. Today, we do not insure investment properties, although we plan to begin looking into that.
By CMHC's own admission in its most recent corporate plan, the premium rate charged on investment properties was substantially below market. It was impossible to enter that business without incurring significant losses. In its most recent corporate plan, CMHC notes that they have now increased premium rates to commercial levels. As a result, our business is now able to consider entering that market.
[Translation]
Senator Ferretti Barth: If you wanted to do this, you would have to change your licence. The CMHC does not have the licence to do this. Senator Gill asked you whether there was any rental housing development in remote territories. You can't provide any mortgage support because you don't have the licence to do so. Have you never given any thought to changing your licence?
[English]
Mr. Vukanovich: In order to get into those types of new products, we must get our licence updated. We would have to make that application to our regulator.
[Translation]
Senator Ferretti Barth: How many years have you been in the mortgage market?
[English]
Mr. Vukanovich: In Canada, we purchased the business from MICC in 1995. We are now in our fourth year of operation.
[Translation]
Senator Ferretti Barth: You didn't change your licence. Are you under the impression that rental housing loans is not a very profitable line of activity for your company? You have worked in this sector for four years. Perhaps you will make some profit if you change your licence. You have not done so up until now. That means that a portion of our society is not covered by your rental housing mortgage company.
[English]
Mr. Vukanovich: As Mr. Mayers mentioned, the recent premium changes, which took effect January 1, 1999, have now made it economically viable to pursue this market.
[Translation]
Senator Ferretti Barth: Did you also know that CMHC has to cover all sectors of our society? It has to make changes. Bill C-66 is designed to do this. Are you prepared to change your licence? You now have competition. The government and the Canada Mortgage and Housing Corporation are 100 per cent liable. Your liability has been set at 90 per cent, and that is fair. The 10 per cent difference will compensate for what you cannot do. Perhaps there are some services that are better than yours, ones that are more complete, more in-depth.
[English]
Mr. Vukanovich: Perhaps you are confusing the rental market with the basic residential market. We compete against them in the owner-occupied residential market, not apartments. As I mentioned earlier, the guarantee relates to being competitive in the segment in which we compete. We are capable of going into rental units if our application for a licence change is successful.
Senator Ferretti Barth: Do you not do that now?
Mr. Vukanovich: We had not seriously considered it because it was very unprofitable. Only in January of 1999 did it become more reasonable to get into that type of business. Again, it is a fairly complicated business.
[Translation]
Senator Gill: I have been more or less following the discussions since the bill was adopted in the House of Commons. Your company indicated that the market was expanding continuously. In 1997, it grew by 5 per cent -- I am using your figures -- 8 per cent in 1988 and, according to your 1999 forecast, there will be a 15 per cent increase. These are more or less your figures. I am trying to quote the figures that you used.
Mr. Vukanovich: That's correct.
[English]
Senator Gill: You mentioned that the ongoing discussions with the Department of Finance are not going badly.
Mr. Vukanovich: The puck is not in the net yet.
Senator Gill: But the discussions are going well. You have asked us to put you on the same footing as CMHC. If this committee is ready to recommend some changes, would you be willing to accept all the obligations and responsibilities of CMHC and to continue your discussions with the Department of Finance?
Mr. Vukanovich: Absolutely.
Senator Gill: If those discussions are going well, why not continue them?
Mr. Vukanovich: We intend to do that.
Senator Gill: Rather than asking us to change Bill C-66, would you be prepared to continue the discussions?
Mr. Mayers: One of the premises underlying Bill C-66 is that the government's intention is to level the playing field. This is such an important part of levelling the playing field that we felt it should be brought to the attention of the various committees reviewing the bill. Without the same level of government guarantee, there will not be a level playing field, because lenders today incur costs when dealing with GE that they do not incur when dealing with CMHC. As a result of the government's stated intention to level the playing field and have CMHC's mortgage insurance fund operate on a commercial basis, we felt it was appropriate that this be considered by the various committees.
The Chairman: Mr. Vukanovich, you stated that the 90 per cent guarantee is contained in an agreement with the government, and I take it you inherited that agreement from your predecessor.
As part of that agreement you pay an annual fee to the government and you contribute to a trust fund established to protect policyholders. Is there anything else in that agreement that is relevant to our considerations? Is that the sum total of the agreement?
Mr. Mayers: The other key element is that the agreement continues to exist only as long as CMHC continues to be a Crown corporation. If CMHC's guarantee were reduced, our guarantee would be reduced correspondingly.
The Chairman: In other words, if CMHC were privatized there would be no guarantee for either of you; is that correct?
Mr. Mayers: The guarantee covers only those mortgage insurance products that are offered by CMCH. If we introduce a new product outside of what CMHC currently offers, that product would not benefit from the government guarantee.
The Chairman: Could additional products be negotiated? As matters now stand, you could not.
Mr. Mayers: Right.
The Chairman: You would not need to have an open-ended agreement with regard to the guarantee, would you?
Mr. Mayers: If the agreement allowed for the Department of Finance to consider extending the guarantee to new products not offered by CMHC on a case by case basis, it would be agreeable to us.
The Chairman: Your testimony is that you would be certainly amenable to an agreement that put you on the same basis, in terms of the guarantee, as CMHC and that imposed other requirements on you in terms of how and where you do your business and the availability of your services and so on.
Senator Doody: Mr. Chairman, if this piece of legislation passes as it is now drafted, all the new unspecified powers that would be given to CMHC will not automatically be passed on to their competitors. This would not level the playing field, it would tilt it considerably more than it has ever been tilted. All of the new fields of endeavour open to CMHC will be automatically closed to the only competition they have. This is tilting the playing field in favour of the Crown Corporation as opposed to the principle enunciated by the proposers of the bill. It is counter-productive. Either the principle of the level playing field is not a serious one or this clause got in the legislation through some inadvertence.
The Chairman: Thank you very much, gentlemen, for your testimony tonight. We will proceed now to hear from the Co-operative Housing Federation of Canada. Some of us took opportunity yesterday to question the Minister when he appeared before us on some of the points that this organization made when it testified at the House of Commons committee. Mr. Hunter is listed as counsel for the organization.
Mr. Laird Hunter, General Counsel, Co-operative Housing Federation of Canada: I have two observations to make, senator. First, there was an error. I am general counsel for the Co-op Housing Federation, and not a director. My client apologizes for their officers not being here. It is their annual meeting and I was deputized to attend. My second observation is by way of an apology. We did not have enough time to translate my presentation into French and for that I apologize.
Senator Murray very kindly provided me with a transcript of the testimony that you heard on June 1. I have had the very briefest of opportunities to review it and I will modify my remarks regarding the statement that I have handed out.
In essence, my client has one very general concern, which, in its representations both to the corporation and to the committee in the other place, it has focused at two specific levels. The general concern has been represented by the testimony that you just heard. It was a theme throughout the testimony before the Industry Committee and in the presentations in Parliament.
The thrust of Bill C-66 is to commercialize CMHC. At a general level, CHF and its membership have no concern about an attempt to provide mechanisms for the corporation to engage in a range of activities to deliver market-driven mechanisms and opportunities, goods and services and products to Canadians and abroad. However, it is the other side of the ledger, the question about the non-market matters, that is of concern.
In his testimony before the Industry Committee, the minister echoed a comment made in the executive summary. He asked if the pressures on CHMC to respond to legitimate demands of an increasingly competitive marketplace would supplant the capability and interest in developing housing policy regarding the plight of those citizens whose needs and incomes are such that the market cannot respond.
On March 25 of this year, in the course of that testimony before the Industry Committee, the minister was asked whether the accountability framework of this bill provides a situation where the government's role in setting policy is almost completely removed. In fact, CMHC is actually setting the government's policy. In response, the minister observed that the traditional devices for accountability were there. The minister ended his comments by saying that in general, with this legislation they are making sure that the corporation can respond to the demands of consumers and the demands of the financial sector.
My client and its members have no objection to that. The concern is the capacity through the corporation and the government to respond to the plight of individuals who are incapable of participating in the market. My client has had a long relationship with CMHC that, while is has at times been uncomfortable, has always, we believe, been to good advantage for both sides to deliver a range of housing in the cooperative model that is now housing significant numbers of Canadians in mixed-income communities.
The principal concern is that the thrust for commercialization, forcing the corporation to exist in a self-financing environment, will in effect militate against a capacity and, with no disrespect, against an interest in providing a range of options for non-market situations.
Two of the concerns that have been expressed by CHF in a range of circumstances are again mentioned in the summary. Those deal with the very broad powers given to the corporation to waive what historically have been statutory requirements regarding certain program initiatives.
In quickly reading yesterday's transcript, I noticed that Mr. Stewart properly observed that the one of the concerns of CHF might well be that the layers and layers of detail that he refers to have been removed. That is indeed the case.
The programs that have been established over the years have been statutory programs reflecting the public policy of the federal government. In the context of an emerging commercialized capacity for a Crown corporation, the shift is away from public, statutory mechanisms to contractual mechanisms delivered in the context of a commercial enterprise.
For people who are without the power in the marketplace, that is a significant worry. I was gratified to see in the testimony of Minister Gagliano and Mr. Stewart that it is their view that the unintended consequence that caused my client considerable concern will not come to pass.
Honourable senators who have had a chance to review the brief submitted to the House of Commons committee will know that not only contractual arrangements but also situations where there are non-contractual arrangements, such as public housing, were also mentioned. What would prevent a government in a province from selling public housing stock?
One of the concerns that CHF has is the tendency, in the context of the proper needs of accountability and fiscal limitation, to forget, to set aside and to make marginal the tools and interests that have historically been a banner of CMHC in providing mechanisms for affordable housing in Canada.
I will end my remarks there. The details of the concerns are expressed in the brief that was handed out, and as Senator Murray has observed, in the testimony that my client gave before the House of Commons committee.
The Chairman: For the record, you put forward three questions here, as you did before the House of Commons committee. We tried yesterday to put those to the minister and his officials. First, will Bill C-66 impede the federal government from acting now or in the future to alleviate Canada's housing needs? Are you reassured by the responses that we got yesterday from the minister?
Mr. Hunter: I am reassured that that is not the intention, senator. The concern is, as I said, the tendency. If you look at proposed new section 28.1 and clause 38 of the bill, you will see that there is a capacity for the corporation to waive the statutory requirements that are in place.
The Chairman: That was your second question: Is it intended to allow provinces to alter existing statutory requirements -- and you say "retroactively" --
Mr. Hunter: It is retrospectively. It is in the context of renegotiated contractual arrangements that historically would have been under a statutory framework.
The Chairman: Are you reassured?
Mr. Hunter: Not completely. I should like to review it with my client. I am reassured that that is not the intention.
The Chairman: Is there a remedy open to this committee in terms of this bill? Are you suggesting an amendment?
Mr. Hunter: No, we are not. Quite frankly, we struggled with looking at what an appropriate amendment might be. We were not able to determine one.
The Chairman: Fair enough. You ask why the bill empowers the corporation to waive the existing NHA provisions for existing programs and to allow a province to waive them. We have had explanations on that point. Are you satisfied with those explanations?
Mr. Hunter: I would prefer to have an explanation in some detail as to what those assurances are. I read very quickly in the material yesterday that they are contained in the agreements, and the social housing agreements that are in place require concurrence of the parties. That is all true, but we are dealing in many instances with, for example at the federal level, a history within the corporation of making adjustments where there are minor breaches of operating agreements still within the context of ongoing program initiatives. There is nothing to ensure that a province will want to maintain the particular program. That is the concern of the client.
The Chairman: You make the point on page nine of your brief that your members strongly believe that the first social housing agreements transferring control of existing federal affordable housing resources from CMHC to the province did not adequately protect your members' operating agreements with CMHC from changes that the province wished to make. I quote:
The minister agreed with us and insisted on a new clause that was implemented in the fifth agreement signed with Nova Scotia. As a result, the first four agreements afford a much weaker protection than those that followed them do.
Mr. Hunter: Correct. In the context of the powers available under this bill, we are assured by the minister and are grateful for the change made in that agreement. However, we worry that in years to come, when different parties are around the table and different histories are there, the extensive powers available in this bill might not be exercised with the respect and largesse that we have come to expect.
The Chairman: With regard to those other provinces, you ask what will happen to third-party operating agreements in those provinces in the context of Bill C-66. Is that a rhetorical question or do you know the answer?
Mr. Hunter: We do not know the answer. However, we are assured by the minister's statement from yesterday.
Senator Butts: I am sorry I did not have time to read the statement that was presented, but I shall certainly do so. Am I correct in assuming that you are not complaining about what is in Bill C-66, but rather about what is not in Bill C-66?
Mr. Hunter: That is a fair way to put it, yes.
Senator Butts: Bill C-66 had nothing to do with the plan of turning everything in social or co-op housing over to the provinces; is that right?
Mr. Hunter: That is correct.
Senator Butts: Could you tell me how many provinces are in on that program? Was that program optional for all provinces? At least one province has told me that they had nothing to do with it.
Mr. Hunter: My understanding, senator, and it is reflected in yesterday's testimony, is that a package arrangement was present at the outset of the negotiations for what has been called "the devolution of social housing to the provinces." Social housing agreements were signed with five and now seven provinces. In the course of that, representations were made to the government.
The minister indicated yesterday in his testimony that because of the nature of cooperative housing, he was interested in pursuing an arrangement whereby, for those provinces that have not signed arrangements, a unified method of dealing with cooperative housing would be developed. My understanding is that discussions are proceeding without co-op housing being part of those arrangements.
Senator Butts: Is CMHC conducting that plan, or do the provinces have some say in it?
Mr. Hunter: My understanding is that there are discussions between the federal government and the provinces.
Senator Butts: Would it be against your principles to tell me which provinces are not in it?
Mr. Hunter: To my knowledge, Ontario, Quebec, British Columbia and Alberta are not in the agreement.
Senator Butts: Those four provinces include most of the population of Canada. That was not quite the information I was given. To be specific, where does P.E.I. stand on this?
Mr. Hunter: Personally, I do not know. I believe they have signed.
Senator Butts: I do not mean to put you on the spot.
Senator LeBreton: The letters we had yesterday indicated Nova Scotia, New Brunswick, Manitoba and the Northwest Territories, Newfoundland and Labrador.
The Chairman: Those are provinces that support the bill.
Senator LeBreton: As a result of seeing those letters, Senator Cohen asked Mr. Rochon the question. He said that negotiations with nine provinces have been completed.
Mr. Hunter: As Mr. Stewart just informed me, an agreement has been signed with seven provinces. There are ongoing discussions with all, I believe, but I am not privy to the level of detail.
The Chairman: In any case, the federal government is out of social housing, right?
Mr. Hunter: For now.
Senator Butts: In effect. Just as a follow up to that, could you tell me if there has been any problem with any of the provinces respecting the contract that your client had with the co-op group?
Mr. Hunter: There were some difficulties in Saskatchewan with a funding model that was proposed, and from the testimony yesterday, I believe 60 per cent of the group signed and 40 per cent did not, or perhaps the split was 70 per cent and 30 per cent; I cannot remember the exact numbers. Time will tell whether CHF's concerns regarding the funding model interfering with the capacity of the cooperative to exist as a cooperative will come to pass.
Senator Butts: I have had many complaints from people who worried about their province respecting the contract that they had had with CMHC, and that is what I am thinking about.
Mr. Hunter: That is the worry and the question that CHF brings to this. In these times of change, how can there be some reassurance that, in the context of this commercially driven bill, the to and fro that has operated mostly successfully with CMHC will continue to operate successfully with the provinces?
Senator Butts: Could you tell me if any of the provinces that have taken it over have had any new co-op projects?
Mr. Hunter: There was some sort of program in B.C. prior to this process, but the answer is no.
Senator Butts: Could this, in effect, be the end of co-op housing?
Mr. Hunter: With some exceptions in Quebec, there have been no major developments in the last few years.
[Translation]
Senator Gill: Mr. Hunter, a lot of people are in favour of housing cooperatives. Yesterday, the minister reassured us that Bill C-66 would not in any way jeopardize housing cooperatives. At the start of your presentation, you referred to clauses 28 and 38. Could you tell us exactly what causes you to have doubts about what the minister said and about the contracts that you have signed with the federal government? Don't these contracts have to be adhered to in the same way when the federal government transfers them over to the provinces? What is it about these clauses that you mentioned at the beginning that causes you to doubt that the agreements with housing cooperatives will be respected?
[English]
Mr. Hunter: First let me say I do not doubt the word of the minister. What I was talking about at the outset was tendencies. Proposed new section 28.1, which appears in clause 34 of the bill, enables and authorizes the corporation to cooperate with a province, amongst others, in the exercise of any of the corporation's powers and to enter into agreements with a party for that party to have any of the powers, duties and functions of the corporation. Then clause 38, the transitional provision, says that the provisions that are amended or repealed continue to apply in respect of agreements entered into before these provisions are so amended or repealed, except to the extent that the requirements of these provisions are waived by Canada Mortgage and Housing Corporation.
The concern that CHF has expressed is in the context of the technical operations of some of the market conditions. It may be necessary to rebalance the agreements in the context of new circumstances. A province is then able to say that they do not wish to do that. The corporation is able to say, "Given that these agreements are in effect in breach and are not being observed, we will allow you to waive the statutory framework that existed that put the co-op program in place and, so long as you observe the principles under the social housing agreements, use those funds within the context of that global agreement."
We are not implying malfeasance, we are simply suggesting that the statutory protection that existed before is now no longer there and is capable of being waived by the corporation in the exigencies of the to and fro that governments will have.
[Translation]
Senator Gill: There's a contract that has been signed between the Canada Mortgage and Housing Corporation and the cooperatives. The Corporation decides to negotiate with the provinces and to sign an agreement with them. I would imagine that, at this point, the federal government would require that commitments already made with these organizations be fulfilled by the province. This is an agreement between the cooperatives and the federal government. Now there is an agreement between the provincial government and the cooperatives. How could a government not abide by an agreement without winding up in court or without the cooperatives being able to go to court?
[English]
Mr. Hunter: I was not suggesting that the government would necessarily be the one in breach of the contract. Oftentimes in social housing arrangements circumstances change and, as Mr. Stewart and the minister are well aware, there is a whole range of workout agreements that are having to be put in place to manage changed circumstances. Historically, in the context of those changed circumstances, the relationship with CMHC has been to adjust the program operating agreement to fulfil and continue the cooperative principles -- the requirement that it be through a cooperative agency; the requirement that that cooperative agency be non-profit; certain requirements regarding rent geared to income; certain requirements regarding democratic control -- all within the context of moving that forward.
In a circumstance where market changes and vacancy losses occur -- and remember that we start from a premise that this is a situation of market failure in housing for people who otherwise could not afford it -- the co-ops find themselves in a situation where they wish to renegotiate their arrangement due to the new circumstances. Again, without implying malfeasance or any ill will, this allows the corporation, not now but down the road, simply to say, "No, the agreement is in breach; you are able to manage that agreement in breach. If that means shutting down that particular project and using those funds within the context of the principles of the agreement that we have signed, you are entitled to do that." That is how the client reads those sets of clauses.
[Translation]
Senator Gill: I would imagine that if this possibility exists right now with CMHC, the same thing would apply in the case of a transfer to the provinces. You talked about the fact that this contract may be renegotiated. I would imagine that the likelihood of this happening is neither greater nor less.
[English]
Mr. Hunter: It exists, but it exists within the context of what Mr. Stewart referred to yesterday as "layers and layers of detail" and of a history of public policy regarding social housing at the federal level that does not exist at the provincial level.
The Chairman: In some provinces.
Mr. Hunter: Yes, in some provinces. The concern is about the tendency.
Senator LeBreton: Senator Butts asked the question I wished to ask. She said that her concern is not necessarily what is in the bill but what is not in the bill. You were reassured that it is not the intention of the legislation and you used the words "I am assured" or "it is not the intent."
How do you remedy that? In this particular circumstance a minister or a government may give assurances that that it is not the intent, but if it is not specifically stated, how can you be sure that the assurances will be carried out?
Mr. Hunter: We looked at a range of possibilities, but not one of them is conclusive. One possibility presented to us for consideration was having some of the social housing provisions dealt with in a specific enabling section which would be dealt with through regulations. In that way, there would be a supervisory arrangement on the public record that was different from the commercial exigencies that drive mortgage insurance and the range of other matters to which this bill does speak. That may be one way of maintaining those kinds of arrangements.
The Chairman: Mr. Hunter, much of the discussion earlier this evening with the people from GE Capital Mortgage Insurance, and some of the discussion with the minister and his officials, centred on the aspect of CMHC's activity in the mortgage insurance business. Do you have any observations on that aspect of CMHC's business?
Mr. Hunter: No, I do not.
The Chairman: Do you have any observations on the suggestion by GE Capital Mortgage Insurance, who are the only competitors of CMHC in this field, that they should be subject to the same government guarantee that CMHC has?
Mr. Hunter: My client has expressed no views on that to me. In the context of any programs that might be developed either at the federal level or jointly with provinces or other actors made available under this legislation, its concern with respect to mortgage insurance is that the commercial nature of the fee for mortgage insurance not be an impediment to those programs going forward.
The Chairman: How could it be?
Mr. Hunter: My understanding, from listening to the testimony here, is that the premium would be set at a risk level that might suggest that this kind of arrangement should not be undertaken. That in and of itself would be considered a significant cost. As I understand it, the current arrangements under social housing are in part fee-based and in part looked at as guarantees of the Crown.
The Chairman: Thank you very much, Mr. Hunter.
Our next witnesses are from the Canadian Home Builders' Association.
Mr. John Kenward, Chief Operating Officer, Canadian Home Builders' Association: We would like to take this opportunity to share with you the value we place on Canada Mortgage and Housing Corporation and the vital role we believe the corporation plays in Canada's national housing system.
The fact that Canada has the best housing system in the world and that we produce the best housing in the world is due in large part, we believe, to the work carried out by CMHC. We believe that Canada is fortunate to have a Crown corporation 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 both to our industry and to consumers, programs designed to help those in need of housing assistance and, more recently, housing export development.
As a Crown corporation, CMHC pursues the federal government's commitment to support and encourage improvements in housing affordability, quality, and choice, as well as to assist those in housing need. When it does, the Canadian Home Builders' Association supports it fully.
The importance of the federal presence in housing has not diminished and we are pleased that the federal government continues to recognize the significance of CMHC's role in Canada's national housing system. That role has been questioned from time to time and we are very pleased that this government continues to see its importance.
With respect to mortgage insurance, we believe that it is important to have a public mortgage insurer. We support legislative amendments that will improve CMHC's capacity to run its mortgage insurance operations in a competitive, innovative, market responsive and financially responsible manner. We believe that a competitive mortgage insurance environment can only help to improve Canada's national housing system and benefit housing consumers.
Consequently, as we did before the House of Commons committee, we are seeking 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 Corporation. 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.
In our view, the aim of legislative amendments should be to support and encourage a competitive and innovative mortgage insurance market in Canada. We are very fortunate to have a well run mortgage insurance operation in CMHC and a highly reputable private mortgage insurer in GE Capital Mortgage Insurance Corporation. We believe that legislation that places them on a fair and competitive playing field will produce a win-win, win-win result. Consumers will win; the industry will win; public policy and Canadian taxpayers will win; and the two insurers will win as well.
CHBA does not portray itself as an expert in the mortgage insurance business. To a degree, we take for granted the existence of a sound mortgage insurance environment. The existence of a public mortgage insurer continues to provide a key element of stability in our national housing system and housing markets across Canada. It has also provided a key point of integration with and support to Canada's housing policies and objectives.
The existence of a private mortgage insurer strengthens our housing system and gives Canadians the benefits of competition. We would like to see them grow stronger. We would like to see the situation continue with both CMHC and GE able to contribute to an even better and stronger environment for home purchasers. While they are competitors, their ability to grow depends on changes to existing legislation. Both insurers have the potential to contribute in significant ways to the evolution of Canada's mortgage insurance sector and Canada's housing system. Both of them also depend on a healthy home building industry and we, in turn, depend on a strong national housing system, to which they both contribute.
With that as a given, the goal is to arrive at a formula that will result in a fair and level competitive playing field between a Crown corporation that is able to meet its public policy obligations and a private mortgage insurer that is able to meet its obligations to shareholders.
The elements of this formula include, first, the Government of Canada's guarantee, which you have discussed very fully, for policy liabilities in the event of bankruptcy. In the case of GE, it is 90 per cent. In the case of CMHC, it is 100 per cent. The second element is capital requirements. In the case of GE, there is an obligation to meet capital requirements. In the case of CMHC, it is expected to make payments to the federal government. The third element is related to the other two. It is the ability of both insurers to compete fairly in the introduction of innovative products to ensure that they can both be leaders in the marketplace.
In this context, it is important to recognize GE's support for CMHC's crucial role in Canada's housing system and its ability to support a strong and economically viable housing industry. It is equally important to recognize CMHC's support for a competitive mortgage insurance business environment, which GE can provide.
Other factors in this equation that impact on fair competition include, as we have already heard, an extremely price sensitive marketplace among mortgage lenders; the need for an opportunity for both mortgage insurers to offer other types of insurance, if one is able to; common guidelines with respect to oversight, and the ability to compete fairly in the secondary mortgage market, and so on. There are, of course, other concerns, such as coverage across Canada and the ability to participate in public-private partnerships.
It is clear that all of these factors and elements bear upon one another. The challenge, finally, is to bring them together in a formula that achieves a fair and level competitive playing field in which public and private mortgage insurers can contribute to the development of the best housing system in the world.
That is our perception of the issue at stake, senator. We are seeking assurance that the result of the legislative changes will be that fair and level competitive playing field, and that we can continue to experience the benefits of the public mortgage insurer in the corporation and the work of GE Capital.
Senator Doody: Mr. Kenward, you said in the course of your comments that you very much favoured a public mortgage insurer. Could you elaborate on that? What does a public mortgage insurer offer you that a private mortgage insurer does not?
Mr. Kenward: We have held this position for a great many years. It is part of our history as a housing industry in Canada. The role of CHHC, which is founded on the mortgage insurance business, has always provided what we consider to be stability in our business environment. As an industry, we certainly attach great value to the existence of the public mortgage insurer over many decades. In many respects, the housing system in Canada has grown from that base.
The second reason, and we reflect on this as a industry because we deal with it from day to day, is that we see the activities of CMHC in a highly integrated way, not a compartmentalized way. We see the relationships between the mortgage insurance, the research they do, and the market analysis, and we have come to understand that it is because of that integration and the leadership that they have been able to provide for over 50 years that the housing system is what it is. Quite frankly, from a selfish perspective on the part of the industry, it is the reason why we have grown as an industry and why we are rather good at what we do.
Senator Doody: I share your enthusiasm for the role of CMHC in the social housing field, and in public housing generally. They have provided an invaluable service. I do not understand why they would ensure more stability in the mortgage insurance field than a private insurer would, but I gather that you feel differently about that.
Mr. Kenward: The difference between the two is that in the case of CMHC we will always be dealing with an institution that has the obligation of public policy. One way or another, that will always make that institution different in terms of what it does and the work that it carries out.
I certainly do not want to read into GE's remarks today, but as I indicated in my statement, I think the GE is very empathetic about this role and has indicated that, similarly, it sees itself operating within the system in a strong and supportive way. GE would seek opportunities to participate along with CMHC in this realm. That should be encouraged.
Senator Doody: I noted your enthusiasm for the establishment of a level playing field for both private and public insurers. Do you feel that the amendments offered or suggested by GE Capital Mortgage Insurance Corporation would help to level the playing field or do you think that this bill on its own, as it now stands, is sufficient to achieve that objective?
Mr. Kenward: I listened carefully to what GE had to say today. I noted that we are moving rapidly into the realm of where their proposed changes are being considered in light of other aspects of the way in which they do operations. For example, there was a clear linkage made between the 100 per cent guarantee and their willingness to review their own business criteria in terms of risk assessment, and so on, in other areas of the country.
It appears to me that the ideas are evolving. It is not quite as simple as saying that there is a 100 per cent guarantee. It is a question of GE's saying, "If we get this, we can see ourselves doing this and that and the other thing."
So I think it is an evolving package. I am not trying to avoid the question, but, as I said in my statement, all of these components relate to one another, all of them ramify on one another and each of them involves certain parameters which GE is prepared to discuss. After that, you could reach a satisfactory formula. At this point, I would be listening to them seriously.
Senator Doody: If I understand what you are saying, the level playing field, which everyone seems to be aiming for, is not achievable in this legislation, but may be achievable through negotiations down the road. Am I reading things into what you said, or could we suggest some amendments that might improve it?
Mr. Kenward: By my own admission, I am not an expert. Nevertheless, there is a great deal to be said for at least comfort within legislation. Since I am not an expert either in mortgage insurance or the construction of legislation, I suspect that GE is looking for some comfort within the legislation in expectation that certain things might arise out of negotiations.
I can fully sympathize with that desire. They do not want to be cut off at the pass.
Senator Doody: That is quite understandable.
Senator Butts: Senator Doody has covered many of my questions, but I will try to pursue them a bit further.
Is your message that you are happy with Bill C-66? You have not proposed any specific amendments, in other words.
Mr. Kenward: No. We are seeking assurance that the legislation will result in a fair and level competitive playing field between the public and private mortgage insurers, and, to the extent that it is possible to maximize the opportunity for them to contribute to Canada's housing system, the industry and its consumers, we week assurance that that will be the end result.
I do not know that that answers your question.
Senator Butts: In a roundabout way, it does. You are saying that you would like to have 100 per cent on both sides.
Mr. Kenward: Very definitely.
Senator Butts: I am a neophyte at this and I just want to make sure I understand you. You are appearing here to support Bill C-66 with at least one amendment?
Mr. Kenward: We will agree with anything that makes this legislation work better in relation to achieving a fair, competitive and level playing field and gives us 100 per cent of the benefit of what GE and CMHC can give the housing system. Anything that can be changed about this legislation to give us 100 per cent in those respects would certainly have our support.
Senator Butts: Great, we are all on the same wave length.
Mr. Kenward: I think we all are.
Senator Butts: Since you are suppliers, builders and so on, would you be happy if this bill addressed social housing and things like that -- in other words, issues that were addressed in the presentation that you heard just before you appeared?
Mr. Kenward: I certainly do not wish to debate with the Co-operative Housing Federation of Canada or, for that matter, with the Canadian Housing Renewal Association. However, my understanding is that what is happening here is a transfer of administrative and management responsibility and authority for federal social housing stock from the federal to the provincial government. I have not yet heard that the federal government has given up its interest, authority or right of decision to invest in social housing in the future.
In relation to the question of the federal government's commitment to social housing, cooperative housing and so on, it will be up to future governments or this government to decide what to do. I do not think they have removed themselves from the field.
The fact that the government supports the residential rehabilitation program through CMHC, which involves an expenditure of money, suggests that it is still in the ball game. The fact that it supports the Affordability and Choice Today program, a regulatory reform initiative that involves CHBA, the Federation of Canadian Municipalities and the Canadian Housing Renewal Association, suggests that it is still in the business of housing affordability and choice. The fact that it also supports an initiative called Homegrown Solutions, once again with the same three partners, and the Canadian Centre for Public-Private Partnerships in Housing in CMHC, which I believe GE has also expressed an interest in with respect to finding ways of financing projects for particular groups, suggests to me that, one way or another, the government still remains very much committed to a role here. We support that. We definitely believe in the importance of the federal presence in housing from that perspective.
Senator Butts: However, is there no relationship with social housing or co-op housing groups with your association?
Mr. Kenward: In terms of those programs, we work closely and we do consult with one another. We do exchange views. We do get testy with one another. However, CHBA has always said that in a civil society, we must have the expectation that government will help those in housing need. We prefer to believe that we are living in a civil society.
Senator LeBreton: I understand your testimony to be that you are very supportive of CMHC and its four pillars in Canadian housing: health, financing, assisted housing and research and then of course the international export component. However, on the specific issue of mortgage insurance, you support the level playing field -- in other words, the 100 per cent guarantee figure.
Earlier testimony indicated that the market share is 12 per cent for GE and 88 per cent for CMHC. Therefore, there is a long way to go for one competitor to catch up with the other. Are you saying that a level playing field for the competition between the mortgage insurance section of CMHC and a private-sector competitor only helps your industry?
Why would this even be included in the legislation? Why would the 100 per cent and 90 per cent discrepancy not be levelled out? Why did they not let the Department of Finance look at it and have done with it?
Mr. Kenward: Before responding to your question, I should also mention that we are fully supportive of GE in this enterprise, as well. In relation to your question, I have no answer other than the one that you have heard already: When GE came to Canada, they bought the 90 per cent guarantee. I do not know what the deeper rationale is here, to be quite honest with you.
What I did find interesting in the discussions earlier was the business that if they had a 100 per cent guarantee, that would broaden the spectrum of elements that they would be able to discuss in relation to the way they conduct business, the kinds of products they put out in the market and so on. Reading between the lines, they even suggested at one point that they would implicitly support the implementation of policies to deal with socioeconomic concerns or problems in the country. They would simply like the opportunity to bid on them. I sensed from what they were saying that they would like to be in the position of introducing products that would enable them to meet needs of the marketplace that might not be met otherwise.
That 100 per cent seems to be a core to something that needs to be pursued. At the same time, I am hesitant to become an expert at this because I understand that all of those elements relate to on another, as I outlined previously.
Senator LeBreton: Bill C-66 is a rather large bill and a large part of it has support. I do not understand why there would not be amendments or why we are hung up on only one operating section of CMHC and this private-sector company. They are working in the same market in that area.
I do not understand why they would not level the playing field. Certainly, competition is good, and the Canadian Home Builders' Association would only benefit from competition like that. If people were not satisfied with the product from one supplier, they could always try another.
Mr. Kenward: Our concern is that we should like to know the full consequences of any amendment. We would not want to see this legislation handicapped by an amendment. In other words, it is clear to us that to have this legislation in place is very important to both the public and the private insurers.
CMHC badly needs it and the privately insurer GE has told us that they support the changes in relation to CMHC. They see in those changes the opportunity to be a larger component of Canada's housing system at the same time. Whatever happens here, we will always have the concern in the back of our minds that something must be taken forward.
Senator LeBreton: That is particularly so when we have the minister responsible for housing testifying yesterday that he personally has no difficulty. He tossed the issue over to the Department of Finance ballpark. It is rather frustrating for a layperson to see the obvious. It cannot be that difficult, surely, especially when you have the minister saying on the record in testimony that he supports it.
Mr. Kenward: It might be an easy amendment, then.
[Translation]
Senator Ferretti Barth: The proposed amendments to Bill C-66 are designed to promote Canadian goods and services abroad. By exporting our technical knowledge in the building industry, will we be able to create jobs?
[English]
Mr. Kenward: I could really get on a platform in relation to exports. The CHBA has been strongly of the view for many years that since we have the best housing system in the world and we build the best housing in the world, we have strong export potential. We are very pleased that this government has taken that forward now. Once again, this is an extraordinarily important role for CMHC to undertake.
We see that the integrated system that I talked about is, in and of itself, an exportable product, as is the understanding of how our system works. We can actually take our system, the way we do mortgages, mortgage insurance, warranty and so on, to other countries. We can take the actual technology out there.
[Translation]
Senator Ferretti Barth: Our Canadian expertise in residential construction.
[English]
Mr. Kenward: Yes, absolutely.
[Translation]
Senator Ferretti Barth: This bill will really promote our visibility in other countries. We will use our construction techniques and our materials. This will be a good thing for Canadians. If we are asked to sell our construction techniques abroad, our technicians are the ones who are going to be travelling to these countries. They'll acquire experience in these countries and, when they come back to Canada, they will have a good knowledge of the labour market that they will be able to pass on to those following them.
[English]
Mr. Kenward: I agree with you 100 per cent. Right now we are concerned about shortages of skilled people in our industry. At the same time, there would be thousands of skilled Canadian workers working in Japan. You are absolutely correct. This is a huge employment opportunity. The challenge we have as an industry is to work with government to get that opportunity over to young people so that they can see that there are career opportunities here.
[Translation]
Senator Ferretti Barth: As a result of an earthquake that took place in Northern Italy, many people were left homeless. Canadians went to Italy and built houses in less than a week.
These houses were built 20 years ago, they are still standing and the Italians have beautified them. Apparently these houses are really well built. Northern Italy is a cold and damp region.
When the time comes to rebuild the houses in Kosovo, the Canadians will be called in. This will be a good thing for your association.
[English]
Mr. Kenward: I must agree with you. All I can say at this point is that we encourage the CMHC role here. They are taking forward their export mandate as rapidly as they can and we are already seeing substantial progress. However, it is a world of opportunity with respect to this subject now.
[Translation]
Senator Ferretti-Barth: How are mortgage loans granted in other countries? Does the bank turn to the Canadian government? Once the mortgage has been obtained, does the foreign bank give money to the construction company or vice versa? How is the transaction made?
[English]
Mr. Kenward: Right now, in relation to the export side of mortgage insurance, we see this as part and parcel of things in our experience and knowledge that we can export. Perhaps Mr. Johnston may wish to add to that.
Mr. Donald Johnston, Senior Director, Technology & Policy, Canadian Home Builders' Association: Often the model is a joint venture where our members will recreate a relationship with builders in the host country and the financial elements are often arranged through that partnership, through joint ventures.
[Translation]
Senator Gill: According to your brief, your association appears to be relatively satisfied with Bill C-66 as it is currently drafted. I would like to clarify certain things, including the CMHC guarantee and the GE guarantee.
Are you saying that the status quo suits the builders and that it could be advantageous to have the same guarantees for both the Corporation and GE? An agreement would have to be negotiated and risks shared. An agreement was signed a few years ago with GE and it worked well.
If I understand correctly, you are hoping for the same type of negotiation. We have to change the rules of the game with respect to the guarantee and the risks. GE is a private company and CMHC is a Crown corporation. Obviously, these two entities do not have the same risks and the same liabilities. One is controlled by Parliament, the other by shareholders.
If we were to provide a similar guarantee, we would have to have the same requirements both for the risks and for the services provided to Canadians. Have I understood this correctly?
[English]
Mr. Kenward: Once again, I do not want to put words in GE's mouth. What I heard is that they would see that as being part of the discussion process. That is to say, if they got the same guarantee, they would understand that they would be sitting down and discussing risk and other aspects that come with that guarantee. If that is the way to get to that fair and level competitive playing field, then we would support that.
Frankly, we do not wish to see the alternative, which is a weaker private mortgage insurer in Canada. We do not see that as being to anyone's benefit. We wish to see this carefully undertaken through discussions so that you end up much closer to this fair and level competitive playing field. We understand that there is a door open to that process because GE would like the 100 per cent guarantee and is prepared to discuss how you actually get there in relation to its own assessment of risks and what it must do. That is my reading of what they were saying. As I said, I do not wish to represent GE on this matter but it seemed to me that the discussions were progressing somewhere.
We do not want a monopoly in this country on the public side or on the private side; nor do we not want one insurer weakened in relation to the other. As someone put it earlier, we want 100 per cent of everything.
[Translation]
Senator Gill: The Canadian Home Builders Association is an important player in the country as far as housing is concerned. I understand that you don't want to speak on behalf of GE. What is your association's perception of this particular issue? You're clearly expressing your own point of view. Does Bill C-66 contain a lot of improvements? If I understood you correctly, you are saying that it's a good bill. Accordingly, should we proceed and enable GE to continue negotiating with the Department of Finance?
[English]
Mr. Kenward: It is not easy for me to respond to that for the simple reason that GE has expressed its concern that if we are not careful we could end up with a seriously weakened private mortgage insurer. Consequently, the view of CHBA is that we must take serious account of that and review what they have to say. We must listen to the evolution of the discussion to see whether there is a formula in here that can be made to work better than the one that you have before you. I am also admitting to you that I am, unfortunately, not able to provide expert advice on the content of that formula.
The Chairman: Thank you very much, Mr. Kenward and Mr. Johnston, for the information you have shared with us so generously. We greatly appreciate it.
Senators, before I introduce our next witness, there is some housekeeping I should like to do on an entirely separate matter. As you are aware, the Subcommittee on Veterans Affairs elected a new chairman recently: Senator Balfour. As you are also aware, the subcommittee has recently completed a study into veterans' health care. Having completed that specific study, the subcommittee desires to have its general mandate on veterans affairs matters renewed.
A motion was passed in the Senate on Monday night authorizing this committee, the parent committee, to undertake a study on issues relating to persons coming under the jurisdiction of Veterans Affairs Canada including the availability, quality and standards of all benefits available to persons. That is the operative part. In other words, it is the renewal of the general mandate for this committee to study veterans affairs matters. The next step is for this committee to pass a motion referring that order of reference to our subcommittee.
The Chair will entertain a motion that the order of reference adopted by the Senate on May 31, 1999, be referred to the Subcommittee on Veterans Affairs.
Senator LeBreton: I so move.
The Chairman: Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: The motion is carried.
With that out of the way, it is pleasure to welcome Ms Ann Rheault, Director of the Bank of Montreal's aboriginal banking unit. She also appeared before the committee of the House of Commons that studied this issue. She is able to enlighten us, as she enlightened them, on a very specific and important aspect of the activity of the Canada Mortgage and Housing Corporation.
Ms Ann M. Rheault, Director, Aboriginal Banking, Bank of Montreal: Thank you, senators, for your time this evening. Aboriginal banking for the Bank of Montreal has been my business for more than five years. I deal exclusively with aboriginal people, primarily with First Nations people, First Nations governments, First Nation housing authorities and First Nations tribal councils. I deal somewhat in the Metis community, in Alberta in particular, and do some business in the Western Arctic. A colleague of mine is responsible for the Eastern Arctic.
Typically, CMHC is the First Nations' partner in the mortgage environment -- and I use the term "mortgage" in quotes -- in First Nation territories because the regulatory environment in which we do business in First Nations territories is extraordinarily unique.
A First Nation territory, or a reserve, as it is called, is governed by the Indian Act. Under the Indian Act, the land cannot be mortgaged, either by the First Nation itself or by individuals. The only vehicles over the years for raising access to capital or debt financing for housing on reserves have been two important programs delivered by Indian Affairs and CMHC. Those are called section 95 financing and section 10 financing, which refer to sections 95 and 10 of the National Housing Act.
Under sections 95 and 10 of the National Housing Act, there really is no mortgage. Security for the loan, to a lender like myself, is an Indian Affairs guarantee and, in effect, CMHC acts as an agent for Indian Affairs and is a project manager. An application fee is paid to CMHC for the work they do and they monitor the program from the initial application date to ensure that it complies with building standards and also from a project management standpoint, because all the financings at this time are for new construction.
Section 95 housing, in a reserve environment, is termed as social housing in most cases. It is subsidized housing and generally multi-unit dwellings. It is the prime source of funding for construction of residential units on a reserve.
Section 10 of the National Housing Act is a non-subsidized housing loan program that is generally a loan granted to an individual, but has involved two loans granted to First Nations themselves or Indian bands themselves as the borrowers. In those instances, an individual band member is the borrower and the loan is secured by a band council guarantee and an Indian Affairs guarantee and, again, CMHC issues an undertaking to insure. However, they are again acting as agents for the First Nation.
Until about four years ago, the environment in raising mortgage financing on reserves was exclusively within those two programs where a mortgage is not actually being taken. The National Housing Act has brought forward these two proposals. Of course, CMHC also had the RRAP program that was referred to earlier, which is used quite extensively on reserve as well.
One of the significant needs, as defined by the RCAP report and the aboriginal financing task force, which issued its final report in September of 1997, was the tremendous need for an increase in capital for First Nation housing.
The growth rate on First Nation territory exceeds that of the Canadian population by about 3 per cent. Housing is chronically in arrears. Much more initiative and ingenuity are being required to supply the needs of First Nations.
The Bank of Montreal was called by our customers, as I am sure other chartered banks have been, to be creative and to design housing loan programs that were exclusive of, or complemented, the existing government programs issued by Indian Affairs and CMHC. We have come forward with some examples, which are in the pamphlets I have given you.
We have come forward with some housing loan programs that do not have what is commonly termed in the business as a ministerial guarantee. We contract with the First Nation government to issue guarantees. Our loans are issued to qualified borrowers on the reserve using the guarantee as security.
We have seven programs in place that provide capital in excess of $25 million. We are still working to do more. It is very important to us and to our customers. It is an important piece of the business we do.
We have also had a need defined for us by other First Nation customers who perhaps do not have the capacity to borrow in amounts or accept the liability of amounts in the multi-million dollar range. Or perhaps they do not have the capacity among some of their members to qualify for the size of loans we are giving. We have been asked to be a bit more creative about that.
One of the solutions we see is allowing CMHC to be creative with us. We have always been good partners. They do business extraordinarily well in the environment that I work in. Let me give you an example of what we should like to see. In the case of a First Nation that is not at the table with a portfolio of loans such as the ones we are doing, CMHC should have an opportunity to issue an undertaking to insure against a loan that is never going to have a mortgage. Under the current regulatory environment on reserve -- and I see no reason to think that this will change -- it is not permitted to have a mortgage over real estate except between Indians and Indian bands -- that is, among themselves. A lender like myself has to find something different to secure my advances which, again, are generally over a 25-year period.
We work a lot with CMHC. We work with them on their training programs and on innovative financing. We very much support the amendments to this bill that will allow CMHC to make some innovative programs available to my customers in the marketplace in which I do business.
[Translation]
Senator Gill: I would like to convey a word of congratulations to the Bank of Montreal. I have been involved in Aboriginal affairs for several years now, and financial institutions or indeed other institutions have not always seen fit to get involved in the Aboriginal communities. The Bank of Montreal is one of the first institutions to have done this, and it has tried to find solutions to the problems we all know about.
I would imagine that you have examined the situation somewhat. You will have noted that this a growing need to build housing in Aboriginal communities. Have you conducted any studies to assess the requirements in communities in the country or in certain provinces? How much money would that involve?
[English]
Ms Rheault: About five years ago, when we were opening a branch on First Nation territory, the first customer of Bank of Montreal came to us and said, "We have invited you to come to our territory, but you need to earn our business, and one of the ways you can do that is by being innovative, particularly in housing." At that time we did a number of studies, but I would rely heavily now on studies that are being done by the Assembly of First Nations, which at the moment has a task force. I crossed paths with them in Alberta two days ago. Their housing committee is doing an updated study.
Typically, the number of new housing units being called for is close to 200,000 on First Nation territory. That is an extraordinary amount of housing. The budget of the Department of Indian Affairs and Northern Development allocates a considerable amount. This is a large community that is growing extraordinarily fast. There was a baby boom within the aboriginal on-reserve community. There is a rapid growth of very young people starting to move into the needs for housing. It is not unusual.
I attended a housing conference with the technical services group in Alberta about three weeks ago. It is sad to say that it is not unusual for 20 people to be living in a house. That is compounded by the growth in the communities; people desire to stay in their communities and they are increasingly able to stay because employment is improving on First Nation territory. That certainly is causing the need for new housing units.
There is also a tremendous requirement for renovation dollars. Our programs include renovations. CMHC's programs could and do include renovation also. The annual allocations for housing on reserve were never intended to be a total cost. It is not unusual in southern Canada, for example, for the annual allocation per housing unit on reserve to be around $20,000 or $22,000. It increases as you go farther north, similar to what the RRAP program does. Nowhere in Canada can you build a house for $22,000. However, they are being built in First Nation territory. Then of course you get houses that are deteriorating quickly and houses that are not complete and therefore are subject to erosion by the elements. I am sorry I do not have that statistic, but it is enormous and it scares most people who have to look at it.
[Translation]
Senator Gill: Do you think that Bill C-66 will enable us to accelerate funding programs for housing in these communities? Does it contain anything that will give a significant helping hand to housing starts in the reserves?
[English]
Ms Rheault: Yes. I can define two needs. It is not unusual nowadays in First Nations territory for the First Nation government and its members to look to do things on their own. Our customers continually ask us to recognize them as governments responsible for the well-being of their members and to do things that may be different -- that is, to do things that may not continue to involve the Department of Indian Affairs or the federal government if there is an alternative. Those programs are very valuable to the First Nations -- I do not mean to suggest otherwise -- but people are looking to do something different.
CMHC is a partner that we can work with on this. If we are relying on a First Nation government for the business that we do with them, we have the confidence in them that has been built up. They are saying, "Do something between us, the First Nation government and the Bank of Montreal." In some cases it may be because mortgage financing is so long term and in other cases it may be because it is a small community.
There are many First Nations that have fewer than 200 people on reserve and very small bands who do not have the capacity to come forward to a lender like me and say, "Ann, we would like to set up a $41-million line of credit or a guaranteed program." We should like to see a situation where CMHC and Bank of Montreal could, with the First Nations and its members, put together a specific loan for that particular member or could put together a program that would recognize the wishes of the First Nation government as partners. We need to be innovative and meet the needs of the community.
The existing section 10 and section 95 programs are very good and they need to remain there. One is social housing with a subsidy attached to it and the other is available for First Nations who are not shy to include Indian Affairs in their transactions.
I have the pleasure of spending a great deal of my time, probably 60 per cent of it, in First Nation territory. I am always hearing, "What can we do that is different and that will allow us to be innovative?"
With the changes that I anticipate being made, CMHC will not have to have a mortgage for underwriting a loan. Along with the many other things that they do, they have a healthy houses program in three First Nation territories in Quebec, Manitoba and Ontario. They have training programs for First Nations people across Canada. There is a lot that they can do. They are a good presence to have and I should like them to continue to have the creativity to do some things differently that will allow people to do the things they want.
There is recognition in the aboriginal community that a significant amount of housing is needed. Government programs are not providing it and are not going to be able to provide it. Many people are accepting responsibility for their own housing needs and saying, "Give me the tools to do this." I certainly support that.
[Translation]
Senator Gill: I think that you're showing the way to the Royal Bank and the other banks.
[English]
Senator LeBreton: Your relationship with Canada Mortgage and Housing Corporation is unique. You are dealing with property on reserves that really belongs to the First Nations people and not specifically to the person who owns the house.
I glean from your testimony that your relationship with CMHC has more to do with assisted housing and the research side where they work with all the other expertise they have in partnership with Indian Affairs and with the Bank of Montreal to come up with innovative ideas to provide housing. Is it fair to say that CMHC's role in all of this is more under the pillar of their assisted housing research than it is under mortgage finance?
Ms Rheault: At the moment they play roles on both sides. I should like to see them have the ability to move into a more active role on the mortgage financing side.
Senator Gill asked what could be done differently. To be specific, reserve land is Crown land held for the benefit of the members of that particular band. Essentially, it is Crown land that is managed through the Indian land registry. The First Nation government has much to say about it, but the Indian Act states specifically that the Minister of Indian Affairs and Northern Development, on behalf of the Crown, manages the land.
I shall give you an example of something that needs to be done differently. Although First Nation governments are intimately involved in housing, they have many other priorities in their lives and governments. A number of First Nations have said to me, "Why can you not do business with a housing corporation on my territory? Why can we not set up something that is sheltered from or separate from the First Nation government?"
That is hard to do, again because of the land tenure. I cannot take a mortgage on the land. That is why I am relying at the moment on a guarantee from the First Nation government. That could, at some time, impact their ability to do other business, although it is considered on their balance sheet to be a contingent liability. As long as I lend well, it will not negatively affect their financial status. However, what if I look at doing business with a housing authority or corporation? First, if it incorporates, it becomes non-Indian and therefore cannot hold land, either.
We are constantly trying to find ways to accommodate the entity that we try to do business with on reserve. We recognize that all of us -- the First Nation government, the federal government through the Department of Indian Affairs, the members of the nation and ourselves -- must manage risk. We cannot do something and ignore provisions of the Indian Act. We cannot do something that would be neither valid nor enforceable at some point where default might occur.
At the moment I have a housing authority that wants to be incorporated in order to manage its own liability or potential liability. It cannot hold land on the reserve and therefore cannot hold the mortgage. However, if CMHC had the ability to work with me to put together a program that would provide mortgage insurance on loans granted under that, then all of a sudden we would have created something very different that would increase access to financing for those members of the nation who are interested in obtaining it and have the capacity to do so.
Senator Butts: The title of your group is the Aboriginal Banking Group. Would you tell me who is in the group?
Ms Rheault: The Bank of Montreal's Aboriginal Banking Group is comprised at a headquarters level in Toronto of five employees. Regionally across Canada, there are another four employees.
We are led by Ron Jamieson, who is our senior vice-president of aboriginal banking. He is a Mohawk from Six Nations. I am the director. We have a product development manager in our unit, a marketing manager and an executive assistant.
In B.C., Alberta, Saskatchewan and Quebec, we have four managers of aboriginal banking. All but two of those nine members, including myself, are aboriginal. We work with about 17 outlets: 11 branches on reserve and six other branches and outlets that serve primarily aboriginal communities. We have about 80 staff amongst those branches. There are also approximately 180 branches across Canada that conduct a significant portion of their business in aboriginal communities.
Senator Butts: Did you say that of the nine members, there are two aboriginal persons?
Ms Rheault: There are two non-aboriginal members. Of the nine, seven are aboriginal people.
Senator Butts: Are there many banks on reserves doing other services apart from housing? Could you give me an idea of how many there would be? Are the banks on the reserve?
Ms Rheault: Yes, we have 11 banks on the reserves, the most of any chartered bank in Canada. There are about 38 financial institutions on reserves. For example, in Quebec there is the Caisse populaire. In Western Canada, there is a large trust company that is 100 per cent aboriginal-owned. They are on reserve. The First Nations Bank is a partnership between Saskatchewan First Nations and the Toronto Dominion Bank. They have three or four branches on reserve. There is also another outlet for financing called the Aboriginal Capital Corporation, which was put together about 15 years ago.
They are also lenders in aboriginal communities. They are not necessarily always on reserve, but approximately 20 of them would be.
Senator Butts: You are in there just in the last few years; is that right?
Ms Rheault: The Bank of Montreal opened its first branch on reserve specifically for an aboriginal community six years ago.
Senator Butts: You said at one point that the Bank of Montreal was designing a plan without guarantees but for qualified persons. What makes a person qualified?
Ms Rheault: It is interesting that you would ask that question. I told one of my colleagues at one time that I had obviously spent too much time in a particular First Nation community when the chief phoned me one day and said that we must move off the five Cs of credit. The five Cs of credit in personal lending are assessments of character, capacity to pay, collateral, which is the biggest stumbling block in this business that we are doing here, and also capital, which is down payment requirements. By character I mean things that include credit ratings, although credit is another category.
Typically, in a personal lending environment, when you take an application you are looking at those factors to determine whether in the best of circumstances this person has the capacity to make these payments and any other commitments they have and whether they will repay. That is the assessment that occurs.
Senator Butts: Do you worry that there is a danger that if you provide for people who have all of those qualifications you will make them like the rest of us -- that is, the poor getting poorer and the rich getting richer?
Ms Rheault: I always say that you need a willing borrower to make a loan. Most people, including myself, would not be able to afford a house unless they had access to a mortgage. I cannot raise $70,000 or $150,000 over a five-year period, which is what First Nations people have been trying together to do. When we started researching in some of the territories, we found First Nation community members who were carrying tremendous debt loads that they had acquired in trying to provide housing for themselves over a five-year period, because typically a personal loan is not granted for longer than five years. That is where you get into mortgage financing with longer terms. People were borrowing in order to provide their own housing.
Another reason that we have a great deal of comfort when we are talking to First Nations about doing this business is that the default ratio in our mortgage portfolio across Canada, and in our own mortgage portfolio within First Nation communities, is nominal. It is almost hard to record. People pay their mortgages first. It is their shelter. It is the most important thing to them. They will pay it before they pay their car loans and their charge cards.
We lend carefully. We have a significant commitment to the communities we do business in not to endanger their well-being by lending badly. It is something that we consider carefully.
Senator Doody: Is there anything about Bill C-66 that you would like to see changed or are you reasonably happy with the content or the direction of the bill? Do you think that it serves your interests, or the interests of your organization in relation to CMHC?
Ms Rheault: I have no changes that I would suggest. The bill does very much serve my particular interests.
Senator Gill: I should like to know the percentage of people who do not pay their loans. Do you have those figures?
Ms Rheault: I can tell you the Bank of Montreal's residential mortgage portfolio loan loss ratio. The last time I looked, which was approximately a month ago, it was 0.01 per cent.
Senator Gill: Is it better than elsewhere?
Ms Rheault: It is better than any other loan portfolio.
Senator Gill: I am asking about the reserves.
Ms Rheault: In my portfolio I have no arrears.
Senator Gill: That will give confidence to those who would like to do business with the Indian people.
The Chairman: Thank you, Ms Rheault. That is very helpful
The committee adjourned.